NATURAL PRICES, MARKET PRICES AND EFFECTIVE DEMAND IN MALTHUS*

Abstract

This article restates the essential link existing between Malthus’ theory of prices and distribution, and his theory of effective demand. The first part of the article deals with his theory of prices and distribution, and shows that, although his contribution to this field has been largely underrated, he provided one of the most rigorous formulations of the theory of natural prices and distribution within the Classical “surplus approach”. He also provided a sound solution to the problems of the “measure of value”, and of the measurement of capital. This will be shown by means of a simple model incorporating Malthus’ measure of value, based on labour commanded. The second part of the article illustrates the link between Malthus’ theory of effective demand and his theory of prices. According to Malthus, natural prices are the condition of reproduction of the economy on a given scale. This implies that they must be such as to yield not only a uniform rate of profits, but also that specific rate of profits which is required by capitalists in order to keep the level of activity constant. Effective demand is the crucial factor determining whether market prices will actually gravitate towards natural prices. The simple model of income determination presented here illustrates the links between effective demand, the price level and income distribution, and establishes the role of effective demand as the determinant of changes in activity levels.