Economic History: Malthusian Trap to Globalization

Posted on Jan 28, 2025 in Economy

Malthusian Trap and Demographic Change

Why did economic growth stagnate in the past? In ancient demographic regimes, two main indicators were mortality and natality (migration is not included). Low life expectancy was a significant factor. But why was mortality so high? The reasons included infectious diseases, poor hygienic conditions, and malnutrition.

The Malthusian Trap

Malthus’ Basic Theory states that the power of population is indefinitely greater than the power in the earth to produce subsistence for man.

Point of Crisis: We produce enough food, but once we cross that point, mortality will increase because we will not have enough food for the entire population. Demand for food increases, but supply does not keep up, leading to food scarcity and high prices.

As a consequence, in terms of natality, we have:

  • Preventive checks: Lower the birth rate, including birth control, postponement of marriage, and celibacy (population is not growing).
  • Imperative checks: Increase mortality.

Population growth and food prices have a positive correlation. These relationships function in a cycle, ultimately compensating for each other. For example, when the population goes down, food prices also go down, and so on.

According to Malthus, the population cannot grow forever; we need to control it because economic resources are limited and cannot keep up, leading to stagnation.

Criticism of Malthus

  1. Food distribution: Inequality – Malthus assumed that food was distributed equally, which was not true.
  2. Technological improvements: Increased food production – hunger is a significant incentive for technological growth.

Between the 11th and 17th centuries, standards of living around the globe remained more or less constant. According to Malthus’ model, resources in the agricultural economy are limited. When the population grows, we have food scarcity, leading to catastrophes. After catastrophes, the population reduces and returns to a level where food is just enough to survive.

In this same period, population growth and wages were negatively correlated. However, since the 18th century, economics has broken the link between population levels and available resources.

Demographic Growth

Demographic Growth (DG) = Birth Rate (B) – Mortality Rate (M)

Demographic Potential has two variables:

  1. The number of children per woman
  2. Life expectancy at birth

Malthusian Assumptions

  • Diminishing returns of labor: If technology improves steadily, resources can grow faster than the population, and living standards can stay permanently above subsistence levels.
  • Increasing the number of workers reduced average production.
  • Improvements in living standards lead to population increases.
  • Subsistence equilibrium: All production is used for subsistence.

Malthus’ vision had political consequences; he and others opposed assistance to the poor (the Poor Laws).

Industrial Revolution: Britain’s Advantage

Our model offers an explanation for two historical questions:

  1. Why were technologies like the spinning jenny invented in Great Britain rather than elsewhere? Wages (relative to the cost of energy and capital goods) were higher in Britain during the 18th century than elsewhere.
  2. Why were they invented in the 18th century rather than at an earlier time? Wages relative to the cost of energy and capital goods rose in the 18th century in Britain compared with earlier historical periods.

This is Robert Allen’s hypothesis about the Industrial Revolution. Labor became more expensive relative to capital goods in England than in France, for instance.

  1. Demographic transition (European marriage pattern)
  2. Domination of international commerce because British fabrics were more competitive & naval-colonial power
  3. High labor demand, due to the growth of rural manufactures & urbanization

High wages led to a rise in agricultural productivity and cheap energy due to:

  1. Abundance of coal deposits (geographical factor)
  2. Early development of coal mining to meet the rising energy demand from urbanization.

Why technology? Expensive wages relative to machines and required less input.

Causes of the First Globalization

  1. The fall in transportation costs (both between countries and within countries): steamboats, railways, the Suez Canal, etc.
  2. The reduction of tariffs due to the influence of liberal thinkers, pressures from export interests, and British hegemony.

Great Britain and the rest of Europe were labor-abundant and land-scarce (due to high demographic pressure) → wages were low relative to land-rents (w/r was low) → They specialized in labor-intensive industrial products.

The New World was land-abundant and labor-scarce (frontier economies) → wages were high relative to land-rents (w/r was high) → They specialized in land-intensive agricultural products.

Impact of Specialization

Great Britain and other European countries specialized in labor-intensive industrial products:

  • Demand for labor increased relative to demand for land.
  • Wages increased relative to land-rents.
  • Industrial workers benefited more than landowners.
  • Inequality fell.

