Malthusian Theory

The Theory
The Concept of Development: He regarded the process of
development as a result of consistent efforts rather automatic.
For him the process of eco.dev. Was one of the ups and downs of
economic activity rather than smooth.
He was concerned with the progress of wealth of a country means
eco. Development.
-Economic Dev. Through increasing the wealth of a country.
-Wealth= Qty. of produce + valuation of the produce.
Population Growth and Economic Dev.
-According to him population growth itself is not sufficient for
ece.development.
-Economic Dev. =Population growth +development process.
-Increase in population is the result of proportionate increase in
wealth. Because increase in K accumulation demands more labor
thus more population. And population growth increases wealth
through effective demand.
-Hence mere increase in pop. growth does not increase wealth.

Malthusian Theory
Role of production and distribution
He regarded production and distribution
as two grand elements of wealth.
If combined in right proportions, they
can increase the wealth of a country in
a short time otherwise it would take
long time for development.
He emphasis on max. production and
optimum allocation of resources to
produce wealth of a country.

Malthusian Theory
Factors in Economic Dev.
Economic and Non Econ. Factors.
Size of potential GNP depends upon
land, labor, capital and organization.
The above factors max. the production
in two major sectors: agriculture and
industrial sector.
Non Economic Factors: security of
property, good constitution and
excellent laws, hard working nature
etc.

Malthusian Theory
Process of Capital Accumulation
Capital accumulation is the most important
determinant of eco. Dev.
Capital formation= profitsaving of capitalists.
Profits comes from capitalists savings rather then
poor income earners.
Deficiency of Effective Demand
Is based on the denial of Says law of markets.
Commodities are not always exchanged with
commodities. In fact great mass of commodities is
exchanged directly for labour. Since workers
(who are consumers) receive less then the value
of the product they produce. Therefore, they can
not buy all commodities which results in surplus.

Malthusian Theory
Economic Stagnation
Supply of labor is inelastic in the short run. But the
supply of capital can be increased faster as
compared to population.
Capitalists invest on productive labor--- wage rises
due to competition. But increase in wage don't
create effective demand bcz workers prefer leisure
over increased consumption. So there is a glut of
commodities in the market.
Resultantly price fall---profit fallsinvestment falls
and both the power of accumulation and the
motive to accumulation are strongly checked.
The gluts leads to stagnation.

Malthusian Theory
Measures to promote Econ.dev.
1.Balanced growth.
Division of economy in agri. Sector and industrial sector. It is
technological progress in these two sectors that can lead to
economic dev.
Capital inv. In agri. till all land is brought under cultivation.
After that there in no more opportunity for profitable
investment in the sector due to diminishing return.
Then move to industrial sector.
However, diminishing return in agri. Sector can be avoided if
technological advancement in industrial sector is rapid
enough to absorb most of the population growth in industrial
sector, permitting reduction in wages in agri. Sector.
2. Raising Effective Demand
i) By more equitable distribution of wealth and landed
property. Low income proprietors create less effective
demand as compared to rich proprietors.

Malthusian Theory
ii) Effective demand can be increased by the expansion of
the internal and external trade. As trade increases wants,
tasts and desire to consume.
Trade keep up the market price of commodities and prevent
the fall of profit.
Iii) Maintenance of unproductive consumers to increase
effective demand.
As production can be raised through raising consumption.
Therefore, unproductive consumption by land lords and rich
persons can increase effective demand.
iV) Malthus suggested public works schemes to remove
unemployment and increase effective demand.

Malthusian Theory
Conclusion:
It is under consumption that leads to gluts of
commodities in the markets and is the main cause
of underdevelopment.
For dev. Both agri. And industrial sectors should
be developed to get max. production. This will
come through technical progress, equitable
distribution of wealth and land, expansion of
internal and external trade, increase in
unproductive consumption and increase in
employment opportunities. Besides, there are non
economic factors such as education, moral
standards,
hard
working
habits,
good
administration and efficient laws.

Malthus Theory
Critical Appraisal
1. Stagnation not inherent in capital accumulation.
He says capital accumulation leads inherently to
stagnation. This is wrong. According to Malthus there is
possibility of permanent under consumption of all
commodities, but actually it is not so because it is a
temporary phenomena.
2. Commodities not exchanged for commodities directly.
He said that commodities are exchanged for labors. In fact
labor is not a correct measure of commodities. In the real
world, we use real prices to measure commodities.
3. Unproductive consumers retard progress.
He suggests spending by unproductive consumers to
support under consumption and to increase effective
demand. It is wrong as it support the idle persons. This
measure will slow down the econ. process.

