Thomas Malthus gave the pessimist's response to Smith's optimism. Malthus, of course, is best known as the author of a work on the dangers of population growth. Population growth is connected with economic growth, and it should not be surprising that Malthus was pessimistic about growth in general. But, in his arguments against Smith's optimistic conception of economic growth, Malthus invented two of the concepts that make economics "the dismal science," and that are central to modern economics. They are
We have explored these ideas in previous chapters. Here, we are concerned mainly with the long run and thus with Malthus' thinking on diminishing marginal productivity. Malthus observed that production requires land as well as labor. Population growth increases the labor supply, but not the supply of land. Labor is a variable input in Malthus' long run, and land is a fixed input. We recall the Principle of Diminishing Marginal Productivity: as the quantity of the variable input increases, the marginal productivity of the variable input declines. Moreover, as we recall from the chapter on diminishing marginal productivity, it is the marginal productivity of labor that determines the wage. Therefore, as population grows, the marginal productivity of labor and the wage decline. Malthus thought this would continue until the wage is pushed down to "subsistence." That is, working people would be able to earn only enough to support their families and reproduce themselves, on the average, and no more either for larger families or for other endulgences.
In the terms of reasonable dialog, Smith had offered an argument for optimism about economic growth, the argument that growth could be a virtuous circle. Malthus undercut Smith's argument by pointing out some problems Smith had overlooked. The problems were expressed in his new concepts of "diminishing returns," "overpopulation" and "unemployment." Malthus claimed those problems would interrupt the virtuous circle, replace it with a vicious circle of population growth, and, ultimately, bring it to a halt in a "stationary state" of general poverty.
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