Adam Smith, David Ricardo and Thomas Robert Malthus
In this paper, we have combined the classical analysis of development and growth with that of luxury consumption. We have also focused on the role played by landlords and labors in the classical economic theories. We have also discussed the other classical economic factors like property rights and contractual agreements in determining fresh investments in agriculture and consumption/growth patterns. Further, we discussed the classical consumption and growth theory of Smith and how that is different from that of the more neo-classical economists like Ricardo and Malthus. The paper also discussed the supply based economic growth model of Ricardo and compared it with the demand driven economic consumption and growth model of Malthus. This paper further highlighted the exclusion of leisure as a factor of growth by Ricardo and how that factor was taken into account in Malthus’ model.
In recent times, the analysis of consumption pattern, development and growth in classical economic literature has seen widespread momentum. Adam’s theory of economic growth, based on luxury consumption, has been scrutinized many a time by the recent economists. How an increase in luxury consumption by the landlords can help the economy get out of a poverty trap is interesting for analysis. Adam argues that luxury goods act as a stimulus for the landlords to increase the productivity and wage of the labors. Thus, it increases the growth rate of the economy and brings it out of indolence. Ricardo and Malthus, on the other hand, have tried to improve upon the theory of Adam by making it more objective. Both of them argue that entrepreneurs increase their capital and laborers increase their families only when it is economically viable. What they meant by economically viable is that the market rate of wage is more than the natural wage rate. Although their theories have the same premise, they have taken a completely different approach to explain the economic growth model. Ricardo argues that the diminishing return in agriculture is the only limit to economic growth whereas Malthus points out that the only obstacle to growth is the lack of stimulus to the continuous increase of wealth. This paper will first highlight different economic theories presented by Smith, Ricardo and Malthus to explain the economic growth and then compare and contrast them.
Classical Consumption, Development and Growth Theories
There are many economists who have made efforts in explaining the consumption pattern in the economy and how that consumption has fueled the development and growth of the nation. However, we will not touch all the economic theories made by different economists; rather we will only focus on the economic theories presented by Adams, Ricardo and Malthus.
Adam Smith in his book “Wealth of Nations” has provided a very detailed historical account of economic changes across the European nations. After taking into account all the changes that had taken place post Roman Empire in Europe, he suggests two possible developments in an agriculturally based economy: “natural progress of opulence” and “historical progress of opulence”. He has explained the “historical process of opulence” in the context of mediaeval European economy. In his opinion, in a typical agricultural economy, the landlords have no incentive to increase the consumption, and, therefore, the wage rate remains stagnant while the consumption by the landlord remains relatively stable. This explains why Europe dominated by medieval feudal landlords has seen almost no growth for centuries. However, Adam Smith has stated that the landlords are willing to increase the consumption when they see manufactured products and in order to do that, they try to increase the agricultural productivity and the rent of the laborers. This fuels a growth in the economy. For Adams, the consumption of luxury products (manufactured goods) is the real key to economic growth. However, Adams’ model of “historical progress of opulence” does not shed any light on how an increase in population of labors is likely to influence the growth in an economy and an increase in wage rate. “Natural progress of opulence” theory is applicable to the British colony of America. Historically, it has seen tremendous growth without a high demand for agricultural products in the domestic economy. America also had no landlords. Adam tries to explain these using institutional, economic factors like colony’s adaption of British legislation. He argues that British legislation has favored equal distribution and easy transference of properties. He states that the demand for agricultural output came from the mainland Europe and that fueled the economic growth of America. He further argues that the other colonies, held by Spanish and Portuguese, could not produce the same level of growth because the demand for their agricultural output was not the same. In short, Adams, theory brings out two main points. Firstly, he points out that even if the fertile land is abundant, growth is only fueled by demand. Secondly, demands for luxury items fuel the growth in the agricultural economy.
Adam Smith is focused on explaining the growth in his theory. However, Ricardo and Malthus have tried to explain a sustainable growth model. Ricardo discusses one main question in his theory: Does limit to growth be located in the productive conditions of the agricultural sector or is it dependent on an adequate level of demand? Ricardo assumes that the Say’s market law holds true. Ricardo’s theory is heavily dependent on the supply side assumptions. Ricardo assumes that there is a subsistence basket of consumption for landlords, entrepreneurs and labors. In fact, he argues that as there is no limit to luxury consumption, the subsistence basket consumption of labors only includes agricultural products. His theory also states that whenever the market wage of the labors is more than the normal wage, they will increase their family. This means that the number of labors available will increase, and in the long run, the wage rate will come down to normal. He also argues, on the basis of the above explanation, that if a continuous increase of agricultural land is available then the economic growth can be sustainable infinitely. However, Ricardo, in his model, completely ignores the role of consumption of luxury goods. He does not include the luxury goods in the subsistence basket. Ricardo’s model states that the consumption of luxury items has no correlation with the growth of population and the overall consumption rate.
Malthus exactly tries to answer the same questions like Ricardo but takes a completely different approach. Malthus’ model is more focused towards the demand (like the Adams’ model) than that of Ricardo. Malthus first expands the consumption from only agricultural products (as per Ricardo) to include leisure. He points out that the real growth can happen only if there is an increase in demand for non-agricultural options. Manufactured and luxury goods provide an incentive to growth. Also, Malthus completely disagrees with Ricardo’s assumption that, as the market rate of wage increases, the family size of labors (thus population) increases. Malthus argues that when the wage rate increases, the labors have two options. They can either increase the family size or they can include luxury items in their subsistence basket. As per Malthus, the subsistence basket of a labor includes agricultural as well as luxury items with the growth of the economy. However, Malthus fails to explain objectively in his model how economic growth is associated with fertility behavior.
In this paper, we have tried to bring forth different classical theories that explain growth and structural changes. The different elements of the economy like luxury consumption, subsistence basket, contractual agreement and property rights and their links to growth are explained using the classical theories of Adams, Ricardo and Malthus. Smith and Malthus have given importance to the institutional factors like contractual agreements and property rights in consumption patterns. Ricardo, on the other hand, proposes that if an infinite supply of agricultural land is provided to the economy, then it can grow infinitely. His model, however, fails to recognize the role of the consumption of luxury items in economic growth. Malthus, on the other hand, tries to explain the growth from a demand perspective, and his model of growth depends on the consumption of luxury items heavily. Ricardo’s growth model is a great endogenous model of growth when the subsistence basket includes manufactured items. On the other hand, Adams and Malthus models are more suited for exogenous variables, but they are incomplete in some ways to explain the overall economic growth.
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