Malthus - Ricardo controversy over Glut (History of Economic Thought - Economics)

● Controversy over Glut

Generally the overproduction refers to the condition when the market has goods but there's no any demand.

This rests on the Says Law of Market and the whole controversy rests over here.

Basically, the Says Law of market states that te supply always fulfills its stated demand.

So, there might be temporary overproduction and unemployment even Says argued on that but general unemployment problem won't be there and full employment equilibrium.

As per Malthus, when the things are being produced it means that the producer's they are saving for capital accumulation i.e. savings of the economy can be used for the capital investment. 

This means that to that extent; the amount saved is not being consumed and due to that there will be decrease in the demand and we can't tell that the whatever are being produced is being demanded and the overproduction/glut is prevalent to that period until and exogenous consumption such as unproductive part which is not participating in this sector; be it older savings i.e. should they start consuming or not.

Nonetheless, Keynes explained it later that the gap will be filled with Income generation and Investment.

Hence, Malthus stated that whenever from the side of the economy and until there'll be no any consumption from unproductive classes the gap won't be filled and due to this there would be Glut/Overproduction.

Due to this overproduction there might result in unemployment because whatever producing is making s/he is not able to sell that.

Investment increase (capital increase) > Savings increase > Consumption decrease so Demand decreases.

He also stated that producers propensity to save is more and if they are also less than the labor class then there's overproduction.

■ Ricardo's answer on this

Ricardo was on his belief on Says Law of  Market.

" The accumulation of capital; (by capitalists Investment) this process is not itself an unending and uninterrupted process, i.e. it can go indefinitely or there might be downfall or the same.

Ricardo said that, Whenever there's an accumulation of capital, due to that the labor demand increases which means wages also increase then the cost of production also increases and the profit decreases. So, this thing decelerates the capital accumulation. This is also the first effect.

But, the second effect of this is the whole process is that when the wage increases the propensity increases and labor supply increases (since population increases).

Through the increase in the propensity due to higher wages labor supply increases (because wage has already increased) due to the increase in demand will neutralize. So, in this way these things move in a cycle.

So, the capital accumulation increases then wage increases then labor supply increases then again wage decreases.

So, this continues on and there'll be no glut in the economy and the economy will be in equilibrium. This particular thing was supported by Says Law, Classical Economics.

Thank you

Aditya Pokhrel

MBA, MA Economics, MPA