Malthusian Theory
4. One sided saving base
He believed that it is only the land
lords who save. But this is an
erroneous view because the major
source of savings in a society is the
income earners and not profit
earners.

Malthusian Theory
Applicability to Underdeveloped countries
Malthuss division and analysis of an economy into the
agriculture and industrial sector is highly realistic.
Lack of capital is the main cause of poverty in the
agriculture sector.
Technological advancement can lead to dev. In both
sectors.
The link b/w population growth and eco. Dev.
Valid policy reforms of balance growth, increase in
effective demand, increase in trade etc.
Contradictions: According to Malthus lack of effective
demand was due to parsimony of capitalists. The
remedy he suggested was unproductive consumption
by rich peoples.

The classical theory

1. Laissez-Faire Policy: classical economists believe
on the free market economy. The operation of
invisible hand.
Existence of free market perfectly competitive
market.
2. Capital accumulation.
The theory regarded capital accumulation as a key
to eco. progress and it will be through saving.
The saving will come from capitalists and landlords
The working class incapable of saving as it get
wages equal to subsistence level.
3. Profits, the incentive to Investment
Larger the profits, greater the capital accumulation.

The classical theory

4. Tendency of Profits to Decline
Profits decline due to increase in competition. As wages
increases due to competition.
5. Stationary state
Classical economists visualize the stationary state as the
end of process of capital accumulation.
When profit starts declining, it ends till profit become zero,
population and capital accumulation stop increasing and
wage rate reaches the subsistence level.
According to Smith, stationary occurs due to scarcity of
natural resources.
Malthus establishes correlation b/w population growth and
food security. He said if population growth remained
unchecked then it would outrun the capital growth and hence
the means of subsistance.
Mill points out that in the absence of technical improvement
in agri., the profits starts decline and ultimately the stationary
state.

The classical theory

Summary
Increase in profitsincrease in inv.
increase in capital stock and improved
techniques---this will increase wages--increase in population---increase in food
demand----need additional labour and
capital---but due to diminishing return to
land increases additional cost----reduce
profits---reduction in investment---retarded
technological progress---diminishing wages
and population growth and capital
accumulation.

Critical Appraisal
1. Ignore middle class: In England two classes
capitalist and labourers.
2.Neglects public sector: i.e. the role of public sector
in accelerating capital accumulation in recent
years.
3. Unrealistic laws.
-According to classical economists the end result of
capitalist dev. Is stagnation due to diminishing
return and malthus theory of population.
-But technological dev and recent trends in
population in developed countries reject the
unrealistic laws.

Critical Appraisal
4. Wrong Notions about Wages and Profits
-Wages have not tended to be at the subsistence level. There
has been a continuous increase in money wages without a
corresponding decline in profit rates.
5. Less importance to technology:
Theory assumed technological knowledge to be given and
unchanging overtime.

The Marxian Theory

Marx contributed to the theory of economic development in
three respects:
1. Broader respect: In it he provided an economic interpretation
of history
2. Narrower respect: In it he specifies the motivating forces of
capitalist development.
3. Alternative respect: Here he suggested alternative path of
planned economic development.
Materialistic Interpretation of History
All historical events are the results of a continuous economic
struggle b/w different classes and groups in society.
The main cause of struggle is the conflict b/w mode of
production and relations of production.
The mode of production refers to a particular arrangement of
production in a society that determines the entire social, political
and religious way of living.
The relations of production relates to the class structure of a
society uniquely characterizes by the following components

The Marxian Theory

Organization of labor in a scheme of division and cooperation, the skill of labor, and the status of labor in the
social context with respect to degree of freedom or
servitude.
The geo-graphical environment and the knowledge of the
use of resources and materials
Technical means and processes and state of science
generally.
According to Marx, every society class structure consist of
propertied and non-propertied classes. Since the mode of
production is subject to change, a stage comes in the
evolution of a society when the forces of production come
into clash with the societys class structure. Resultantly,
social revolution starts which leads to class struggle----the
struggle b/w haves and have-nots. This ultimately
overthrows the whole social system.

