Malthus’s Theory of Economic Development | Economics

We generally remember Robert Malthus as the propounder of his famous Theory of Population. But it is well to remember that Malthus had also some important things to say about economic development and it is refreshing to note that in several ways he anticipated the later economists like Keynes and Kaleeki. Also, the Malthusian version of economic growth represents in several respects a refinement of the general classical theory.

He recognised, more than did the other classical economists, the importance of a distinct and systematic theory of economic development. Book II of his “Principles of Political Economy” deals with the “Progress of Wealth” where he says- “There is scarcely any inquiry more curious or, from its importance more worthy of our attention, than that which traces the causes which practically check the progress of wealth in different countries.”

The problem of development, according to Malthus, lies in explaining why the actual gross national product (actual riches) should differ from the potential gross national product (power of producing riches). He thus points out the way in which the potentialities of economic development in a country should be realised. This can be done by larger production and fairer distribution.

Malthus contends that the process of economic development is not automatic. Rather conscious, deliberate efforts are needed to bring it about. For instance, Malthus explains that mere increase in population cannot by itself lead to economic development unless there is increase in effective demand. (This is anticipation of the Keynesian doctrine). He says – “A man whose only possession is his labour has, or has not, an effective demand for produce according as he is, or is not, in demand by those who have the disposal of the produce.” He rejects Say’s Law which says “supply creates its own demand” and that savings are automatically invested and constitutes a demand for capital goods.

Malthus’s important contribution is in showing that savings in the sense of not consuming is a mere negative act and instead of creating more demand it will lead to a decline in effective demand. Only savings which are furnished by increased gains and are invested create an effective demand. Thus, according to him, “abstinence on the part of capitalists, far from accelerating economic growth, will in itself retard it.” Hence, Malthus brings out an important fact that in advanced economy consumption, saving and investment all should expand simultaneously.

Role of Capital:

Malthus attaches great importance to the accumulation of capital for economic development. He regards capital as indispensable to development. According to him, “no permanent and continued increase of wealth can take place without a continued increase of capital.” Besides, Malthus underlined the importance of foreign trade for speeding up economic development. Foreign trade provides incentives for investing, since it leads to the extension of the market for the goods produced and for greater division of labour resulting in increased output.

There is another important fact brought out by Malthusian analysis of economic growth, namely, the structured change that takes place in the process of economic development i.e., a decline in the relative importance of agriculture as the economy moves forward. We know that economic development in developing countries is regarded as synonymous with the development of industries. Naturally, agriculture is eclipsed by the speedier development of industries. As a means for expanding agricultural output, Malthus suggested land reforms.

Of far greater importance than what has been pointed out above, is the anticipation by Malthus of the theory of ‘dualism’ as applied to underdeveloped economies. He envisaged the economy as consisting of the two major sectors, viz., the agricultural sector and the industrial sector. His analysis of the interrelation between these two sectors is quite interesting and enlightening. The law of increasing returns operated in the industrial sector, whereas the agricultural sector was subject to the law of diminishing returns, the rate of technological progress being responsible for this difference.

Malthus brings out an important truth that when one of these sectors lags behind, it retards the development of the other sector. We know how in India the failure on the agricultural front was responsible for the slow rate of growth. “The development of the industrial sector of underdeveloped countries is limited by the poverty of the agricultural sector.” This is due to the fact that the lack of purchasing power in the rural masses reduces effective demand in the economy and retards its growth.

Assessment of Malthus’s Contributions:

There is no doubt that Malthus made a valuable contribution to the theory of economic development. His repudiation of Say’s Law and emphasising the importance of effective demand and its relation to saving and investment are indeed noteworthy for their modern touch. A great deal of what he wrote on the subject is applicable to an underdeveloped economy, especially relating to the theory of dualism.

It has been pointed out by the critics of Malthus’s theory of economic development; he concentrates on explaining the factors which hinder growth rather than the factors that promote economic progress. However, some elements of his theory make positive contribution to the growth process. For example, he considers production and distribution as the two grand elements of economic growth. The distribution of production is as important as production itself or sustained economic development. He also gives importance to capital accumulation in bringing about economic development.

At the same time he emphasises that the capital accumulation will choke off if it is not possible for the additional goods to find consumers. That is, he points to the significance of effective demand for sustained accumulation of capital. Increase in effective demand, according to him, is as important as increase in production. Therefore, unlike Adam Snuth, he thinks that excessive parsimony will reduce aggregate demand leading to widespread depression and unemployment. He recommends a more egalitarian system of distribution in order to increase effective demand. He also recognizes the importance of non-economic factors in economic development.

Though Malthus is more well-known for his theory of population than his contribution to growth economics, his emphasis on fair distribution of production and effective demand makes his theory of development distinct from that of other classical economists, such as Adam Snuth and David Ricardo. According to his population theory, population increases so rapidly as to outstrip the food supply due to the operation of law of diminishing returns which has largely been falsified owing to the rapid increase in agricultural productivity yet it is very helpful in probing the problem facing the labour-surplus developing countries of today.

Relevance of Malthus’s Theory to Developing Countries:

Malthus’s theory of development is negative in the sense that he concentrates his attention on the causes which hinder growth rather than the causes which promote economic progress. However, some elements making positive contribution to growth process are discernible in his Principles of Political Economy. Malthus considers production and distribution as the two grand elements of economic progress.

The distribution of production is as important as production itself for the furtherance of economic progress. He also fully realises the significance of capital accumulation in economic growth. At the same time he makes the important point that the accumulation of capital will choke off if it is not possible for the additional goods to find consumers. Herein are contained the seeds of the significance of effective demand.

Increase in effective demand, according to Malthus, is as important as the increase in production. Excessive parsimony decreases the effective demand leading to widespread depression and unemployment. He recommends a more egalitarian system of distribution in order to increase effective demand. Malthus also duly recognizes the importance of non-economic factors. Above all, Malthus is better known for his theory of population than his contribution to growth economics. He held the view that population increases so rapidly as to outstrip the food supply due to the operation of the law of diminishing returns.

Malthus’s contribution to economic growth contains several elements that are relevant to the developing economies. His emphasis on both production and distribution, capital accumulation and the creation of congenial non-economic factors is as valid today as was in his time. Though his theory of population has largely been falsified owing to the rapid increase in agricultural productivity, yet it is very helpful in probing the problems facing the overpopulated developing countries of today.