Say’s law – supply necessarily creates its own demand
The incomes paid to the suppliers of factors of production (land, labour & capital) in the form of wages, profits & rents must equal the total price of the goods produced with these factors.
This means that the income generated during the production of a given output is equal to the value of that output, & that any increase in the supply of output means an increase in the income necessary to create demand for that output with the general consequence that supply creates its own demand.
This would imply no general overproduction & that crises are caused by either exogenous shocks (wars, revolutions, harvest failure), or temporary disproportionalities in production.
Marx characterised Say’s Law as ‘pitiful claptrap’ & ‘childish babble’.
Ricardo overlooks the fact that the commodity has to be converted into money.
Was Marx an underconsumptionist?
Sweezy, Marx himself says that, “the ultimate reason for all real crises always remains the poverty & restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit” (Capital, Vol. 3, p.484)
Luxemburg complained that Marx’s analysis of social reproduction appeared to show that capital accumulation could continue indefinitely & without limit, which would put Marx in accord with Say’s Law.
Keynes also attacked Say’s Law.
The Harrod-Domar growth model sought a middle path between Ricardian emphasis upon production & the Keynesian emphasis on demand.
The model argues that there is a possibility for balanced growth which will not lead to diminishing profits & unemployment.
Marx doesn’t make his position clear on crises because he intended to study competition, the credit system & the state much more thoroughly first. But he never completed his work.
Production & Consumption, Demand & Supply & the Critique of Say’s Law
The relation between production & consumption, has three fundamental forms:
- Production & consumption can constitute an immediate identity:
Productive consumption – the act of production entails the consumption of raw materials, instruments of labour & labour power.
Production & consumption are one & the same act.
Consumptive production – consumption often requires a simultaneous production process, e.g. preparation of foodThe distinction is important because the former lies wholly within the sphere of the production of surplus value, whereas the latter – in so far as it involves personal services to the bourgeoisie or productive activity within the workers’ family (cooking, washing, etc) – may remain outside the sphere of direct production of surplus value.
- Production & consumption can have a mediating relationship:
Production creates the material for consumption, dictates also the manner or mode of consumption, at the same time as it provides the motive for consumption through the creation of new social wants & needs.On the other hand, consumption produces production, in the sense that production is rendered entirely redundant without consumption.
- Production & consumption each “create the other in completing itself, & creates itself as the other”.Marx intends to convey the sense of a process in which a process of production flows into a process of consumption & vice-versa.The unity of the two processes constitutes a social process of reproduction.
“The important thing to emphasise here is only that [production & consumption] appear as moments of one process in which production is the real point of departure & hence also the dominant moment’.
“The individual produces an object & by consuming it…is reproduced as a productive individual”.
The process of reproduction must embrace the reproduction of labour power as well as the reproduction of the social relation between capital & labour.
Value must be understood in terms of the underlying unity of production & consumption, though broken by the separation between them.
The separation of sales & purchases in space & time creates the possibility – & only the possibility – for crisis. (Capital, vol. 1, p.114)
And it is money that makes this separation possible because a person who has just sold is under no immediate obligation to buy but can hold the money instead.
“[Purchase & sale] fall apart & can become independent of each other. At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money,…is greater than the demand for all particular commodities…” (Theories of Surplus Value, pt2, p.504)
“…if supply & demand balance one another they cease to explain anything”, & it follows that “the real inner laws of capitalist production cannot be explained by the interaction of supply & demand”. (Capital, vol. 3, p.190)
The antagonisms embedded within the capitalist mode of production are such that the system is constantly being forced away from an equilibrium state.
In the normal course of events, Marx insists, a balance can be achieved only by accident (Capital, vol. 2, p.495).
The Production of Surplus Value
Capital is a process, value in motion undergoing a continuous expansion through the production of surplus value.
