T.R. Malthus’s Principles of Political Economy first edition was published in 1820

This is the 200th anniversary of the publication of the first edition of Thomas Robert Malthus’s Principles of Political Economy in 1820.

The funny thing is that I was thinking about the publication of Malthus’s first edition of his Principles only because I was thinking about how hard it is to maintain friendships with other economists who differ with our own views, which from that led me onto thinking about the greatest friendship in the history of economics, the friendship between David Ricardo and Robert Malthus, and how Ricardo had written to Malthus, just before he died, that even had they agreed on everything instead of disagreeing on everything – which was more or less the truth of it – he could not have liked Malthus any more than he did. It really is how economic discourse should be undertaken. And from that it occurred to me that the publication of Malthus’s text led onto the General Glut debate, the formulation of what we now call Say’s Law, which then instigated the Keynesian Revolution and thereon to modern macroeconomic theory. There can hardly be an anniversary in the entire history of economics more significant than that.

The second edition from The Liberty Press can be found online here.

The Outline

Malthus may have been the single most influential economist who has ever lived – Karl Marx included. In his own time there was his Essay on Population which was a crucial element in the structure of economic theory as well as a good deal of social policy in his own time and for long after. Far more important, however, was his Principles of Political Economy, published exactly two hundred years ago this year in 1820, which touched off a debate over the possibility of a “general glut” – demand deficiency – that has had two sets of consequences. In his own time and until 1936, the mainstream of the economics community were united in denying the possibility of a general glut, that is in denying the possibility of over-production as a cause of recession and high unemployment. But then, of even more significance, John Maynard Keynes, following his coming across the general glut debate in his reading of Malthus’s correspondence with Ricardo at the trough of the Great Depression in 1932, was set on the road to write The General Theory in which the possibility of a general glut – a deficiency in the level of aggregate demand – was developed so that an under-employment equilibrium was seen as not only possible but common.  Virtually the whole of mainstream economic theory has as a result accepted Malthus’s conclusion down through to the present day.

Malthus published his economics text Principles of Political Economy exactly two hundred years ago in 1820, but what made its publication so notable was that Malthus was already world-famous because he had previously published his Essay on Population in 1798 (a book which has never since then been out of print). Malthus’s Principles was not therefore just another text on economic theory but was authored by the most famous “public intellectual” of his time.

In so far as economic theory was concerned, it was a generally standard account for its time, except that he argued that the recessions that had followed the Napoleonic Wars which had ended in 1815 were due to a general glut, or in modern terms, to a deficiency of demand. The notion of a general glut needed to be distinguished from a particular glut. That an individual product could be produced in quantities so large that not all production could be sold was recognised as obviously true. A general glut, however, suggested that not just individual products, but an excess of output in general of everything could be produced.

The reason that a general glut might occur was due to over-saving. Production was being channelled into proportionately too large a flow of capital goods rather than into consumer demand. The additional capital was creating a flow of output beyond the willingness of the population to consume everything that had been produced, leading to a general glut and a high level of unemployment.

His solution was that the landed aristocracy be encouraged to spend more and invest less.

This proposition led to what has since been called “the general glut debate” which, according to Thomas Sowell, continued through until 1848, only finally coming to an end with the publication in that year of John Stuart Mill’s own Principles of Political Economy.

The core question of the general glut debate was whether it was even conceivable in a world of scarcity that the productive powers of an economy could overwhelm the willingness of a community to buy everything that had been produced. It was conceded by all that too much of any individual product might be produced, and that if there was a large disorganisation in the specific goods and serviced being produced an economy might end up in a downturn where many might lose their jobs.

Virtually every economist at the time entered into this debate.

But the economic consensus was that an economy could not produce more than an economy.


