Study unit 3
Chapter 6, 7 & 8:
Chapter 6
- Malthus on the Poor Laws
Malthus believed poverty and misery are natural punishments for the failure by the “lower classes” to restrain their reproduction. He felt that there must be no government relief for the poor. He believed that by giving them aid would cause more children to survive thus ultimately worsening the problem of hunger. Some of his ideas were adopted into the Poor Laws. This law abolished all relief for able-bodied people outside workhouses. A man applying for the relief had to pawn all his possessions and then enter a workhouse before assistance was granted; his family either entered a workhouse or was sent to work in the cotton mills. Either way, the family was broken up and treated harshly to discourage it from becoming a public charge. These workhouses were invested with a social stigma and entering them can at a high physiological cost. The law aimed at making public assistance so unbearable that most people would rather starve quietly than submit to its indignities.
- Malthus’ population theory
According to Malthus, Population when is unchecked, increases geometrically; subsistence increases at best only arithmetically. That is, population tends to increase at the rate of 1, 2, 4, 8, 16, 32, and so forth, whereas the rate of increase of subsistence is at best only 1, 2, 3, 4, 5, and 6.
Malthus identified two types of checks to population growth: those he called “preventive checks” and those he called “positive checks.”
Preventive checks - Preventive checks to population growth are those that reduce the birth rate. The preventive check of which Malthus approved was termed moral restraint. People who could not afford children should either postpone marriage or never marry; conduct before marriage should be strictly moral.
Positive checks - Malthus also recognized certain positive checks to population—those that increase the death rate. These were famine, misery, plague, and war. Malthus elevated these to the position of natural phenomena or laws; they were unfortunate evils required to limit the population.
- The meaning of Say’s law
The law is most commonly expressed as “supply creates its own demand”, meaning that total income created during a given production round is sufficient to buy up the production of that same production round.Notice that Say’s law does not claim that the very act of supplying an individual good will create a demand for it.No, Say’s law applies only to the aggregate level. It claims that aggregate supply creates its own aggregate demand.Take as your starting point all those in the economy who, at a given moment, spend money to buy goods. Their spending will create income for the sellers of these goods. If these sellers subsequently spend their entire recently earned income on buying goods again, total demand for goods will sustain itself at an unchanged level. If that level were originally sufficient to buy up total production and there was no increase in output (no economic growth), the re-spending of all income would guarantee that there will be no market glut. Say’s law holds.
- Malthus’s explanation for the failure of Say’s Law
Malthus saw the economy as having perfectly synchronized production rounds of equal lengths. Thus all firms start producing at the same time, pay wages at the same time and start selling finished goods at the same time. It would then appear that the finance to buy up the output of the current production round consists of nothing more than the wages paid out during the current production round. Entrepreneurs are thus prevented from making any profit even when workers spend their wages in full (no leakages). Because these wages are a cost of production for the firm, the following must hold for the firm sector as a whole: aggregate demand for goods = cost of producing these goods. Firms can at best earn back what they previously paid in wages and demand is never sufficient for firms to make a profit. As a result of not making a profit, firms will not be inclined to invest and economic activity would stagnate. This was the problem Malthus saw. The only way for firms to make a profit is to find a demand for their goods which is not a cost of production for them.
- The theory of market gluts
Ageneral glutis an excess of supply in relation to demand. (Page 99)
Chapter 7
1. Inductive, historical method vs abstract, deductive method
Inductive, historical method is the German Historical School. Economists of this school emphasized the importance of studying the economic historically as part of the integrated whole. Abstract, deductive method is the Marginalist school. Marginalists rejected the historical method in favor of abstract, deductive, analytical approach pioneered by Ricardo and other classicist.
2. Why, according to Ricardo, price determines rent rather than the other way around
Ricardo could ignore the influence of rent on price, because he (Ricardo) assumed a single use of agricultural land, say grain production. There being no alternative uses, the opportunity cost of grain production is zero. As an opportunity cost of land use, rent is therefore zero; so it cannot influence price. Ricardo assumes “marginal cost pricing” of agricultural products (price = marginal cost), while rent is not part of the marginal cost of the land cultivator. Rather it is a fixed cost, which remains the same for the land cultivator, irrespective of how much he produces on his parcel of land. Because rent is reckoned as part of average cost (total cost divided by quantity produced), rent then impacts price.
Chapter 8
- Mill on production - Mills analyzed 3 productive factors –
Land, labour & capital. Productive labour includes only those kinds of exertions that produce utilities embodied in material objects. Labour that yields a material product only indirectly is also held to be productive thus including educators & government officials. Unproductive labour is that which does not terminate in the creation of material wealth. Capital is the result of saving and is the accumulated stock of the produce of labour, and their aggregate amount limits the extent of industry. Everything that is not spent is saved and everything saved is invested. Thus the rich by use of their savings (investments) can give employment to the poor. If the rich spend less o luxury goods and more on investments then the wage fund & demand for labour would rise. If the population increases, the increase in demand by wage earners would offset the decrease in demand for luxury goods by capitalists. If the population does not increase in proportion to the growth of capital, wages would rise and luxury consumption by workers would supplant luxury consumption by their employers. This is the optimistic world of full employment. Population is limited by the fear of want rather than by want itself (people do not reproduce above a point where they can support their wants/needs). Increase of capital depends on two things – the surplus product after the necessities are supplied to all engaged in production and the disposition to save. The greater the products that can be made from capital the stronger the motive for its accumulations. Land is limited and Mill applied the short run law of diminishing returns and the long run concept of returns to scale to land.
- Wage Fund Doctrine
Mill, like many before him, accepted the wage fund doctrine. Wages according to him depend mainly upon labour demand & supply. Wages cannot rise except by an increase of the aggregate funds employed in hiring labourers or by a decrease in the numbers of workers employed. Wages cannot fall except by a decline of the funds devoted to paying for labour or by an increase in the numbers of labourers to be paid. According to Mill, government cannot increase total wage payments by fixing a minimum wage about the equilibrium level. The higher wages that some workers would receive will be offset by the loss of employment others will face. This doctrine provided a basis for opposing unionism but Mill did not use it for this purpose. Workers cannot raise their income through collective action – if wages rise in one place it falls in another.