For the individual capitalists there are three basic phases:
– As a buyer in commodity markets (value = money)
– As an organiser of production ( value = labour process)
– As a seller in the market (value = material commodity)
The circulation of capital presupposes that continuous translations can occur from one phase to another without any loss of value.
“There arise relations of circulation as well as of production which are so many mines to explode” the smooth functioning of bourgeois society:
“Capital describes its circuit normally only so long as its various phases pass uninterruptedly into one another. If capital stops short at its first phase M-C, money capital assumes the rigid form of a hoard; if it stops in the phase of production, the means of production lie without functioning on the one side, while labour power lies unemployed on the other; & if capital is stopped short in its last phase C’-M’, piles of unsold commodities accumulate & clog the flow of circulation. (Capital, vol. 2, p.48)
The circulation of capital can be conceived of in the following manner: surplus value originates in production & is realised through circulation.
Although the fundamental moment in the process may be production, capital ‘which does not pass the test of circulation’ is no longer capital.
Marx defines the realisation of capital in terms of the successful movement of capital through each of its phases.
Money capital has to be realised through production; productive capital must be realised in commodity form; & commodities must be realised as money.
This realisation is not automatically achieved because the phases of circulation of capital are separated in time & space.
Capital that is not realised is ‘devalued’, ‘devalorised’, ‘depreciated’ or even ‘destroyed’.
The ‘destruction of capital’ refers to the physical loss of use values.
The ‘depreciation of capital’ refers to the changing monetary valuation of assets.
The ‘devaluation of capital’ refers to situations in which the socially necessary labour time embodied in material form is lost without, necessarily, any destruction of the material form itself.
It is important to recognise that use value, exchange value & values are expressive of an underlying unity which requires that the destruction, depreciation & devaluation of capital be seen as part & parcel of each other.
All crises are crises of realisation & result in the devaluation of capital.
Devaluation can take different forms:
– Idle money capital
– Unutilised productive capacity
– Unemployed or under-employed labour power
– Surplus of commodities
- The Time Structure & the Costs of RealisationThe advantage of seeing devaluation as a necessary ‘moment of the realisation process’ (i.e. capital at rest, e.g. as a product waiting to be sold, money waiting to be transferred) is that it enables us to see immediately the possibility for a general devaluation of capital – a crisis – & gets us away from the identities assumed under Say’s Law.Any failure to maintain a certain velocity of circulation of capital will generate a crisis.Crises will result if inventories build up, if money lies idle, if more stocks are held, etc.
A crisis occurs not only because the commodity is unsaleable, but because it is not saleable within a particular period of time. (Theories of Surplus Value, pt 2, p.514)
There is considerable pressure to accelerate the velocity of circulation of capital.
The turnover time of capital is, in itself, a fundamental measure which also indicates certain barriers to accumulation.
Marx treats the physical movement of commodities as part of the material production costs & therefore as productive of value.
Costs of accounting, storage, marketing, information gathering, advertising, etc are all viewed as necessary costs of circulation.
The same applies to costs that attach to the circulation of money – banking.
There is a desire to reduce these costs of circulation.
- The Structural Problems of Realisation
- If capitalists cannot find in the market the right quantities & qualities of raw materials, instruments of production or labour power at the price appropriate to their individual production requirements, then their money is not realisable as capital. The money forms a hoard.If the capitalist employs large quantities of fixed capital which have a relatively long life, then the capitalist, in order to realise the value of the fixed capital, is forced to sustain a specific kind of labour process with particular input requirements for a number of years.Those capitalists producing means of production for other industries must expand their production in anticipation of future requirements which may or may not materialise.
- Within the confines of the production process, capitalists must enjoy that relation to labour power & must possess that technology which permits the value of the commodities purchased to be preserved & surplus value added.Capitalists must shape the labour process to conform to the social average at the very least.Competition puts a further obligation on the capitalist to keep pace with the general process of technological change.
- The conversion of specific material use values into the general form of exchange value – money – appears more difficult in principle than does the conversion of money into commodities.The commodity must fulfil a social need.
