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The Work of Thomas Malthus. Thomas Malthus: 1766-1834 Malthus, Thomas. 1798. An Essay on the Principle of Population as It Affects the Future Improvement of Society Published Anonymously . The Basics Assumptions of Malthus. Food is necessary for the existence of humankind.
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The Work of Thomas Malthus • Thomas Malthus: 1766-1834 • Malthus, Thomas. 1798. An Essay on the Principle of Population as It Affects the Future Improvement of Society Published Anonymously.
The Basics Assumptions of Malthus • Food is necessary for the existence of humankind. • Passion between the sexes is necessary and will remain unchanged.
The Conclusions of Malthus • Population tends to grow faster than the food supply • Food increases arithmetically • Population increases geometrically • This is the cause of poverty and misery
Policy Implications of Malthus • Policy implications from Malthus • Rising wages lead to rising populations • Rising populations lead to falling wages • Hence, policies to improve the plight of the poor are futile.
Malthus Today • Galor, Oded and David N. Weil. 1999. “From Malthusian Stagnation to Modern Growth”American Economic Review. (May): 150-154. • The article focuses on three aspects of economic development: 1. Malthusian Regime 2. Post-Malthusian Regime 3. Modern Growth Regime Refer to Figure 1 in the article.
Summarizing Malthus Two aspects of the Malthusian Model • A factor of production (land) is in fixed supply. Hence diminishing returns applies to all other factors of production. • Law of Diminishing Returns - As a variable input increases, holding all else constant, the amount of output from each additional input employed will eventually decline. • Hence, output from land may increase, but at a diminishing rate. 2. There exists a positive relationship between standard of living and population growth. Increases in income will lead to increases in population. • Conclusion: Level of per-capita income will remain the same in the long-run. Increases in income will only lead to more people, which will lower per-capita income.
Evidence Supporting Malthus • Agnus Madison (1982) estimates that the growth rate of GDP per-capita in Europe between 500 and 1500 was zero. • Massimo Livi-Bacci estimates that the growth rate of world population between 1 A.D. and 1750 to be 0.064%. In other words, population was very stable. • The argument that population and wages are linked was borne out by the Black Death. The plague in Europe in the 14th century reduced population, which in turn raised wages. Higher wages, in turn, lead to increases in population. • Population could rise if technology improved. However, increases in technology would not change per-capita income, only the size of population. We do observe differences in technological levels across pre-capitalist societies, but little difference in standard of living.
What Happened? • As per-capita income rose in Europe, initially population also rose. However, the increase in population could not keep pace with the increase in technology. Hence, Western civilization escaped the Malthusian trap. • Evidence: Between 1740 and 1840, life expectancy in England increased from 33 to 40. In France, life expectancy rose from 25 to 40. In other words, standards of living were improving. • Initially population also increased. Fertility rates, though, by the end of the19th century slowed. • How is it that the link between income per capita and population growth was severed? • How does one account for the sudden spurt in growth rates?
The Galor-Weil model • Technological progress raises the rate of return to human capital and hence induces parents to substitute quality for quantity of children. Evidence: Rates of schooling in Europe increases from 2.3 years to 9.1 years from the beginning of the 19th century to the onset of the 20th century. • As children become more educated, the speed of technological progress increases. • As population rises, the land to population ratio falls, and wages decline. Hence, population will fall. Rapid technological progress, though, overcomes the land constraint, allowing wages to rise.
Galor and Weil Regimes • Malthusian Regime • Increases in income lead to increases in population, which means per-capita income falls back to its original levels. • Therefore, income per-capita is roughly constant • Post-Malthusian Regime • Increases in income lead to increases in population • But income rises faster than population so per-capita income rises • Modern Growth Regime • Per-capita incomes continues to rise. • Parents choose quality of children over quantity and population starts to fall.
Technological Progress and Population Growth • Higher incomes allow families to have more children. • The return on human capital increases, encouraging families to substitute quality for quantity. • In the Post-Malthusian world, the first effect dominates. In the Modern Growth era,the second effect is more important.
Technophysio Evolution • Fogel, Robert W. 1999. “Catching Up with the Economy.” American Economic Review. March: 1-21. • “Technophysio evolution (the existence of a link between technological and physiological improvements) implies that human beings now have so great a degree of control over their environment that they are set apart not only from all other species, but also all previous generations of Home Sapiens. The new degree of control has enabled Homo Sapiens to increase its average body size by over 50 percent, to increase it average longevity by more than 100 percent, and to improve greatly the robustness and capacity of vital organs.”
