HS 419

1. HS 419 Lecture 3

2. A few concepts • Market economy – prices are determined by the market ( limited govt. intervention) • Equilibrium price – Price where demand curve and supply curve intersects • Marginal – the last unit • Diminishing Marginal Utility

3. Law of capital accumulation More investment Increases specialization As labours are producers as well as consumers

4. No Limit to growth Growth will stop Law of Population Increase in supply of labor Reduce leads to fall in wage Increase in profit society progresses on an ever rising path & that too itself

5. Malthus came with his essay on population growth

6. Thomas Malthus – Essay on population • In 1798, classical economists Thomas Malthus put forth his argument. • His argument was that the growth in population always runs faster than the growth in the resources available to feed and shelter people • “Population when unchecked, increased in a geometrical ratio, and subsistence for man in an arithmetic ratio” • So inevitably we cannot grow forever if there is a resource scarcity. • By resource scarcity he meant scarcity of land.

7. Thomas Malthus – Essay on population • But what he failed to see was the role of technological changes, which was already taking place around them. • He also failed to see that development may lead to fall in population growth, which we see now in the western world. • Hence, Malthus’s theory on population growth and natural resource scarcity was termed as ‘dismal science’ as it was argued that the increase in population pressure acts as an incentive to develop new technology and producing more food. • IPCC reports and environmentalists now echo Malthusian pessimism by emphasizing that growing population and consumption both directly impact on the entire planetary environment

8. Malthusian limits • Malthusian limits has raged over the centuries, with many critics asking how it became possible to have a six fold increase in global population • However, Malthusian limit is a useful reminder to society and government that continued profligate consumption could sooner or later get us into trouble.

9. Cornucopian's – a critic to Malthusian limit • This group dismisses Malthus and sees instead an ever increasing human population enjoying ever more benefits from the planet • Ester Boserup (1981) believed “necessity is a mother of invention” and asserted that increase in population pressure acts as an incentive to developing new technology and producing more food. • Her analysis concluded that population growth naturally leads to development, at which point population pressure would decline.

10. Ricardo • A great friend of Malthus – also realized and agreed with Malthus that population and diminishing return will lead to a gloomy future • He put forth three forces that will regulate economic growth ( same as Smith but interpreted in a different way)

11. Stationary State • The law of capital Formation - Same as what Smith said • But Law of population growth was a bit different • Once population grows due to higher wage rate, even if the wage rate falls supply will not be effected (inelastic supply) so wage will not rise, it will fall to the minimum subsistence – this will reduce demand in the market – thus economy will not grow further • Law of diminishing return will also operate – as more and more labour is applied to land, the additional produce of the additional labour will be less and less Stationary State

12. Stationary State – Ricardo

13. Stationary State • As society progresses, more and more capital is accumulated – population increases – productivity falls – rent rises- wage falls to subsistence level – profit falls too – economy reaches stationary state (limit to growth )- system comes to a dead halt