When faced with market saturation capital is forced towards the stimulation of new social wants.
The evolution of social wants & needs is an important aspect of capitalist history.The capitalist must also find customers with sufficient money to buy commodities – effective demand. (Theories of Surplus Value, pt 2, p.506)
If an effective demand for commodities does not exist, then the labour embodied in the commodity is useless labour & the capital invested in its production is lost, devalued.
As holders of money or masters of the production process, capitalists exercise direct control.
But when the commodity has to be exchanged, the fate of capitalists depends upon the actions of others – workers, other capitalists, unproductive consumers & the like – all of whom hold money & must spend it in certain ways if the value embodied in commodities is to be realised.
If the capitalist mode of production is characterised by perpetual expansion of value through the production of surplus value, then where does the aggregative effective demand come from to realise that expanding value through exchange?
The Problem of Effective Demand & the Contradiction Between the Relations of Distribution & the Conditions of Realisation of Surplus Value
“The ‘social demand’, i.e. the factor which regulates the principle of demand, is essentially subject to the mutual relationship of the different classes & their respective economic position, notably therefore to, firstly, the ratio of total surplus value to wages, & secondly, to the relation of the various parts into which surplus value is split up (profit, interest, ground-rent, taxes, etc). And this again shows that nothing can be explained by the relation of supply to demand before ascertaining the basis on which this relation rests.” (Capital, vol.3, pp.181-2)
The conditions of direct exploitation, & those of realising it, are not identical. They diverge not only in place & time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production & the consumer power of society. But this last named is …determined…by the consumer power based on antagonistic conditions of distribution. (Capital, vol.3, p.244)
There is an underlying contradiction between the distributional arrangements characteristic of capitalism & the creation of an effective demand sufficient to realise the value of commodities through exchange.
The demand exercised by the working class can never be an ‘adequate demand’ in relation to sustained capital accumulation, because the ‘labourers can never buy more than a part of the value of the social product equal to…the value of the advanced variable capital’ (Capital, vol.2, p.348)
Considered from the standpoint of the class relation between capital & labour, the individual consumption of the labourer becomes ‘a mere factor in the process of production’, since it serves to reproduce the labour power required for the production of surplus value (Capital, vol.1, p.573)
“Capital pays wages e.g., weekly; the worker takes his wages to the grocer, etc; the latter directly or indirectly deposits them with the banker; & the following week the manufacturer takes them from the banker again, in order to distribute them among the same workers again” (Grundrisse, p.677)
The reproduction of the working class & the consumer power that goes with it is caught within the circulation of capital. The capitalists must collectively produce enough wage goods & lay out sufficient variable capital in the form of wages to ensure that the working class possesses the effective demand required for its own reproduction. Yet individual capitalists are under continuous pressure to cut back wages & reduce the value of labour power, while those producing wage goods look to the labourers as a source of effective demand.
“Contradiction in the capitalist mode of production: the labourers as buyers of commodities are important for the market. But as sellers of their own commodity – labour power – capitalist society tends to keep them down to the minimum price.
Further contradiction:…production potentials can never be utilised to such an extent that more value may not only be produced but also realised; but the sale of commodities, the realisation of commodity capital & thus of surplus value, is limited, not by the consumer requirements of society in general, but by the consumer requirements of a society in which the vast majority are always poor & must always remain poor.” (Capital, vol.2, p.316)
Although the variable capital that forms the effective demand of the labourers has its origins with capital, the capitalists producing wage goods are potentially vulnerable to the consumer habits of the working class. Every effort is made to ‘raise the conditions of the labourer by an improvement in his mental & moral powers & to make a rational consumer of him’ (Capital, vol.2, pp.515-6)
Rational is defined in relation to the accumulation of capital.
