Capital II, Chapter 20 - Part 6

3. Exchange Between the Two Departments: I(v+s) against IIc

In fact, Marx was well aware that whilst social value/exchange value is objectively determinable, the level of demand is subjective. The social value of a Sinclair C5 is objectively determinable on the basis of the labour-time required for its production. But, if potential consumers decide it has very little use value, for them, they will not buy it. In fact, this subjective valuation of it will feed back into the objective valuation too, because for Marx, it is only socially necessary labour-time that counts. Commodities that are produced and not demanded have no exchange value, however much labour-time was used in their production, because it was not socially necessary.

Marx makes this clear later in Capital III, Chapter 30, where he sets out his theory of crisis in summary. He says, assume there are only workers and capitalists; ignore accidental effects, such as fluctuations in market prices, due to temporary changes in supply and demand. This latter is not insignificant because with the high degree of interrelatedness of the economy, especially as developed by credit, any fluctuation in market prices in one sphere, that prevents the reproduction of capital, or causes a disproportion and misallocation of capital, can have a consequence for the whole economy. But, Marx, having noted this discards it to show how the very process of production leads to crisis. He also discounts the effects of all the frauds and swindles previously outlined, which credit also facilitates.

“Then, a crisis could only be explained as the result of a disproportion of production in various branches of the economy, and as a result of a disproportion between the consumption of the capitalists and their accumulation. But as matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always remains the poverty and 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 III, p 484)

As Marx points out, demand is itself a function of capitalist production, which determines the shape of distribution, as highly unequal.  So, for example in the global economy, millions do not starve because there is insufficient food, but because those millions do not have the income or wealth to buy the food that is available.  At the same time, millions more have income and wealth more than adequate to buy food, and can only be persuaded to buy more at much lower prices.  They already consume so much that they suffer with obesity, and throw away large amounts of the food they buy.

These were issues that Marx could only come to much later, in concretising his theory, but which he did not live long enough to complete. His models here, as with his solution of the Transformation Problem, are then at a high level of abstraction, designed to illustrate that under a series of simplifying assumptions, one of which is general equilibrium, all output can be exchanged.

The model presented is:

Department 1:

Capital Employed – C 4000 + V 1000 = 5000

Output/Commodity - Product C 4000 + V 1000 + S 1000 = 6000

Department 2:

Capital Employed – C 2000 + V 500 = 2500

Output/Commodity Product – C 2000 + V 500 + S 500 = 3000

For greater realism, the above figures can be considered to be £ bn.

So, the capital employed is £7,500, and it produces a total national output of £9,000. A surplus value of £1500 has been produced, which is equal to a 100% rate of surplus value on the £1500 of variable capital employed - £1,000 in Department 1, £500 in Department 2.

Thinking about this in similar terms to the Robinson Crusoe/Man Friday example, Robinson produced the means of production, and Friday the means of consumption. So, Robinson produces the fishing nets, bow and arrow etc. that Friday needs to hunt and fish. Robinson exchanges these means of production with Friday, who in turn provides Robinson with the fish and game he requires to live. Robinson maintains the capital, Friday produces the revenue.

The only difference in the model presented is in the existence of a surplus product and surplus value. Friday produces a surplus over and above his own requirements, but it is not a social surplus, because it has to cover Robinson's consumption needs. If Robinson did not produce means of production, that is time Friday would have to spend in that pursuit.

But, in the model above, the workers in Dept. 2 not only have to produce a surplus product over their own needs, so as to cover the consumption needs of workers in Department 1, providing them with the necessary means of production, they also have to produce a further surplus amount to cover the consumption needs of the capitalists in both departments.

So, if we look first at Department 2, the workers there produce means of consumption with a value of £3,000. We can now see where the demand for this output comes from.

£bn.

Workers in Department 2 500

Workers in Department 1 1,000

Capitalists in Department 2 500

Capitalists in Department 1 1,000

Total 3,000

Department 2 comprises all those firms producing a range of articles for consumption, from food to motor cars. So, all this is saying is that £500 of demand arises here within the department, as workers producing food buy cars, and vice versa etc.

Similarly, workers producing a range of means of production, in Department 1, use their wages to buy consumer goods from Department 2. The capitalists in both Departments use their surplus value to do likewise.

But, in order for the workers and capitalists in Department 1 to buy these consumer goods, they first have to receive their wages, and possibly their profits. The latter is only possible, because, as seen previously, the capitalists have money to cover their expenditure on consumption needs during that time when they are waiting to sell their commodities. The surplus value when realised always recovers this money thrown into circulation.

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