Malthus and the Theory of Gluts

Thomas Robert Malthus is famously known for his theory of population but there is another theory that caught the eyes of economic scholars later, The theory of Gluts. Today we’ll talk about Market Gluts, its political background, the solutions proposed for the same, and its relevance today.

Thomas Robert Malthus

The power of population is indefinitely greater than the power in the earth to produce subsistence for man.

Born in 1766, Thomas Robert Malthus has a great contribution to theories of economics, social development, and demography. In 1798, Malthus published “ An Essay on the Principle of Population“ in which he mentioned his famous theory of population. Economists before Malthus have talked about population, it was considered an asset in productivity of wealth but Malthus gave the population a proper place in economics. The plight of workers during the industrial revolution is said to be the motivation behind Malthus’s theory. He predicted the population to grow in geometric progression while the supply of food to increase in arithmetic progression. This he said will double the population in the next 25 years and food will be scarce. He believed there will exist overpopulation and overproduction.
It was later when he was teaching History and Political Economy at the East India Company College in Hertfordshire he wrote “Principles of political economy” which got published in 1820. He introduced the concept of effective demand and the theory of gluts through this book. Apart from that, he criticized David Ricardo and John Baptise Say in support of his theory.

Political background

The effects of the French revolutions were inevitable during the 18th century. Trade and thus prices were impacted. Disease, poverty, unemployment, and inflation were widespread. England saw a series of heavy taxes being imposed on the public along with repressive laws which resulted in clashes between the classes. After the war, England was positive about its trade and its exports. It started exporting as much as in the pre-revolution period in the belief that the need for its goods is just the same. But wars left other countries in worse conditions leading to overproduction. Along with this, the exchange rates became unfavorable to England and this resulted in the devaluation of its currency. Serious effects on the wages of the labor class were evident.
In addition to this, the French revolution left people with debates regarding the role of government.
We can see many theories emerging during this period regarding production, value, labor wages, and the role of government.

Say’s law

John Baptise Say said that “Supply creates its own demand”. He argued that the overproduction of commodities is not possible and thus there is no possibility of General Gluts. Man produces with the motive of either consuming or selling the commodity. He sells to purchase another commodity that is either used for consumption or production of another commodity. Now the savings among all this is invested for further production. Thus, savings are also consumed by a different set of people. He argued that in a laissez-faire capitalist economy, there exists a self-correcting mechanism due to flexible prices and interest rates.

Theory of gluts

No limits whatever are placed to the productions of the earth; they may increase forever.

The wave of the first Industrial revolution resulted in massive production of goods due to advancements in technology and research. This also created a class of unproductive feudal lords and their unearned incomes in the form of land rents as well as a lavish lifestyle. This worried Malthus. He borrowed the concept of division of labor from Adam Smith and started by saying that it is limited by the extent of the market and to get an efficient level of production the market needs to be widened. But given the limitation of the market, division of labor will cause overproduction. This overproduction will reduce the price of the goods, to the extent that it will be lesser than the cost of production after a point. This will reduce the output, employment and investment. In addition to this, the saving habits of the middle and wealthy class will result in underconsumption. Underconsumption along with overproduction will result in glutting of certain consumer goods in society.
Gluts are the increased quantity of goods without any increase in value.

A way out

This decrease in the price will keep going until all goods are too cheap for consumers to buy and there is a clearance in the market. He gave two solutions to this situation. First, Increase the wages of the labor, to give them more purchasing power. They will buy this glut of goods in the market. But there is a problem here. An increase in wages will increase the cost of production, increasing in price of the commodity, followed by a decrease in consumption and export of that good, a reduction in output and employment. So, he proposed a second solution, to increase the demand of the wealthy class to absorb the overproduced goods from the market. One way to ensure this he said is to promote the corn laws, which will obstruct imports, increase the rental income of the landlords and they will have more money to spend on consumption.
Despite all this Malthus was against unproductive consumption and redistribution financed by the government through high taxes and fiscal debts.
Some even criticize Malthus for favoring the feudal lords. If we read the political history of that time, it will be clear that economists were believed to favor a certain class and write their theories in favor of them.

Relevance

John Maynard Keynes favored the theory of Malthus. He also believed that it is demand that drives the market and that we need to regulate the demand to reach equilibrium. He dismissed the idea of Say and Ricardo. The theory of Malthus, particularly the theory of Gluts was not given much importance before Keynes quoted him. His theories came to light after that and research was done on them after the General Theory of Employment, Interest, and Money came. He even favored the idea of effective demand, for which he said that we need government intervention to increase consumption, the demand for goods. But this was only a short-term solution that he gave. After all, “In the long run, we are all dead”

Karl Marx also used this theory and stated that in capitalism, there will be an improvement in technology and along with cheap labor this will ultimately result in overproduction. He predicted a crisis due to this overproduction.

The relevance of this theory can be seen in business cycles, which predict the over-production of capital during the boom period. Due to the boom in the market, profits swell and a mountain of fictitious capital is built-up by speculation and borrowing for unwarranted future expansion. This needs extra workers to work on, but the market has the required products. The only solution is to reduce the price, which ultimately results in a reduction in profitability and thus slumps.

We can see that Malthus and his theory of Gluts are still alive in these theories.

Reference

Malthus past and Present

Malthus and classical economics by S. Ambirajan

Malthus and his work By James Bonar

The evolution of Economic Thought by Jacob Oser