The Marxian Theory

Surplus Value
Class struggle is simply the outcome of accumulation of
surplus value in the hands of a few capitalists.
Capitalism, according to Marx, is divided into two great
protagonists: the workers and the capitalists.
Labour power is like any other commodity which is bought on
market rate. The value of labour like the value of any other
commodity is the amount of labour that it takes to produce
labour-power. In other words, the value of labour power is the
value of the means of subsistence necessary for the
maintenance of the labourer, which is determined by the
number of hours necessary for its production.
According to Marx, the value of the commodities necessary
for the subsistence of the labour is never equal to the value of
the produce of that labour. If a labourer works for a ten-hour
day, but it takes him six hours labour to produce goods to
cover his subsistence, he will be paid wages equal to six
hours labour. The difference worth 4 hours goes into the
capitalists pocket in the form of net profits, rent and interest.
Marks, calls this unpaid work surplus value. The extra labour
that a labourer puts in and for which he receives nothing,
Mark calls surplus labour.

The Marxian Theory

Capital Accumulation
Marx says that it is the surplus labor that leads to capital accumulation.
Capitalist tries to max. profit in three ways
By increasing the number of hours
By reducing the subsistence wage
By increasing the productivity of labor through technological change.
The third method is more important . And the capitalist increase the productivity by reinvesting the
surplus value.
To explain the origion of profit and to analyse the relation b/w wages and profits, Marx separates
capital into constant capital and variable capital, surplus value/profit=s.
Marx divide the total output of the economy (w) into Department 1 and department 2.
Department 1 related to production of capital goods and the department 2 relates to the consumers
goods. The total output of each department is
W1=C1+V1+S1 and W2=C2+V2+S2

C=constant capital, V= variable capital, S=surplus value

Total value of output =w=c+v)+s.
In order to analyze the nature of capitalist accumulation, Marx establishes certain relationships
between c, v and s.
C/ V = represents the organic composition of capital.
S/ V = represents the rate of surplus value or the ratio of profit / wages. This is also called the degree
of exploitation.

Department 1 related to production of capital goods and the

department 2 relates to the consumers goods. The total
output of each department is
W1=C1+V1+S1 and W2=C2+V2+S2
The value of total constant capital in both the departments
(c1+c2) must equal the output of the deptt. 1. (c1 +v2 +s1).
i.e. C1+c2=c1+v1+s1
C2=v1+s1
Similarly the total consumption in both the departments
(v1+s1+v2+s2) must equal the total output of department 2.
C2+v2+s2=v1+s1+v2+S2
C2=v1+s1
This shows that the value of constant capital in department 2 is
equal to the value of commodities consumed by workers and
capitalists in department 1.

The accumulation takes place because the

production of department1 is greater than the
demand for constant capital in both the
departments that is
C1+v1+s1> c1 +c2
v1+s1>c2
This shows that accumulation is taking place
which is being invested in employing more labour
and means of production in department 1 then in
department 2. These in turn increases the surplus
value.

The Marxian Theory

-Marx says that rate of profit is not dependent solely on the
rate of surplus value.. the rate of profit can change even
though the rate of surplus value remains constant.
How?
if a change occurs in the organic composition of capital
(c/v). How?
Technological progress ------increases the ratio of (C/ V)---concentration of capital in gigantic enterprises-----Increases
the competition among the capitalists to cheapen their
products---- introducing labour saving machines.
The capitalists who are unable to replace labour with capital
are squeezed out and their enterprises are taken over by big
capitalists.
Capital accumulation reduces the demand of labour or
decrease in wages to semi-starvation level thus more
surplus value. This is the law of increasing misery of masses
under capitalism.

The Marxian Theory

Draw fig and elaborate.
According to Marx, replacing the labour with
capital is killing the goose that laid the golden
eggs. He believes that technological progress
tends to increase the organic composition of
capital (c/v). Since the rate of profit is inversely
related to the organic composition of capital, the
profit tends to decline with capital accumulation.
r= s/v
C/V

r= rate of profit.
r varies inversely with organic composition of
capital and directly with surplus value.
Or r increases with the increase in surplus value
and decreases with the organic composition of
capital.

The Marxian Theory

Capitalist Crisis:
When degree of exploitation increases----ratio of labor to
total output falls----the rate of profit declines----production no
longer profitable-----consumption declines as machines
replaces labor and unemployment increases----Every
capitalists tries to dump goods in the market resultantly small
firms disappear. Now the capitalists crisis has begun. The
ultimate cause will be poverty and limited purchasing power.
Economic crisis appears in the form of an over-production of
commodities, problem of finding markets, fall in prices and
reduction in output which further reduce employment,
workers will further ruined.
In each period of crisis stronger capitalists expropriate the
weaker capitalists----a strong class of monopolists appears.
Ultimately point reach where capitalists and labour become
incompatible with there capitalists integument.

