Malthus and Ricardo on stability of capitalist economy
This argument between Malthus and Ricardo over the stability of a capitalist system to maintain full employment of its resources significantly influenced the development of economic theory.
In the history of thought, this argument between Malthus and Ricardo is also known as the controversy over Say's Law.
Jean Baptiste (1767-1832) was a French economist. He formulated what is today known as Say's law - a statement that there could be no underutilization of the resources in market economy - supply creates its own demand - in other words, incomes received while supplying the services of productive factors are just sufficient to buy all final goods, which are produced in the economy.
In other words - a capitalist system will automatically provide full employment of its resources and high rates of economic growth.
A crucial step in this statement is that all potential purchasing power, that is all incomes are returned to market as demand for consumer goods (consumption) or producer goods (investment). With regard to the investment, it means that every decision to save some money is also a decision to invest this money. This excludes the possibility of hoarding the money (that is keeping money in the strongbox, in safe, under the bed or hide it somewhere). All money is returned to the economy as consumption spending or investment through the banking system for example.
However, savings do not always turn into investment easily and this is the main weakness of the Say's Law from the modern point of view.
Say's law gives a very positive, bright view of capitalist system. Almost all classical economists accepted Say's Law. Only Malthus attacked it, opposed strongly to this view.
Ricardo's arguments won the battle and Say's law was accepted in mainstream economics until 1930s, when John Maynard Keynes developed his macroeconomic theory and criticized Say's Law. Since then this is a controversial view, no longer accepted by the majority of economists.
But in the most of the 19th century Say's Law was accepted generally and economists believed that market economy has the power to always maintain full employment of its resources - there is no unemployment of labor in capitalism with the exception of these people who do not want to work at the market wage or are in the process of changing employment.
So let's see what were the arguments of Malthus against the view that capitalist economy has immanent stability and always fully employs capital and labor.
Unfortunately, Malthus never precisely stated his arguments, but he presented some both naïve and more sophisticated points about problems of maintaining full employment of resources in capitalism.
His more naïve view was that labor does not receive the whole product produced in the economy (because there are also savings made by capitalists in the economy) and so demand created by the labor class is not sufficient to purchase all final goods at market prices. Labor class lack the purchasing power sufficient to buy all the goods produced in the economy.
This is of course correct, but Malthus did not see that capitalists return their savings to the market in form of demand for produces goods (as investment), there will be no deficiency of aggregate demand.
His more sophisticated view was that too much savings in capitalism can produce troubles in capitalism in the long-run.
He claimed that there is appropriate rate of capital accumulation in the economy that the economy can absorb and that too much saving and investment will cause difficulties.
According to Malthus, the process of savings leads to a reduction in the demand for consumer goods (we save more and limit our expenditures for consumer goods) and the process of investment leads to the production of more consumer goods in the future - but the demand for these goods is reduced today (we save more). Therefore, according to Malthus there is a possibility that in the long run, consumer demand will not be sufficient to purchase all final goods produced. Therefore, there is a possibility of depression and unemployment of factors of production in the long run.
This is quite confused and not a very detailed explanation of a possible depression in capitalism in the long-run and most economists at the time were not persuaded. The problem of stability of capitalism returned to economics only after over 100 years during the Great Depression of 1930s. and the discussion of the reasons for unemployment in capitalism was taken up then by J. M. Keynes. Classical economists during the whole 19th century did not rather believe that there could be some excessive unemployment of resources in capitalism.
2