Malthusian Behavior and Competition

Time to discuss some more economics! Here I'm going to make an argument that a generalized version of some of the views set forth by Thomas Malthus have value in a behavioral explanation of certain economic behaviors, particularly monopolistic competition.

The General Form of the Malthusian Argument

Thomas Malthus is also a rather well-known economist. In An Essay on the Principle of Population he laid down a theory the attempt of disproving which led to a lot of early development in economics - that population will never case growing until living conditions are at the point where no more people can be supported.


It seems rather straightforward, but the concept is a real slap in the face of economics because it essentially states that any universal escape from poverty is ultimately a short-term solution, because the population will always increase to the point where poverty becomes a problem again.

While over the extreme long-run there's a possibility this hypothesis is true - and I honestly suspect it is - to date constant technological growth has prevented the full power of Malthus' prophecies from being felt for quite some time.

Now, more importantly than all of this, what happens if we generalize this concept to as large a scope as possible?

Well, then we get a rather frightening concept which, essentially, states that any system that adequately provides for all of its members will acquire more members until it can no longer do so.

That's a little too broad, though, so now we need one of these...

A Concrete Example

What is it that causes people to enter a system or to introduce new entities into a system? That would be the desire to replicate the success of other entities in the system.

A common example of this that, at least in my opinion, is represented in quite the correct manner to students in introductory economics is the problem of physical location for identical businesses.

Imaging a situation like this - there are two identical two-dimensional ice cream carts that perform business on the same line segment. There is a density function describes how many people are on every portion of the line segment. Everyone wants ice cream, but wants to travel the shortest distance to get said ice cream and, as such, will only go the closest ice cream cart.

So, where do the ice cream carts end up?

Well, the correct answer is that they end up right next to each other at the point on the line where half of the people are to the right of both carts and half are to the left. This occurs because both businesses are ultimately mobile - if they see the other cart taking in more business than they are, they simply move next to the cart, or even to the other side of the cart. After some number of cart movements, both carts will end up in the only position which leaves neither with an incentive to move, which we have already described.

This occurs because of a Malthusian behavior in the two carts - if they view the other cart and see it is doing better than they are, they will move towards it until that is no longer the case, with the assumption that belonging to the same group as the better-performing cart will necessarily impart the same success upon themselves.

Here, of course, it does. Largely as a result of our original assumptions, but, still, everything works out quite well.

Monopolistic Competition and Malthus

Now for something a little more complicated. Imagine their exists a market with a finite number of buyers and sellers, a decent amount of product differentiation, and under the influence of economies of scale. A fine example of this would be, say, automobile manufacturers.


There exists a limit to the number of sellers that can be supported in a market like this, and that limit is a function of economies of scale - which dictate how much a seller has to produce to be efficient - and demand - which basically limits the amount that can be sold easily.

For simplicity's sake, let us just say the limit is the number of units demanded divided by the minimum a seller must produce to be competitive in the market. We will call this number L.

If the market is below L, all selers are doing well. The market will attract more sellers because it is an attractive, under-supplied market.

If the market is above L, at least one seller will be unable to maintain his position in the market over the long-run. In the short-run, many sellers will probably suffer minor setbacks.

But does the market ever more from below L to above L? Malthusian behavior would say it does, and the argument makes a lot of sense. Here it is...

Generalizing, if the market is below or at L all the sellers in the market seem to be performing well. If I am an outside potential seller, the market appears to be attractive, even if happens to be at L because all sellers appear to be performing well, making my natural assumption that any seller in the market will perform well.

If I then enter the market and it turns out the market was at L, either myself or one of the other sellers will eventually have to exit the market, assuming that no non-market forces are at work. Before a seller exits the market, one or more sellers will have to suffer an overall loss on activities.

When the market returns to a state where it is at or below L, it again becomes attractive for sellers to enter. When it reaches L it is, again, attractive, and a seller will enter and push the market into unbalance until at least one seller is forced to exit the market.

This, then, should create a situation where some portion of the sellers in a monopolistically competitive market (which is more or less what we described above) is nigh constantly suffering from limited profits. If you look around, I would say there are plenty of empirical examples, although I haven't done any statistical measurements to support the concept (I may in the near future, but I'm writing this first mostly to get it down).

This can, of course, be defeated by a change in how the economies of scale function in the market, but at that point our initial assumptions are invalidated and the whole model has to change to begin with. That sort of situation is strikingly similar to the concept that technological advancement has allowed people to enjoy increasing standards of living even with increased populations, as has been shown over the course of history and treated as empirical evidence against Malthus' original argument.


And that wraps all of that up. In the near future I'll be writing about some economic models that can be explained in a more valid, intuitive way by examining them as the result of Malthusian Behavior, performing some empirical analysis to provide support - or not, I suppose - for the concept, and, eventually, deciding what - if any - the individual and social policy reactions to Malthusian Behavior should be.

Hopefully you'll enjoy it.