Theory of Glut and Glut Controversy

 GENERAL GLUT

In macroeconomics, a general glut is an excess of supply in relation to demand, specifically, when there is more production in all fields of production in comparison with what resources are available to consume said production.

GLUT CONTROVERSY

Malthus' basic argument is that higher propensity to save and investment leads to a reduction in consumption and ultimately excess supply. Ricardo's basic argument is that capital accumulation can not go indefinitely unless the capital is productively employed, thus there can not be over production.

MALTHUS THEORY OF GLUT

In Britain in 1818, a large decline in agricultural prices led to the severe depression of 1819, and the high levels of unemployment that followed led to general social unrest.

Malthus answer was to explain how it was possible for the demand for goods and services to be less than the amount of goods and services produced - so his was a theory of deficient demand - and when that happened, goods would pile up in the marketplace and a general glut would ensue.

But why did this happen? Why did goods pile up in the marketplace and simply rot away (creatively) while so many people struggled to meet the necessities of life? His solution was to realize that the costs of production (i.e. the natural value of the goods) had to be equal to the income of the various classes in society, i.e. that the value of production had to equal wages plus interest plus profits (notice that rents are missing - more on that below).

He argued that labor is hired only if it produces a value greater than it is paid, so labor income alone won't be enough to consume all that is produced. That leaves Capitalists and landlords to make up the difference.

Capitalists' main desire was to accumulate capital, and to do that they needed to save. But the problem was that this led to a tendency for capitalists to save too much, more than there were profitable opportunities. Hence, some of the saving sat idle - imagine pieces of gold sitting in a safe somewhere doing nothing instead of being employed productively supporting new investments - and this led to deficient (or, as he called it, ineffectual) demand. So capitalists did not consume enough. How to solve this? By moving income to landlords. Landlords could depend upon income from rent, and because of that, they consumed all that they earned - more rent would come in the next time period so they spent lavishly on "personal services", there was no need to save. Importantly, this was unproductive consumption - landlords took from output but added noting to it - and hence they could be depended upon to make up the slack in demand if income could be shifted in their direction. Their was no danger than this class would save too much.

Here, then, was the solution. An important policy question of the day was whether the corn laws - tariffs on cheaper grain from France and other countries - were helpful or not. Malthus answer was that they helped. By raising the price of corn (i.e. grains), rents would increase and this would shift income to landlords. They would then buy up all the extra goods the capitalists had left idle by saving too much and the problem would be solved.

One question, though, is why Malthus didn't advocate a transfer of income from capitalists who saved too much to workers who didn't save anything. Why wouldn't that have taken care of the problem?:

The only way to assure adequate effectual demand, then, was through some redistributional device, such as the corn laws, that would permit the landlords to receive more rent and thereby, through their own expenditures and those of their servants, to contribute more to aggregate demand without contributing to further increased production. Once again the economic welfare of all society depended on promoting the interests of the landlords. 


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