““Here a great confusion: (1) This identity of supply, so that it is a demand measured by its own amount, is true only to the extent that it is exchange value = to a certain amount of objectified labour. To that extent it is the measure of its own demand -- as far as value is concerned. But, as such a value, it first has to be realized through the exchange for money, and as object of exchange for money it depends (2) on its use value, but as use value it depends on the mass of needs present for it, the demand for it. But as use value it is absolutely not measured by the labour time objectified in it, but rather a measuring rod is applied to it which lies outside its nature as exchange value.”
In other words, supply is determined by value, whereas demand is determined by use value. The former is objectively determinable, but the latter is not, because it is a function of the subjective preferences of consumers. It is then quite possible that, for any commodity, or for all, at any particular time, the producers of commodities may produce a quantity of commodities, which have an objectively determinable value of say £1 million, equal to say 1 million hours of abstract labour-time, but, if consumers decide that they do not wish to buy these commodities at that total cost, some will remain unsold, supply will exceed demand, and ultimately the prices of the commodities will fall. In reality, as Marx says, some of the labour-time expended upon their production was not socially necessary, and, therefore, did not actually create value.
If only 80% of these commodities find a demand at this price, then its clear that 200,000 hours of abstract labour-time, equal to £200,000 was not socially necessary labour-time, and therefore, the real value of these commodities, despite the 1 million hours of abstract labour spent on their production, was not socially necessary. These commodities have a value of only 800,000 hours, or £800,000.
“Just as it is a condition for the sale of commodities at their value, that they contain only the socially necessary labour-time, so it is for an entire sphere of production of capital, that only the necessary part of the total labour-time of society is used in the particular sphere, only the labour-time which is required for the satisfaction of social need (demand). If more is used, then, even if each individual commodity only contains the necessary labour-time, the total contains more than the socially necessary labour-time; in the same way, although the individual commodity has use-value, the total sum of commodities loses some of its use-value under the conditions assumed.”
(TOSV2 p 521)
To this extent, its clear that, in the short term, it is demand that dictates the market price. In this case, consumers were not prepared to buy all these commodities at their price of production, and so the market price fell. At other times, they may be prepared to pay more than the price of production to obtain the commodities, so that, if supply does not rise to meet this increased demand, then the market price will rise. This, in fact, is what happened with oil prices etc. causing their market prices to rise sharply, before increased investment caused supply to rise, and prices to crash. Its for this reason that Marx and Engels say that capitalists get to know from experience how to take into account these variations in market prices, above and below the price of production.
But, what is also clear is that these short term fluctuations in demand can only explain the determination of the movements of market prices above and below that price of production – what in orthodox economics would be called the equilibrium price – they cannot explain the determination of the price of production itself. Only the determination of value on the basis of the objective measure of labour-time, which finds its expression in a capitalist economy in the cost of production, and average rate of profit can do that.
Yet, as Marx points out, even this is not so simple, because the price of production itself is only a price of production at a given level of output. In Capital III, Chapter 39, for example, Marx examines the price of production of wheat, under a series of conditions, where demand is rising, so that additional supply can only be provided by bringing additional land into cultivation. If the additional land that must be brought into cultivation is less fertile than the land currently being cultivated, then the cost of production of wheat will rise, because proportionately less wheat will be produced in total, for the amount of capital laid out for its production.
If, on the other hand, the increase in demand for wheat is sufficient to bring into cultivation some other more fertile land, that may not have previously been used, because of its distance from markets, because it required a large investment of capital for drainage etc., then the output of wheat will rise by proportionately more than the increase in the capital laid out to produce it, so the cost of production will fall, and the price of production of wheat will also fall. So, even the objectively determined value of the commodity is itself also a function of the subjectively determined preferences of consumers, which determines the level of demand, just as that level of demand, is also a function not just of the subjective preferences of consumers, but also of the objectively determined value of the commodity!
“Supply and demand determine the market-price, and so does the market-price, and the market-value in the further analysis, determine supply and demand. This is obvious in the case of demand, since it moves in a direction opposite to prices, swelling when prices fall, and vice versa. But this is also true of supply. Because the prices of means of production incorporated in the offered commodities determine the demand for these means of production, and thus the supply of commodities whose supply embraces the demand for these means of production. The prices of cotton are determinants in the supply of cotton goods.
To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.”
(Capital III, Chapter 10)
Having examined the inadequacies of the bourgeois theory of prices, in relation to the US Retail Sales data, I now want to examine the inadequacy of the bourgeois understanding of profits, and why that means that it views falling prices as causing falling profits, which in relation to falling oil prices, copper prices and so on led to a sharp sell off on stock markets. I will turn to that in Part 7.