The Marxian Theory

The expropriators are expropriated. This is the
historical tendency of capitalist accumulation.
Here the Marx provides the economic explanation
of the necessity and inevitability of the
revolutionary transformation from capitalist to
socialist society.
Capitalism leads to proletarian revolution wherby
the dictatorship of the proletariat is established.
Poverty will disappear. Each individual will
contribute to national income according to his
abilities and receive according to his needs.

Critical Appraisal of Marx theory

The Marx theory was criticized for the following reasons
1. Surplus value unrealistic: Because in the real world, we
are concerned not with values but with real tangible prices.
Thus Marx has created unreal and abstract and unreal value
world.
2. Marx---A False Prophet: Because there is no increasing
miseries of labor in capitalist societies. However, the socialist
countries have lagged behind capitalist countries.
3. Technological progress helpful in increasing employment:
As Marx pointed out that with increasing technological
progress, unemployment will increase. But this was an
exaggerated view. As technological progress has created
more employment opportunities by raising aggregate
demand and income.

Critical Appraisal of Marx theory

4. Falling tendency of profits not correct:
As Marx pointed out that with the increase in organic
composition of capital, the profit rate will decrease.
But he failed to visualized that technological innovation can
be capital saving too. With this capital out put ratio will
decline as a result of profit can raise due to high productivity.
5. Marx could not understand the flexibility in Capitalism:
Marx could not foresee the emergency of political democracy
as the protector and the preserver of capitalism. Democracy
has introduced social security measure, anti-trust laws etc.
6. Cyclical Theory Wrong:
Marx said, with the capital accumulation-----reduction of
demand for consumption goods. He could not realized that
with economic development the share of wages in national
income need not fall, nor the demand for consumer goods.

The Marxian theory and the

underdeveloped countries
The Marxian theory is not applicable directly to
underdeveloped countries.
Marx was mainly concerned with problems
connected with the development of capitalism in
Western World.
Foreign domination was regarded as the principle
cause of economic backwardness of the colonies.
The only remedy was their political freedom.
Some of the variables of his analysis do exist in
under developed countries.
Exploitation of labor in such economies remained
for the benefit of home country.

Even now in almost all the under

developed countries that are also politically
free, wages are near subsistence levels;
increasing misery of the masses is visible,
high unemployment, problem of under
consumption.
Marx perception of planned developmentproduction of capital goods and production
of consumer goods.

Marxs perception of planned development is

applicable to underdeveloped countries as the
countries are dualistic economies (capital sector
and subsistence sector like agriculture and other
small scale sectors). Capital sector produces large
economic surplus while other small surplus.
Transforming the subsistence sector into the
former so as to increase the economic surplus.
Countries like India, Egypt, Burma and Ghana
have followed the Marxian schema in their
development plans with the objectives to increase
employment opportunities, purchasing power, to
build a strong capital base and technical
capabilities.

Marxs Stages of Growth

Historically society has passed
through the five different stages:
1. the Primitive Communal Stage
2. The slave stage
3. the feudal stage
4. the capitalist Stage
5. the socialist or communist stage

the Primitive Communal Stage

From the use of sticks and stones to making new
implements like bows and arrows, boats etc.
Learn how to make fire.
People lived in groups, work on common lands
with common tools.
Start of land cultivation of crops
Beginning of barter system
In the process of social evolution some producers
began to produce more than required
The exploitation starts which paved the way for the
emergence of slave society.

The Slave Stage

In this stage the development of productive forces was
based on the corresponding productive relations. The slave
owner owned both the means of production and the slave.
Emergence of slave city like Rome and Greece having
different organs of powers and exploitation.
The productive forces were further developed.
Increase in irrigation facilities.
Ore mining and smelting of metals began
Canals were built.
Cloth and footwear making , pottery making and metal
smelting and forging began.
With the passage of time the slave societys class structure
led to the conflict b/w the productive forces and the relations
of production.