What is the impact of technophysio evolution? • The human species is increasing in size. A male of average size (5 ft. 10 in, 172 pounds) requires 2300 calories per day. If the population of Europe averaged this size in 1700, the quantity of food would have proved insufficient to support work. Hence, we can conclude (and the evidence supports this conclusion) that the population had a smaller average size. • Fogel argues that technophysio evolution accounts for about 50% of British economic growth over the past two centuries.
Defining Economic Growth • Economic growth: Transformation of a nation’s inputs into greater and greater amounts of output. • Intensive growth: Growth due to an increase in the quality of a nation’s factors of production. • Extensive growth: Growth due to an increase in the quantity of a nation’s factors of production.
Intensive Growth, Historically • Intensive growth is due to changes in technology or international trade • Is technological change likely in a pre-capitalist society? • In a society based primarily on tradition, innovation is not only not encouraged, but actively discouraged • Why? In a community where people are primarily living at subsistence, any change could potentially destroy the community. In other words, tradition represents certainty, uncertainty threatens the survival of the community.
Impact of Trade • Intensive growth can occur via improvements in the quality of labor. This can occur via trade, which widens markets, and allows for a greater division of labor. • Was this a common event? Trade was an integral part of Ancient Greece, the Phoenicians, the Roman empire, etc. However, one could argue that most people and communities did not benefit from international trade.
Extensive Growth, Historically • Increasing labor, while holding the quality of labor constant, does not alter per-capita growth. • Increasing land is only possible via warfare. • Capital accumulation is limited because of • technology does not exist. • even if technology did exist, usury laws discourage the lending of funds from savers to borrowers.
Zero Economic Growth • Conclusion: In the absence of trade, economic growth in pre-capitalist societies is zero. • Consequently, pre-capitalist societies designed institutions with the expectation of zero economic growth. Such institutions included a prohibition on usury (the charging of interest on loans) and the ‘Just Price.’
Zero Economic Growth and the Structure of Society • The possibility of economic expansion was not envisioned in pre-capitalist. Without growth, how do you satisfy people’s “unlimited” wants? • The key is to limit desire. An examination of the philosophies of Aristotle and Thomas Aquinas reveals the emphasis each places on limiting wants, rather than expanding capabilities. • The limit on wants means that the terms of exchange must be regulated so that substantial gains or losses are not incurred. Such an event would encourage people to ignore traditional obligations (with gain) or prevent the fulfillment of societal obligations (with losses).
Why did usury laws exist? • In a society without economic growth, all transactions are perceived as being zero-sum • the gains of winners = the losses of losers • In this environment, how would people regard the lending of funds? • People with wealth are giving money to people without funds. In return, the people without funds pay the people a greater sum of money. In other words, the poor are transferring wealth to the rich. • In sum, charging interest increases the divide between the wealthy and the poor.
On the Road to Capitalism • Mercantilism: An economic system in which the government determines the allocation of resources by assigning the rights to certain economic activities. • Further technological change expands the trade possibilities, opening people to new products (primarily food related). • Expansion of trade requires political stability. Hence the merchants conspired to promote kings at the expense of the church and the aristocracy. • Hence change occurred on two fronts both politically and geographically. These changes should be seen as linked.
Summarizing Mercantilist Thought • Following the scholastics, who assumed the gain of one person via trade was another person’s loss the mercantilist’s assumed the total wealth of the world is fixed. Exchange between nations via international trade was thus a zero-sum game. • The wealth of a nation was increased via increased production, increased exports, and decreased domestic consumption. In other words, maximize the difference between exports and imports.
Mercantilist Trade Policy • A nation should encourage exports via • government encouragement of domestic production • acquisition of cheap raw materials via imports • maintaining low wage levels • Imports should be discouraged via tariffs, quotas, subsidies, and taxes • A “favorable” balance of trade will lead to an increase in a nation’s stock of precious metals, which is how a nation’s wealth was defined.
The Price-Specie Flow Mechanism • Favorable balance of trade would increase the flow of gold and silver (specie) into the economy. • The increased money supply would increase the level of price. • Higher prices will lead to a decline in exports and an increase in imports. • For nations with an unfavorable balance of trade, the opposite would occur. • Thus no nation could maintain a favorable balance of trade in the long run.
Feudalism vs. Capitalism • Under feudalism the focus of society is on the community. The individual cannot be the primary focus, since life is a zero-sum game. • Under capitalism the focus shifts to the individual. In essence, the viewpoint of the merchants increasingly dominates society. The shift in focus creates incentives for innovation, which leads to higher incomes, which further encourages technological change. • In other words.... the vicious cycle which dominated much of human history (life is a zero-sum game so we create institutions that encourage a zero-sum game) was replaced by a virtuous cycle. (life is a positive-sum game so we create institutions that encourage a positive-sum game).