The Malthusian Paradox: Declining food prices in the very long run

Abstract

More than two centuries ago in his Essay on the Principle of Population, Thomas Malthus famously issued his dire prediction that mankind was doomed to survival at a subsistence level. His concept of population growth expanding to absorb the available food supply has been roundly contradicted by history, thanks in part to a rapidly dropping birth rate in rich countries. However, economics remains the "dismal science" as his underlying idea of natural resource scarcity impinging on the prospects for progress remains as a cornerstone of modern economics. Without Malthus' population growth dynamics, the existence of finite natural resources remains a constraint on growth. In the case of agriculture, the proposition is that more people or richer people increase the demand for food, and given the constraint on arable land, this means that food becomes scarce. In economics, price is taken as the paramount indicator of scarcity. Yet, as we demonstrate with data stretching back to 1650, real food prices, the price of food items relative to those of other goods, have fallen dramatically. For example, in 2008 the real price of wheat was only 3% of its 1650 level, while corresponding ratio for the price of sugar was less than 0.05%. Of course, the decline in food prices has been far from smooth over the centuries since 1650. Just as in recent years, food prices over the longer span are characterised by substantial volatility. We utilize an approach based on the work of Joseph Schumpeter to separate out long cycles in each price series, and then examine the intra-cyclical trends for indications of increasing or decreasing scarcity of food based on the movement in their real prices over the course of successive cycles. We examine intra-cyclical trends in prices for nine food commodities; bananas, beef, cocoa, coffee, lamb, rice, sugar, tea and wheat; for up to six cycle periods; 1675 to 1731, 1731 to 1786, 1786 to 1842, 1842 to 1897, 1897 to 1953 and 1953 to 2008. Data are available for us to calculate intra-cyclical trends for all six cycles for five commodities: beef, lamb, sugar, tea and wheat. Among these commodities negative trends dominate, especially for tea and sugar. For the other commodities the number of calculated trends is smaller, but again negative trends dominate. Clearly, the dire predictions of the Malthusian model fail to hold for real prices of food commodities. What is missing in the "dismal science" that explains the failure of the Malthusian prediction? Clearly, technology plays a central role, but the treatment of technology in economic modelling is limited at best. There has not been much progress beyond Schumpeter's suggestion in The Theory of Economic Development that the answer lies in understanding the process of economic development. In particular, he contrasts the analysis of economic development to that of the equilibrium analysis of a stationary state implicit in the analysis of Malthus and other classical economists. Schumpeter argues that endogenous technical change is built into the capitalist organisation of the economy, which allows entrepreneurs to profit through introducing innovations in the form of new production methods, new products, new forms of organization and the opening of new markets. This implies technical change is assured under capitalism, but it is discontinuous and its nature, location and extent are uncertain. The challenge for economics today is to develop models of the economy that can be used to understand more fully the process of technical change and thereby avoid the false implications of the treatment of natural resource constraints latent in the Malthusian model.