Aggregate Demand and the Malthus-Keynes Relation

The determination of the profit rate in terms of the land-based growth model, or its two-sector refinement, relates to the maximum possible return (Malthus 1820: 300, 1836: 275). The return on capital might, however, be lower. The relevant chapter, ‘On the Progress of Wealth’, analyses the problem of secular stagnation notwithstanding high growth potential, or the absence of a land- scarcity constraint (ibid.: 1820: 345, 1836: 309). I set aside issues peculiar to economic development strictly defined and focus on a perceived problem of aggregate-demand deficiency disallowing sustainable output expansion, and depressing the rate of return, arising from a process of ‘saving’—translated into real capital accumulation and resulting in expanded capacity—financed by reduced consumption. Here lies the prime theoretical difference with Ricardo, who relied on the Law of Markets to assure expansion of markets to absorb increased output emanating from a larger capacity.

Malthus, however, characterized the war period 1793-1814 as one of unparalleled sustainable growth because the creation of new capacity was in response to and financed out of initially increased profits reflecting expanded markets rather than out of reduced consumption (ibid.: 1820: 459, 1836: 395). The prosperity is also attributed to war finance via government borrowing and ‘unproductive’ expenditure which raised the profit rate and stimulated private accumulation (ibid.: 1820: 373-374, 1836: 329-330).

Malthus’s technical argument relating to unsustainable growth is problematic. Consider the proposition that a successful saving (investment) process requires initially raising the exchangeable value of aggregate output by way of demand emanating from outside the productive sector, or by ‘the maintenance of an adequate proportion of unproductive consumers [1836: consumers not directly productive of material objects]’ (ibid.: 1820: 463, 1836: 398). The problem is that a source of demand external to the productive sector was not in fact posited, as is implied here, as a necessary condition for sustainable growth:

[W]ithout supposing the productive classes to consume much more than they are found to do by experience, particularly when they are rapidly saving from revenue to add to their capitals it is absolutely necessary [1836: it is necessary] that a country with great powers of production should possess a body of unproductive consumers [1836: consumers who are not themselves engaged in production].

Indeed, Malthus is explicit in both editions that ‘there can be no occasion for unproductive consumers, if a consumption sufficient to keep up the value of the produce takes place among those who are engaged in production’, and that ‘there might be little occasion for unproductive consumers’ were capitalists to restrict their savings to ‘what could be beneficially added to their capitals’ (ibid.: 1820: 464-465, 1836: 399-400). The empirical norm, however, was an excessive response to profit opportunities, reflecting a Marx-like passion for saving: ‘Almost all merchants and manufacturers save, in prosperous times, much more rapidly than it would be possible for the national capital to increase so as to keep up the value of the produce’ (ibid.: 1820: 465, 1836: 400). At the close of his book, Malthus again insists on ‘a greater tendency to parsimony than is consistent with the most effective encouragement to the growth of public wealth’ (ibid.: 1820: 517, 1836: 434). Malthus, we may conclude, does not propose a ‘general theory’ of unsustainable growth reflecting aggregate-demand deficiency.

Notwithstanding his reputation as a pioneer of historical economics, Malthus offered only two instances of the alleged excess, taking for granted that if land scarcity can be ruled out there remained only his own explanatory candidate for any observed downward trend of interest and profit rates. The first is the British case after the mid-eighteenth century:

[T]hat this fall in the rate of interest and profits arose from a redundancy of capital and a want of demand for produce, rather than from the difficulty of production on the land, is fully evinced by the low price of corn at the time, and the very different state of interest and profits which has occurred since (ibid.: 1820: 475-456, 1836: 405-456).

Late seventeenth-century Italy provides a second instance of the purported phenomenon. These casual appeals to the historical record to support a theoretical argument scarcely justify Keynes’s attribution to Malthus of a sustained concern with ‘inductivist verification’. We recall also the purely ‘theoretical’ response to Jones in justifying the land-based growth model. Malthus does not, at least in these key instances, live up to his own insistence that ‘general experience’ alone can provide the foundation of ‘a just theory’.

The perceived problem of an excessive rate of saving (investment) arises only when profits are initially high; there would be no motive to expand capacity during periods of low profits. Accordingly, Malthus did not analyse the post-war years of depression in terms of his notion of unsustainable growth; rather, those years are characterized in his account by saving unaccompanied by corresponding investment. The initiation of the depression is found in a sudden inflow of foreign corn generating falling farm incomes and consequently reduced expenditures on manufactured products; monetary contraction was a contributing feature (Malthus 1820: 493-494, 1836: 416-417). With Ricardo in mind, Malthus asked: ‘[W]here are the understocked employments...fully capable of absorbing all the redundant capital which is confessedly glutting the markets of Europe in so many branches of trade? It is well known by the owners of floating capital that none such are now to be found’ (ibid.: 1820: 499, 1836: 420). Malthus also refers to capital flight abroad,

when profits are low and uncertain, when capitalists are quite at a loss where they can safely employ their capital, and when on these accounts capital is flowing out of the country.when all the evidence which the nature of the subject admits.distinctly proves that there is no effective demand for capital at home

(ibid.: 1820: 495, 1836: 418).

