The Ricardo - Malthus Correspondence

Ricardo’s Critics: Malthus and Senior

Within a short period after the appearance of Ricardo's Principles, a number of writers rallied to his doctrine and method. Perhaps the most able of these writers was John Ramsay McCulloch, a frequent contributor to Britain's most influential journal, The Edinburgh Review. Also conspicuous among this group were James Mill, the father of John Stuart, and Thomas DeQuincey. These men considered themselves Ricardians, and they faithfully sought to spread and defend the ideas of their master. But Ricardo did not en­joy the luxury of uncritical success. Two of his foremost critics in England were Thomas Malthus, with whom we are already familiar, and Nassau Se­nior, who became the first professor of political economy at Oxford University in 1825.

The Ricardo-Malthus Correspondence

From their first meeting in 1811, there was little of fundamental importance in political economy that Malthus and Ricardo agreed on. This fact is revealed in their lengthy correspondence with each other, which spanned two decades. Many disagreements were minor, but in 1815 their respective investigations of the Corn Law put them on opposite sides of the free-trade issue.

Corn-Law Controversy In Ricardo's system, rent is viewed as a socially unnecessary payment (i.e., a current payment made but not necessary to bring forth the available supply of land). Thus when land rents rise (as Ricardo ar­gued they would under the Corn Law), they do so at the expense of profits. Since Ricardo saw profit as the engine that drove economic progress, he per­ceived in the Corn Law a threat to economic growth, and he therefore argued vigorously in favor of free trade.

Malthus, however, argued that higher corn prices were in the interests of the workers, since the workers' purchasing power was closely tied to the price of corn. It was, as we noted earlier, common for classical writers on political economy to speak of "corn wages" in an attempt to describe real purchasing power. Therefore, a crucial question in the Corn Law debate was whether or not higher corn prices meant higher real wages. Ricardo thought not, and he argued accordingly. Malthus took the opposite stand and argued in favor of the Corn Law.
Their antagonism on this and other points of economics constituted merely the first of many famous disagreements that would ensue among future econ­omists. George Bernard Shaw captured this element of economics in his wry comment: "If you took all the economists in the world and laid them end to end, they still wouldn't reach a conclusion." Are there no permanent truths in economics?

Obviously, economists do frequently disagree, much to the dismay of those individuals who find security in unanimity of opinion. However, as in the case of Malthus and Ricardo, disagreement is rarely based on theoretical principles but rather on interpretation, method, or policy. We have already seen that Malthus and Ricardo agreed on the basic theory of rent. Yet debates on inter­pretation, method, and policy leave considerable room for value judgments, which in turn reduce the frequency of unanimity among participants of the de­bate.

Economic Method

Equally illuminating on this point was the disagreement between Malthus and Ricardo on economic method, which found form in the Malthus-Ricardo debate on exchange value. Recall that Ricardo treated costs as the determinant of value but strove for simplification to the point where a single variable (i.e., labor) became the only significant one. Malthus, on the other hand, who was interested in economic principles "with a view to their practical application," insisted on incorporating Ricardo's cost analysis into a supply-and-demand framework. In this, Malthus was clearly on the right track, but his theory of value did not win out over Ricardo's. The reasons for this are not entirely clear. There were two aspects of the value question that Malthus addressed. The first was an explanation of exchange value; the second, an ex­planation of the measure of value.
According to Malthus, the principle of supply and demand determines what Adam Smith called "natural price" as well as market price. He defined de­mand as the will combined with the power to purchase and supply as the quan­tity of commodities for sale combined with the intention to sell them (Princi­ples, p. 61). "But however great this will and these means may be among the demanders of a commodity," argued Malthus, "none of them will be disposed to give a high price for it, if they can obtain it at a low one; and as long as the means and competition of the sellers continue to bring the quantity wanted to market at a low price, the real intensity of the demand will not show itself (Principles, p. 63). Malthus then correctly concluded that the causes of an in­creased price are "an increase in the number, wants, and means of the de­manders, or a deficiency in the supply; and the causes which lower the price are a diminution in the number, wants, and means of the demanders, or an increased abundance in its supply" (Principles, p. 64).

Ricardo rejected this notion because he understood the term "demand" to mean something different. In fact, a comparative study of the works of both authors shows that Malthus and Ricardo often talked to each other at cross-purposes and that the whole confusion on the role of demand and supply could have been cleared up if they had each understood the difference between a change in quantity demanded (i.e., movement along a demand schedule) and a change in demand (i.e., shift of the schedule). However, the notion of supply and demand schedules had not yet found its way, explicitly, into economic analysis. For his part, Ricardo viewed Malthus's efforts as an undue concern with trivia. In two letters to Malthus, he wrote:

If I am too theoretical (which I really believe is the case), you I think are too prac­tical. There are so many combinations and so many operating causes in political economy that there is a great danger in appealing to experience in favor of a particular doctrine, unless we are sure that all the causes of variation are seen and their effects duly estimated (Works, VI, p. 295).