The New World specialized in land-intensive agricultural products:

  • Demand for land increased relative to demand for labor.
  • Land-rents increased relative to wages.
  • Landowners benefited more than workers (especially low-skilled workers).
  • Inequality increased.

Migration Flows

  1. Above all, economic reasons: the search for higher wages and employment opportunities.
    • In Europe, demographic pressures and migration to cities limited employment and wages.
    • The New World, abundant in natural resources and labor-scarce, had higher wages and more employment opportunities.
  2. Falling transportation costs, access to credit, and the opportunity to accumulate savings (the poorest, or the inhabitants of the poorest regions, could not afford the trip overseas).
  3. Migratory chains: friends and relatives who had migrated earlier sent remittances to finance the trip and provided support in the countries of destination.

In Europe, labor outflows reduced demographic pressures and increased employment opportunities, pushing up wages. In the New World, the massive influx of migrants increased the supply of labor. This limited wage growth, especially in low-skilled activities. Migratory flows reinforced the distributive effects of trade.

The Great Depression and the New Deal

Liberal political economy theories advocated for minimal intervention of the State in the economy. In a recession, ailing firms and banks had to go bust, and market mechanisms (prices and wages falling) would restore full employment. In this line, economic policy during the Hoover administration aggravated the crisis.

Keynesian Theory and the New Deal

Keynesian theory stemmed from the idea that self-correcting market mechanisms are not sufficient to reactivate the economy: the State must intervene to reestablish the confidence of households and firms and increase Aggregate Demand (AD).

Keynes’ Multiplier: As our expenditure becomes other people’s income, a given initial increase/decrease in expenditure (AD) generates a bigger increase/decrease in income (Y).

The Paradox of Thrift: If one household predicts a bad stretch, it can increase its savings, and if one of its members becomes ill or loses her job, savings will be at their disposal. But if all households decide to cut expenditures and increase their savings at the same time, it is precisely this that will cause the bad stretch: AD will fall, and more jobs will be lost. Why? Because spending and income go hand in hand.

What can the government do? First, let automatic stabilizers do their job and absorb part of the shock (unemployed people receive benefits, for example). Additionally, it can pass a fiscal stimulus: increases in public spending or tax cuts that maintain AD until firms and households recover their confidence. Increasing the public deficit may counteract the fall in private demand and avoid a worsening of the recession.

Why Demand Falls

  • Uncertainty: The fall in employment and the crash of 1929 reduced the confidence of economic agents: firms postponed investments, and households increased their savings because they were not sure they would be able to maintain their consumption levels.
  • Banking crisis: Banks, which had granted loans backed by shares, faced an increase in defaults and saw their assets depreciate. Frightened savers withdrew their deposits, and many banks went out of business. The panic spread to solvent banks because the FED did not perform its role as lender of last resort decisively.
  • Deflation: As sales of goods decreased, so did their prices. Deflation augmented the real value of debts (established in nominal terms), reduced the price of shares and real estate, and led many households to postpone consumption. The effect of deflation on the economy was greater than in previous crises because private debt was much higher.

Recovery and the Role of Expectations

The value of the dollar was progressively cut (in 1934, the exchange rate was fixed at 35 dollars per ounce) → the devaluation of the dollar and the restrictions imposed on gold transactions brought the US de facto out of the gold standard.

  • This gave the FED margin to decrease the interest rate, which, combined with the rise in prices, placed the real interest rate in negative figures between 1934 and 1937.

Increasing government spending, rebuilding the banking system, and leaving the Gold Standard reactivated the economy: with the exception of the crisis in 1937-38, between 1933 and 1940, the economy grew at rates close to 10%, and the unemployment rate fell 15 points.

  • The improvement in households’ expectations was as important as changes in economic policy. The economic recovery and employment growth reduced uncertainty, and households reassessed their wealth: their expectations about their future income and the value of their assets improved. Households no longer needed to increase their savings, and consumption returned to pre-crisis levels.
  • Nonetheless, the unemployment rate did not fall to the level of 1929 until 1943.