The weak incentive to invest is also attributed to a lag of wages behind the fall in prices (ibid.: 1820: 446-447, 1836: 387). But wage adjustment did not provide the solution, for the stagnation continued even after labour had ‘adjusted itself to the new level of prices’ (ibid.: 1820: 446, 1836: 387). For though labour is cheap, there is neither the power nor the will to employ it all; because not only is the capital of the country diminished, compared with the number of the labourers, but, owing to the diminished revenues of the country, the commodities which those labourers would produce are not in such request as to ensure tolerable profits to the reduced capital (ibid.: 1820: 495, 1836: 417).

One passage concerns the sudden reduction at war’s end of government spending accompanied by lower taxation and ‘saving’ from increased disposable incomes:

The returned taxes, and the excess of individual gains above expenditure, which were so largely used as revenue during the war, are now in part, and probably in no inconsiderable part, saved. I cannot doubt, for instance, that in our own country very many persons have taken the opportunity of saving a part of their returned property tax (ibid.: 1820: 499, 1836: 420, Hollander 1997: 609).

Since, in the prevailing circumstances, attempts to add to capacity were repeatedly ruled out, it would seem fair to understand ‘saving’ in this context as hoarding or a demand for money to hold, or other forms of leakages. Somewhat more tricky is a reference to ‘that disturbance in the balance of production and consumption, which has been occasioned by the sudden conversion of soldiers, sailors, and various other classes which the war employed, into productive labourers’ (Malthus 1820: 512, 1836: 430) which might be said to imply the employment of the demobilized servicemen in actual investment programmes that turned out to be unsustainable. But again, Malthus’s account of post-1814 Britain points away from this reading.

Can we then conclude—as did Jacob Viner—by saying that ‘Malthus attributed the depression, apparently, to an increase in saving unaccompanied by a corresponding increase in investment, and thought that, given the absence of sufficient incentive for investment under prevailing conditions, the remedy was to be found in increased private expenditure on consumption’ (Viner 1937: 194, fn. 27)? The answer would be clearly affirmative were it not for one severe complexity. Although Malthus recognized leakages from the expenditure stream in the post-war years, when refuting those who appealed for increased ‘saving’ as the solution to the problem of unemployment he has in mind not hoarding but real investment or additions to capacity. We must carefully note that nothing is said of investment as implying a net increase in expenditure; the objection to the proposal turns rather on the increased flow of output emerging from the expanded capacity corresponding to increased ‘saving’:

[S]aving is the means of furnishing an increased supply for the increasing national wants. If however commodities are already so plentiful that an adequate portion of them is not consumed [1836: profitably consumed], the capital so saved, the office of which is still further to increase the plenty of commodities, and still further to lower already low profits, can be comparatively of little use [1836: to save capital can only be still further to increase the plenty of commodities, and still further to lower already low profits, which can be comparatively of little use] (Malthus 1820: 467, 1836: 401).

We thus find intruding the concept of unsustainable expansion which is strictly pertinent to growth economics, or the ‘long run’. Furthermore, it is evidently assumed that the finance of capital expansion derives from a reduction in consumption spending rather than from hoarded funds, since otherwise increased current expenditure could not possibly be neglected; indeed, the point in question is precisely that a reduction in consumption outlays to finance increased capacity as a solution to depression must be damaging.

The foregoing orientation is amply confirmed by Malthus’s counter proposal for tax-financed public works as the most immediate step available (ibid.: 1820: 511, 1836: 429). For while increased government outlays would admittedly be balanced by reduced private outlays precluding any net increase in expenditure—the ‘Treasury View’ as it later came to be termed in Britain—a stimulus is yet perceived to be generated by the transfer from ‘productive’ to ‘unproductive’ expenditure:

[I]n our endeavours to assist the working classes in a period like the present, it is desirable to employ them in unproductive labour, or at least in labour [1836: those kinds of labour] the results of which do not come for sale into the market, such as roads and public works. The objection to employing a large sum in this way, raised by taxes, would not be its tendency to diminish the capital employed in productive labour; because this, to a certain extent, is exactly what is wanted

(ibid.: 1820: 511, 1836: 429).