Capitalists generate an effective demand for products as buyers of raw materials, partially finished products, etc. The total value of constant capital purchased furnishes the total demand for the output of industries producing these commodities. As with variable capital, this effective demand for constant capital originates with the capitalists. The expansion of production requires increasing outlays on constant capital & on expansion of effective demand.
To the degree that technological change forces substitutions between variable & constant capital inputs (production becomes more constant capital intensive), so we will witness a progressive shift towards the production & consumption of means of production.
The total aggregative demand at any one point in time is C+V, whereas the value of the total output is C+V+S.
Where does the demand for S, the surplus value produced but not yet realised through exchange, come from?
Consider the consumption of luxuries on the part of the bourgeoisie.
“Paradoxical as it may appear at first sight, it is the capitalist class itself that throws the money into circulation which serves for the realisation of the surplus value incorporated in the commodities. But, nota bene, it does not throw it into circulation as advanced money, hence not as capital. It spends it as a means of purchase for its individual consumption. (Capital, vol.2, p.334)
This indicates to us immediately that one of the necessary conditions for sustained accumulation is that ‘the consumption of the entire capitalist class & its retainers keeps pace with that of the working class’ & that the capitalists must spend a portion of their surplus value as revenues for the purchase of consumption goods (Capital, vol.2, p.332). For this to happen requires either ‘a sufficient prodigality of the capitalist class’ (p.410) or a disaggregation of the capitalist class into capitalists who save & ‘consuming classes’ who ‘not only constitute a gigantic outlet for the products thrown on the market, but who do not throw any commodities on the market’ (Theories of Surplus Value, pt.3, pp.50-2).
Individual capitalists generally have the capacity to survive quite well & live off their wealth while waiting for surplus value to return to them. From this standpoint it does indeed seem as if capitalists throw money into circulation to acquire consumer goods that will, at the end of the production period, be paid for out of the production of surplus value. But there are clear limits to this as a general social process. We have to consider where, exactly, these financial resources come from in the first place if not out of surplus value? Which brings us to the brink of a tautology: the financial resources to realise surplus value come out of the production of surplus value itself.
“It is in the nature of capitalist production to produce without regard to the limits of the market…Since market & production are two independent factors the expansion of one does not correspond with the expansion of the other” (Theories of Surplus Value, pt.2, pp.522-5)
Overproduction ‘is specifically conditioned by the general law of production of capital: to produce to the limit set by the productive forces…without any consideration for the actual limits of the market or the need backed by ability to pay; & this is carried out through continuous expansion of reproduction & accumulation…while on the other hand the mass of the producers (the working class) remain tied to the average level of needs, & must remain tied to it according to the nature of capitalist production’ (Theories of Surplus Value, pt.2, p.535)
A potential way out of this difficulty is to expand commercial relations with non- or pre-capitalist societies & sectors. This was to be Luxemburg’s solution to the problem of effective demand, & it led her to establish a firm connection between the accumulation of capital & the geographical expansion of capitalism through colonial & imperialist policies. Marx for the most part excludes questions of foreign trade from consideration in Capital & assumes ‘that capitalist production is everywhere established & has possessed itself of every branch of industry’ (Capital, vol.1, p.581). But in the Grudrisse (pp.407-9) he does not so restrict himself. He argues that a ‘precondition of production based on capital is…the production of a constantly widening sphere of circulation’, so that ‘the tendency to create the world market is directly given in the concept of capital itself’.
“Capital drives beyond national barriers & prejudices as much as beyond nature worship, as well as [beyond] all traditional, confined, complacent, encrusted satisfactions of present needs, & reproductions of old ways of life. It is destructive towards all this & constantly revolutionises it, tearing down all barriers which hem in the development of the forces of production, & the exploitation & exchange of natural & mental forces.”
