Keynes and Malthus

To explain how unemployment could arise in a market economy, Keynes also went back to the beginning of economics, and specifically to some of the ideas of Thomas Malthus.

Malthus, we recall, was responding to the optimism of Adam Smith. Smith had proposed a new idea: that the growth of well-being and material prosperity could be self-sustaining. Drawing on the importance of division of labor, Smith reasoned as follows: as markets grew larger and more extended, greater division of labor would become possible. With more division of labor, higher productivity would result. With higher productivity, higher income and still bigger markets would exist, and so a new round of subdivision of labor would occur, and higher productivity yet, and so on. Malthus, responding to this optimistic view, stressed the limits on this process of growth. Looking to the long run, he proposed that population growth (with a strictly limited supply of land) would limit growth.

But Malthus was no more optimistic in the short run than in the long. In the short run, he questioned the link between increased productivity and higher income. It is true that an increase in productivity could lead to higher income -- but only if the more-productive workers are all employed producing goods and services. Malthus suggested that they might not be employed. The number of workers employed (he reasoned) would depend on the demand for output. Employers would not hire workers to produce output the employers could not sell. If labor is more productive, that would mean that a given demand for goods and services could be produced with less labor -- and if the demand for goods and services should be unchanged, increasing productivity would just mean that there would be fewer jobs. Thus the link would be broken -- no further extension of markets, no further growth of productivity, stagnation in place of growth, even in the short run.

In this argument, Malthus brought two new ideas into the economist's tool-box of concepts, though both concepts were to remain controversial right down to the present. The first of these new concepts was unemployment, a concept we explored in an earlier chapter. The other was the idea that unemployment could be caused by insufficient aggregate demand.