Our differences may in some respects, I think, be ascribed to your considering my book as more practical than I intended it to be. My object was to elucidate princi­ples, and to do this I imagined strong cases that I might show the operation of those principles (Works, VIII, p. 184).

To be sure, there was also something else at work. Ricardo's theory of value was oversimplified and long run in its outlook, but it was the cornerstone on which the entire Ricardian system rested. To abandon it would lead to col­lapse of the whole analytical structure, something that Ricardo understandably resisted vehemently.

Compared with his views on the nature of exchange value, Malthus's ideas on the measure of value underwent many changes through his successive works. This fact indicates that he was not quite sure of his mind on the subject, a failing that intruded on other parts of Malthus's economics as well. In the final analysis, this wavering aspect of his thought presented a weak defense against the onslaught of Ricardo's relentless logic and may consequently ex­plain why it was Ricardo, not Malthus, who carried the day in British classical economics.

Say's Law and Underconsumption Having challenged the Ricardian theory of value, Malthus was not about to let up. He further questioned the Ricardian theory of profits. One major assumption of Ricardo's analysis was that the cost of producing food controls wages (directly) and profits (indirectly through the effect on wages). In the Ricardian system, higher corn prices lead to higher money wages and falling profits. Malthus, however, would not concede that higher food prices were the only or even the major reason for lower profits. Utilizing a Smithian distinction between "productive" and "unproductive" consumption, Malthus singled out insufficient aggregate demand as a source of weakening investment incentives and thus of lower profits.

Malthus's argument runs as follows. That part of production devoted to the "necessities of life" creates its own demand, whereas the demand for that part devoted to "convenience and luxuries" depends on the consumption habits of the "nonproductive" elements of society (e.g., the landlords). Since the land­lords do not always spend their incomes like other groups in society (i.e., on consumption goods), it is possible that an oversupply of commodities might exist. What is required to guarantee a steady expansion of output and to elim­inate an oversupply of goods is a sufficient level of "effectual demand," and this, Malthus thought, would not be guaranteed by the mere importation of cheap food.

In a letter to Ricardo, Malthus set forth his position on effectual demand:

Effectual demand consists of two elements, the power and will to purchase. The power to purchase may perhaps be represented correctly by the produce of the country whether small or great; but the will to purchase will always be the greatest, the smaller the produce compared with the population, and the more scantily the wants of society are supplied. When capital is abundant it is not easy to find new objects suf­ficiently in demand. In a country with little comparative capital the value of yearly pro­duce may very rapidly increase from the greatness of demand. In short I by no means think that the power to purchase necessarily involves a proportionate will to purchase, and I cannot agree... that in reference to a nation, supply can never exceed demand. A nation must certainly have the power of purchasing all that it produces, but I can easily conceive it not to have the will (Works, VI, pp. 131-132).

The classical idea that Malthus attacked in this passage was the notion that in the process of production, exactly enough income is generated to purchase the output produced and that-barring hoarding-all the income so generated will be spent to purchase that output. Given currency by the French economist J. B. Say, this classical notion became known simply as "Say's law," which states that supply creates its own demand. Few notions were so completely assimilated into the mainstream of classical economics. Malthus's criticism of Say's law therefore indelibly marked him as a maverick among economists, a fact that nevertheless endeared him to that well-known pioneer of modern macro theory, John Maynard Keynes.

Although Malthus's assault on this bastion of classicism had little effect on orthodox economics before Keynes, it contains at least one major insight into the savings-investment decisions that so concerned Keynes at a later date. The insight concerns the idea of an optimum propensity to save. In several key pas­sages from his Principles, Malthus affirmed this idea:
If consumption exceed production, the capital of a country must be diminished, and its wealth must be gradually destroyed from its want of power to produce; if pro­duction be in great excess above consumption, the motive to accumulate and pro­duce must cease from the want of an effectual demand___The two extremes are ob­vious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encourage­ment to the increase of wealth is the greatest (Principles, p. 7).

In other words, Malthus recognized that consumption expenditures represent demand and thafsavings represent potential demand (through investment), but that the latter by no means guarantee effective demand. In more modern jar­gon, ex post saving is always equal to ex post investment (a fact that Malthus apparently accepted), but ex ante saving need not always equal ex ante investment.2 Thus Malthus argued the possibility of a general glut.

Malthus's criticism of Say's law was important for two reasons: (1) it con­tained a theory of output and employment that bore Keynesian trappings, and (2) it constituted a critique of Ricardo's theory of profit. Yet Malthus's analy­sis of aggregate saving was analytically stillborn, since he neither specified the market forces capable of maintaining the optimum rate of saving nor analyzed the purely monetary causes of overproduction. As a consequence, Say's law was successfully defended by Ricardo and his followers, and it subsequently become a familiar cornerstone of classical economics.