US Retail Sales and False Profits - Part 2 of 9

Say's Law assumes that income and expenditure must always be equal, because income is what every seller obtains from selling their commodity – including workers who sell their commodity, labour-power – and its assumed the only purpose of selling a commodity is to buy another, or several others of an equal amount of value. In describing this view, Marx quotes Ricardo,

“... No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.” 

(TOSV2 p 493-4)

and,

“Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected” 

(TOSV2 p 501)

In other words, it assumes that the market operates on the same basis that it did when all such exchanges took place by barter. Individual commodity owners take their commodity to market, for the sole purpose of obtaining some other commodity or set of commodities of equal value. In that case, every sale must be simultaneously a purchase, because commodities are only exchanged for other commodities. What people obtain as income, therefore, is equal to what they sell, and what they sell is equal to what other people spend, so, in total, income must equal expenditure.

Economists like Smith and Ricardo, had never experienced the kind of crisis of overproduction that arose after 1825, Marx says, and so their theory never had to account for it. The only crises they had seen, Marx says, were the various financial crises that occurred in the previous century, resulting from the fact that banks printed their own bank notes in excess of their capital, and lent money in excess, which caused speculation such as that which arose with the South Sea Bubble, Tulipmania, John Law's Mississippi Scheme and so on.

As a result, these economists, and their followers, believed that there could be no crisis of overproduction, and when their followers came to explain these crises, when they did arise, they were, therefore, led to the argument that it was caused not by overproduction, but by underconsumption. So, for example, when Britain overproduced textiles, which it shipped to China, it was argued that the glut of these textiles on the Chinese market, was not a result of overproduction by British capitalists, but underconsumption by Chinese consumers. The reason for that underconsumption was then that China was not producing enough of the commodities that Britain required, which could then be exchanged for these textiles.

If we relate this back to the US Retail Sales data then, its clear why this fall in the value of sales is understood as being the consequence of reduced demand. The other option, that demand might actually have remained constant, or even risen, whilst the prices of commodities, in aggregate, fell is rejected, because, according to Say's Law, any reduction in prices, caused by increased supply, must be compensated, at an aggregate level, by the resultant increase in demand, i.e. as the price of individual commodity units falls, with a rise in supply, so demand rises, meaning the total expenditure remains the same, and incomes and expenditure are, therefore, the same. The fall in the prices of oil and copper, are similarly viewed in this way, so that when the price of copper fell, this was interpreted as meaning that the demand for copper must be falling, which suggests a slowing of economic activity, falling profits, and so shares sold off.

In Part 3, I will examine why Say's Law is wrong, and why, therefore, the understanding of the falling prices, and lower US Retail Sales data is also wrong.

Back To Part 1