"Was Malthus Right?"

Chris Dillow is worried that Malthus may have been right after all:

Was Malthus right?, by Chris Dillow: In the Spectator, Tony Curzon Price talks abut “Malthus inflation”. This not only does violence to Malthus’s idea, but also perhaps understates the problem we face now.

Malthus’s theory was not about the general price level but about relative prices. He thought the prices of the “means of man’s support” - food to him, but we can include oil today - would be raised by diminishing returns, whilst wages would be depressed by increased labour supply. This interaction, said Malthus, “constantly tends to subject the lower classes of the society to distress and to prevent any great permanent amelioration of their condition.”

Now, this was, as Gregory Clark points out in A Farewell to Alms, a superb description of all economic history up to the time when Malthus was writing (1798).

But it’s also true now. Commodity prices have boomed this century - though they seem to have levelled off in recent weeks - whilst Chinese and Indian industrialization represents a massive rise in the supply of labour.

To describe this as inflation is to miss the point. It represents, as Malthus saw, a real threat to workers’ living standards, at least in the west.

The standard view seems to be that the threat will pass. In the near-term, a levelling off of commodity prices would allow inflation to fall back, thus restoring real wage growth. And in the long-term, continued productivity growth will push up workers’ living standards.

But herein lie my doubts. First, what’s raised workers’ real wages in the past - say in the “golden age” of the 1950s and 60s - has not been productivity growth alone. It‘s also been the ability to appropriate those gains by exploiting bargaining power - through strong trades unions, the scarcity of skilled labour or simply the lack of competition arising from having a closed economy. But these forces are weakening - remember, there’s an awful lot of skilled labour in China and India.

Secondly, should we really be so confident in the strength of the forces for endogenous growth as to expect technical progress to continue to beat diminishing returns? Sometimes, I fear such optimism is mere faith - a mix of market fundamentalism (“the free market will solve the problem”) and induction (“things can go on as they have for the last 200 years”). Neither can be trusted, can they?

Update: Free Exchange comments.