Text 17: thomas robert mafthus (1766-1834)

Prophet of the "Dismal Science"

Standards of living in many developing nations continue to decline because the growth in population is greater than economic growth. If world economic growth continues to average about two percent annually, nearly half the world's people will live in countries where population growth exceeds economic growth.

This was foretold by an 18th-century English economist, Thomas Malthus. In his Essay on Population (1798) Malthus warned of the dire consequences of uncontrolled population growth. His argument was direct and simple. While food supplies can be increased through the addition of land and labor, the rate of growth is in an arithmetic progression (2, 4, 6, 8, 10 and so on). But population growth expands in a geometric progression (2, 4, 8, 16, 32, 64 and so on).

Given the difference between the rate of populatior growth and that of food production, Malthus concludes that a large portion of humanity was doomed to a life of misery. Worse yet, as the arithmetically increasing food production fell short of satisfying the geometrically increasing population, malnutrition and disease would take their toll until the rising death rate restored the balance between food and population.

Other than urging the poor to have fewer children, there was nothing that society could do to reduce starvation or suffering, Malthus thought. For that reason, he opposed legislation to provide relief and housing for those living in poverty. In his view, such aid would simply encourage the poor to have more children and worsen their lot. It is little wonder that after reading the Essay on Population, Thomas Carlyle, a contemporary British writer, called economics the «dismal [depressing] science.»

Since Malthus's day several factors have prevented the fulfillment of his prophecies. The most visible of these has been the enormous increase in food production, on the one hand, and declining birthrates in the industrialized nations on the other. Food production increased far beyond anything he could have foreseen, owing to scientific and technical advances in farming. Meanwhile, declining birthrates have brought several European countries near zero population growth.

Critics of Malthusian theory argue that the focus on population misses the main causes of hunger and starvation. The fact is that the agricultural nations grow enough to feed themselves and the rest of the world. However, not enough food reaches those in need because poor nations do not have the international currency with which to purchase it from world suppliers.

Thomas Malthus, a controversial figure in his own time, remains one today. To some he was a great prophet whose theories are still relevant. To others, his opinions are as shortsighted and inappropriate today as they were nearly two hundred years ago.

TEXT 18: IRVING FISHER (1867-1947)

Pioneer In Monetary Theory

Irving Fisher spent most of his adult life as a professor of economics at Yale University. An accomplished mathematician, he used those skills to explain many of his theories. In his best known formulation, the equation of exchange, Professor Fisher showed the relationship between the quantity of money in circulation and the level of prices.

The equation of exchange is stated as follows:

MV = PQ, where:

M = money supply

V = velocity of circulation

P = average price of goods and services

Q = quantity of units sold

Simply stated, the equation of exchange tells us that total spending is equal to the total value of the goods and services produce i by the economy. Let's see why. M is the total amount of money in circulation, and V is its velocity. Velocity is simply the number of times that money turns over in a year. In other words, the amount of money in circulation, multiplied by the number of times it is spent (MV) is equal to the total amount of money spent by the economy in the course of the year. To illustrate, let's suppose that each student in your class produced a product for sale, and that the selling price of each item is $1. Your teacher buys the product from the student sitting in the first row, first seat. That student uses the dollar to buy the product from the student in the second seat.

The process continues around the room as each student uses the dollar from the preceding student to buy the product of the next student. Assuming that there are 30- class members (including the teacher), 30 items will be sold. One dollar bill will be exchanged 30 times. Applying the equation of exchange, the total amount of money in circulation will be $30 because:

M = $1; V = 30; and MV - $1 x 30 = $30.

The equation of exchange helps to explain why prices (and therefore the value of money) fluctuate. Since MV = PQ, it follows that when V and Q are constant, any change in the money supply will directly affect prices. In other words, when the money supply increases, so will prices, and vice versa. We can also see that increases in the money supply will not result in price increases if the output of goods and services is increased at the same or a faster rate.

TEXT 19: KARL MARX (1818-1883)