Surplus Dilemma:

The Malthusian Market Glut Phenomenon.

Malthus, a prominent figure in the theory of population, was the first theorist of economic crisis and the forerunner of the under-consumption theory. He provided the foundation for the Keynesian analysis of a capitalist economy, which suffers from chronic deficiency of demand and periodic ups and downs due to business cycles.

Newman who is an economist observes that considering his time and environment, a theory of market glut put forward by Malthus reveals considerable insight into his past.

Before Malthus, all the classical economists believed in Say's law of the market, which stated that every supply creates its own demand. This led to the belief that overproduction and glut in the market were impossible. This analysis further led them to another conclusion that the accumulation of capital at a rate, faster than investment was also impossible. In other words the classical economists not only assumed a state of full employment but also a balance between production and consumption as well as saving and investment (S = 1).

Maltus disagreed with Say's law of market and denied the equality between saving and investment. He believed that capitalist production is not self-adjusting and that a crisis might arise from the conditions inherent in the capitalist process of production. He believed that the level of output at any time depended upon effective demand, which was high enough to ensure a continual supply of goods.

Malthus pointed out that the value of the product produced by the efforts of labour was always more than the amount of money paid as wages to the workers, leading to a lack of demand for the goods produced by the workers. Capitalists can demand more goods but are interested in saving and accumulating of capital. To increase and maintain effective demand, Malthus was in charge of balancing the supply and demand of goods.

In figure O1 O2 measures the total labour supply. Productive labour is measured from the left and unproductive labour from the right. Line Z which starts from O1 is the net commodity output line, and Line X which starts from O2 is the service line which is a function of unproductive labour.

At an equilibrium wage rate, O1N1 productive labour is employed and O2N1 unproductive labour is employed. O1N1 productive labour produces N1K output, at point K, where the demand line intersects the supply line Z. So at point K supply is equal to demand. Further, at this point, Say's law of the market is also proved.

However as assumed by Malthus, supply will not be equal to demand. The total demand consists of investment demand and consumption demand. (D=C+I). Since the demand is made by two different groups of people, there is no coordination in the decisions of these two groups.

In the figure, the demand made by unproductive labourers is N1T1 and the demand made by productive labourers is K1T. The total demand is N1K1. The glut is measured by the difference between supply and demand. Supply is N1K. Demand is N1K1. So glut or overproduction is KK1.

Thus for the first time in the History of economic thought, Malthus has pointed out the possibility of glut or overproduction.

Written by : W. Dilini Peiris and Raini Charuka

References,

Kanopiadmin. (2019). Say’s law of markets. Mises Institute. https://mises.org/library/says-law-markets