The Feudal Stage

The development of productive forces was based
on feudal relations of production where the feudal
lord owned the land and the serfs as the main
means of production.
The serfs worked like slaves for the land lord.
But unlike slave society, the peasants could own a
plot of land, livestock, farming tools and
implements etc.
Much progress in agriculture.
Feudalism gave rise to two types of class struggle:
one is b/w the serfs and the feudal lords and
second b/w the proletariat (industrial workers) and
the bourgeoisie (middle class).

The Capitalist Stage

In this stage the capitalist owns the
means of production and uses them
for individual profit.
The worker is free to work for any
capitalist.
The worker does not has any means
of production but sells his services.
Exploitation of labour by capitalists.
Long working hours and receive less
Surplus value.

The Socialist or Communist Stage

This stage is the result of revolution
by the proletarian.
Each individual will contribute to the
national product according to his
abilities and receive according to his
needs.

The Lewis Model of Modern-Sector Growth in a TwoSector .

Surplus-Labor Economy
The model focused on the structural transformation of
a primarily subsistence economy.
The underdeveloped economies consist of two sectors.
i. A traditional, overpopulated rural subsistence sector
characterized by zero marginal labor productivity.
Ii. High productivity modern urban industrial sector .
Wage premiums in urban industry 30% above rural
wages would encourage migration from rural to urban.
Re-investment of profits would lead to a self
perpetuating development.

Assumptions:
i. level of wages in the urban sector is
constant, determined as a given
premium over a fixed average
subsistence level of wages in the
traditional agriculture sector.
Ii. At constant urban wage, the supply
curve of rural labor to the modern
sector is perfectly elastic.

The Lewis Model of Modern-Sector Growth in a TwoSector .

Surplus-Labor Economy

Assumptions of the traditional sector:

i. Surplus labor in the traditional sector.
(bcz MPLA is zero ).
ii. Wage=APLA
Whereas in industrial sector Wage= MPLM

As a result of this process, the surplus labor

will be absorbed in industrial sector.

Criticisms of the Lewis Model

Rate of labor transfer and employment

creation may not be proportional to rate of
modern-sector capital accumulation
Surplus labor in rural areas and full
employment in urban?
Existence of constant real urban wages
upto the point where the supply of rural
surplus labor is exhausted.
-Institutional factors such as union, civil
service wage scale and MNC(multinationals
company) hiring practices tend to negate it?
Assumption of diminishing returns in
modern sector. (Increasing return to scale)

Rostows Stages of Economic Growth

He sought an historical approach to
the process of eco. Development.
He discriminated five stages of
eco.growth.
1. the traditional society.
2. the pre-conditions for take-0ff.
3. The take-off
4. the drive to maturity
5. the stage of high massconsumption.

The Traditional Society

He defined the traditional society as
one whose structure is developed
within limited production functions .
The development of science was at its
very initial stage.
The social structure was hierarchical
in which family connections played a
dominant role.
Political power was concentrated in
the regions in the hands of the landed
aristocracy supported by civil servants
and army.

More than 75% of the working

population was engaged in
agriculture. Therefore, agriculture was
the main source of income.

The pre-condition for take-off

The pre-conditions for take-off were
encouraged by four forces.
1. The new learning or renaissance,
2. the new monarchy
3. the new world
4. the new religion

These forces developed reasoning

and scepticism against Faith and
Authority. This resulted the end of
feudalism and led to rise of national
state, and inculcated the spirit of
adventure which led to new
discoveries and inventions and
consequently the rise of the elite in
the new mercantile cities.

These forces brought about the changes in

social attitudes, expectations, structure and
values.
In any case the process of creating preconditions for take off form traditional
society follows along these lines.
the idea spreads that eco. Progress is
possible and is a necessary condition for
some other purposes e.g national dignity,
private profit, the general welfare, better life
for the children, better education etc.

The pre-conditions for sustained

industrialization usually required radical
changes in three non-industrial sectors.
First, build-up of social overhead capital
e.g. transport .
Second, a technological revolution in
agriculture,
Third, an expansion of imports including
capital imports.
It was reactive nationalism---reaction
against the fear of foreign domination.

The Take-off stage

In this stage the forces of
modernization contend against the
habits and institutions.
It is the era of industrial revolution.
This period to supposed to be short,
lasting for about two decades.

Take off periods for different countries. See

book.
Conditions for take off
1. rise in the rate of investment form 5% to
over 10% of national income.
2. the development of one or more
substantial manufacturing sectors with a
high rate of growth.
3. the existence or quick emergence of a
political, social and institutional framework
for expansion of modern sector.