What Ricardo failed to appreciate was that the incessant & inexorable breaking down of old barriers & the revolutionary transformation of needs on a world scale ‘only transfers the contradictions to a wider sphere & gives them greater latitude’ (Capital, vol.2, p.468)
Although Marx accepts the idea that accumulation inevitably results in the penetration & absorption of non-capitalist sectors, he specifically denies that this can resolve the effective demand problem. He plainly thought that if a solution was to be found it must lie within the capitalist mode of production itself.
Perhaps the extra effective demand required to realise the surplus value can come simply from an expansion of the quantity of money, either directly through the production of the money commodity, such as gold, or indirectly through the credit system.
While Marx accepts that the organisation of the credit system is a necessary condition for the survival of accumulation, he warns us against entertaining ‘any fantastic illusions on the productive power of the credit system’ (Capital, vol.2, p.346)
Furthermore, from the standpoint of the money circuit of capital, M-C-(M + ∆M), it seems as if more money is required at the end of each turnover in order to accommodate ∆M, the profit.
For all these reasons, it is tempting to accept a version of the monetarist illusion in which the effective demand problem is solved by an expansion in the money supply.
Since money is a cost of circulation rather than productive activity, reliance upon the money producers to furnish the extra effective demand would have the effect of switching capital way from the production of surplus value into the absorption of surplus value as circulation costs.
Dispelling the fantastic illusions that surround the credit system is a more complex matter, but in the end a similar argument applies.
Marx delivers the coup de grace to the monetarist illusion, however, by considering the role of money in relation to the commodity & productive circuits of capital. The quantity of money required at a given velocity of circulation is related to the total value of commodities being circulated. From this standpoint, ‘it changes absolutely nothing…whether this mass of commodities contains any surplus value or not’. The money stock may need replacement or augmentation in order to accommodate the proliferation of exchange, but this has nothing directly to do with the realisation of surplus value through exchange (Capital, vol.2, p.473).
The investigation of the monetary aspects to the realisation of surplus value appears to lead to a dead end. But a proper analysis of it provides us with certain clues as to what the only possible resolution to the effective demand problem can be. The monetarist illusion arose in part, for example, by confusion of the total quantity of money with the total quantity of money functioning as capital. Money capital can be augmented by converting an increasing quantity of a constant stock of money into capital.
It is the further conversion of money into capital that furnishes the effective demand required to realise surplus value in exchange.
Money must exist before it can be converted into capital. But the creation of money in no way guarantees its conversion into capital. This conversion involves the creation of ‘fictitious capital’ – money that is thrown into circulation as capital without any material basis in commodities or productive activity.
In searching for a material basis it can be exchanged against the surplus value embodied in commodities. The realisation problem, as it exists in the sphere of exchange, is resolved.
But this solution to the effective demand problem means the creation of new money capital, which must now be realised in production. And so we come full circle. We are back in the sphere of production, which is, of course, where Marx insists we should be all along.
The solution to the problems of realisation in exchange is converted into the problem of realising surplus value through the exploitation of labour power in production.
We see, once more, the social necessity for perpetual accumulation, but we now derive that necessity out of a study of the processes of realisation within the continuous flow of production & consumption.
A balance between production & consumption can be achieved under the capitalist mode of production only through perpetual accumulation.
Perpetual accumulation depends, however, on the existence of labour power capable of producing surplus value.
The necessary geographical expansion of capitalism is therefore to be interpreted as capital in search for surplus value.
The penetration of capitalist relations into all sectors of the economy have a similar basis.
Capitalism constantly presses up against the capacities of the social & physical world to sustain it.
Capitalism encounters external barriers because the ‘original sources of all wealth’ – the soil & the labourer – do not have limitless capacities (Capital, vol.1, p.507). But it also encounters ‘barriers within its own nature’ (Grundrisse, p.410).
There are strong forces driving the system away from equilibrium, that accumulation for accumulation’s sake is an unstable system in both the short & the long run. Crises restore the balance between production & consumption. These crises entail, however, the devaluation, depreciation & destruction of capital. With also entails the devaluation, depreciation & destruction of the labourer.