The significance of all this becomes apparent when we revert to the Malthus-Keynes relation. That Keynes held Malthus in the highest regard is not in any doubt. But admiration falls short of affirming positive ‘influence’. For he was not uncritical in the ‘Robert Malthus’ essay of the analysis of the ‘balance of Saving and Investment’ (Keynes 1933 [1972]: 102). Moreover, in The General Theory, while commending Malthus for assuring ‘the notion of the insufficiency of effective demand...a definite place as a scientific explanation of unemployment’ (Keynes 1936 [1973]: 362), he expressed regret that Malthus had failed to provide an adequate ‘alternative construction’ to

Ricardo’s since he was ‘unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive’ (ibid.: 32). For this there is considerable justification since the technical case for ‘unproductive consumption’ in the growth context is not adequately supported—recall that the requirement turns on an empirical estimate of excessive responses to high profits.

Recognition by Malthus of excess demand for money to hold in his portrayal of the post-Napoleonic depression might certainly be said to have a ‘Keynesian’ flavour. But there are two important riders. First, allowance for excess demand for money is scarcely unique to Malthus, as Mill’s famous ‘Of the Influence of Consumption on Production’ testifies. Malthus himself pointed out to Ricardo, correctly, that Say, no less, acknowledged the phenomenon (in Ricardo 1951-1973, volume VIII: 260). But secondly, and more important, we recall that when objecting to proposals for increased ‘saving’ to ameliorate the depression, Malthus—identifying ‘saving’ with a real ‘investment’ programme financed by reduced consumption expenditure— focused entirely on the damaging impact on activity of an expanded flow of output emanating from a larger capacity in the face of reduced consumption. This is far from the approach in The General Theory, where output flows deriving from investment expenditure are, of course, irrelevant in the ‘short run’.

The difference between the Malthus’s and Keynes’s worlds is particularly striking when it comes to public works proposals. Malthus’s argument for mitigating a depression by tax-financed public works expressly adopts the Treasury View, relying on a stimulus provided by the switch from ‘productive’ to ‘unproductive’ (in this case, government) spending. By contrast, Keynes’s analysis of the multiplier effects of public works assumes there to be no contemporaneous reduction in either consumption or investment (Keynes 1936 [1973]: 116-117, 119).

Conspicuous in Malthus’s account of the depression is the absence of automatic adjustment mechanisms assuring recovery; the alleviation of the depression is attributed to ‘the happy opening of new and large channels of exportation’ reflecting, in part, trade liberalisation (Malthus 1824: 324). Reliance on external stimuli suggests a Keynes-like ‘unemployment equilibrium’ in their absence. Furthermore, as with Keynes, downward wage flexibility was perceived as a necessary but insufficient condition for recovery. However, on only one occasion, to my knowledge, did Malthus caution that reduced wages would have a tendency to diminish aggregate demand (see Malthus 1827). Moreover, even here there is no suggestion that a nominal wage reduction cannot assure a real-wage reduction, a conspicuous feature of Keynes’s analysis.

Taking a broader perspective, there is surprisingly extensive common ground between Malthus and orthodox economists regarding stabilisation policy. Thus, Malthus rejected monetary injections as a solution to the post- 1814 depression (Malthus 1820: 514-515, 1836; 431-432). He adhered to standard opinion regarding the Gold Standard, and in one respect he was more conservative than Ricardo, who justified permanent devaluation of the pound should that be called for to avoid severe deflation. Malthus’s fiscal conservatism also emerges in the rejection of debt financing in the post-war period on the supply-side grounds that the future burden of taxation required to pay off the National Debt would hamper production. Particularly striking is his objection to interference with the rate of saving, notwithstanding his preoccupation with its ‘caprices’, particularly a tendency to ‘excessive’ saving in response to a high return on capital mitigating against sustainable growth. That there was no Malthusian ‘revolution’ is understandable not only because of the deficiencies in the argument regarding the necessity for ‘unproductive consumption’ but also because novel policy implications were absent to resolve the perceived problem.

However, this conclusion must be qualified. It would be easy to get the picture out of focus if we dismiss Malthus’s practice of putting to the test policy proposals according to their impact on macro-distribution and consequently on the volume of final demand. The establishment of a research programme of this order—to be illustrated presently by Malthus’s caution regarding National Debt repayment and, more generally, preoccupation with the difficulties of correcting faulty policy—goes far to justify Keynes’s qualified enthusiasm.

There remains a complexity in the record that we can only mention briefly here. Keynes was much impressed by Malthus’s account of a protracted post-war depression that, Malthus charged, Ricardo failed even to acknowledge. But a recent study (Davis 2005) demonstrates that Ricardo’s intimate knowledge of contemporary monetary and financial circumstances convinced him that there was no unmitigated depression requiring explanation but rather a series of cyclical fluctuations. If this is so, Ricardo’s macromodel incorporating the Law of Markets by no means precluded a proper diagnosis of the post-Napoleonic years.