Say’s Law and François Hollande

Following the discussion on L’offre crée même la demande, which are the words the French President used last week to indicate that economic policy will now follow more classical directions, and in particular adopt Say’s Law as the guide to policy, I have pulled this posting out of storage which was put up in December 2012. Having just watched the video again, I am even more astonished than I was then how accurate this is as a representation of the underlying ideas. But central to understanding Say’s Law is to understand that it is a macro concept related to how an economy works, rather than being a micro concept about individuals. In spite of everything you might have learned in a conventional economics course, Say’s Law was the foundation for understanding the classical theory of the cycle. If you want to know what causes recessions and then how to deal with them, you must understand Say’s Law.

My book, Say’s Law and the Keynesian Revolution, has been turned into a movie! John Papola, the genius behind the Keynes-Hayek Rap, has now done a movie on Say’s Law, the fundamental principle of the pre-Keynesian theory of the business cycle. Before Keynes, they knew you could have recessions but they also knew that the one thing that could never be the cause of recessions was a deficiency of demand. Too little demand relative to potential supply was a symptom, not a cause. Today all macroeconomics proclaims demand deficiency as the problem itself that must be cured. Therefore we have had one stimulus after another followed by one economic catastrophe after another. In Australia there’s the mining industry and nothing else to drive the economy forward.

To help you understand the video, here are a few bits of background to catch the full flavour of just how beautifully done this is.

John Maynard Keynes introduced the notion of aggregate demand into economic theory. Before he published his General Theory of Employment, Interest and Money in 1936, demand deficiency as a cause of recession was literally and with no exaggeration seen as a fallacy. Today, of course, his macroeconomics is the mainstream and when recessions occur the first thought in everyone’s mind is to restore demand.

Keynes took the idea of demand deficiency from Thomas Robert Malthus, a nineteenth economist who published his Principles of Political Economy in 1821. Keynes was reading Malthus’s letters to Ricardo in October 1932 which was the specific reason that he would eventually write a book on demand deficiency as the cause of recession. The entire economics fraternity refuses to accept this obvious bit of inspiration since it would make Keynes’s claims to originality not quite as honest as the great man would have liked us all to believe. But since there is general consensus that Keynes formed the idea of demand deficiency in late 1932 and there is no question whatsoever that Keynes was reading Malthus in late 1932, there is equally no doubt that the standard story as peddled by Keynes is utterly untrue.

Say’s Law, which does not get mentioned by name in the video, was called the Law of Markets during classical times. The principle was given the name Say’s Law in the 1920s but it was Jean-Baptiste Say in France and James Mill in England who together are responsible for the initial crafting of this bedrock proposition. But as a very good first approximation to its meaning, there is only a rolling momentary credit to the best short statement which was given by David Ricardo in a letter to Malthus in 1821. There he wrote:

Men err in their productions, there is no deficiency of demand.

Ricardo was trying to explain to Malthus that the recessions that followed the ending of the Napoleonic Wars in 1815 were not due to there being too much saving and therefore too little spending. It was not even spending that mattered. What had gone wrong, the same thing that is the cause of all recessions, is that the goods and services produced did not match the specific demands that people with incomes had. There were therefore unsold goods and services, but not because there was too little spending and too much saving, but because businesses had produced one set of goods (housing in the US to take the most recent example of recession) that could not be sold at prices which covered their costs. The structure of production was wrong which would inevitably, as it always does, affect credit markets as defaults became legion.

The notion that recessions were caused by not enough spending, either in 1821 or in 2012, is ridiculous. There is never a deficiency of demand, only a deficiency of purchasing power. And this is the last element you need to understand the plot of the video. What gives someone purchasing power – what makes individuals within an economy able to buy more – is more production. Producing saleable products – rising productivity – is the only means by which economies can grow and therefore, beneath it all, as Friedrich Hayek explains, there must be more investment in capital (actual productive assets not money) and more innovation which improves the technology embodied in the capital. An economy is driven by supply, never demand.

That is the message of the video. It is a piece of genius that so much can be so cleverly condensed into just over four minutes. But if you wish to understand the point, these are the things you need to know. And if you wish to know even more, there is my book as well.

This has now been posted at Quadrant Online.