US Retail Sales and False Profits - Part 3

Marx long ago demonstrated what is wrong with Say's Law. Take first the argument that lies behind Say's Law, which was accepted by Smith and Ricardo, and their followers, that the market must clear, because each sale is simultaneously a purchase. Marx points out that this is only true under systems of barter, where commodities are exchanged for other commodities of equal value. As soon as barter is replaced by a money economy, this is no longer true. Under a money economy, the act of production and consumption, and of purchase and sale are separated.

“It can therefore be said that the crisis in its first form is the metamorphosis of the commodity itself, the falling asunder of purchase and sale.”

(Theories of Surplus Value Part 2, Chapter 17, p 510.)

The fact that I sell a commodity, and obtain money from its sale, does not at all commit me to then having to spend this money. I can decide to simply hoard the money obtained, for any number of reasons. As Marx puts it,

“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, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.”

(TOSV2 p 505)

This is, in fact, an argument that was later adopted by Keynes, in also rejecting Say's Law. For Keynes, it appears as the Marginal Propensity to Consume, whose converse is the rate of saving. And, as Marx points out, this is true where prices fall both at the level of the individual commodity, and for commodities in general. In other words, just because the price of apples falls, this does not mean that I must buy more apples, and if the price of all commodities falls, it does not mean I have to buy more commodities in total. Its likely that I will do so, but the amount by which I increase my purchases is likely to be proportionately less than the fall in prices, so that my total spending will fall. As Marx puts it,

"The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

(TOSV 3 Chapter 20, p 119)

It is equally unintelligible, why if the price of knives falls, that I must spend the money I save, in buying other commodities, such as forks, or plates etc. rather than simply thank my good fortune for the fall in prices, and hold on to the savings in money form. The smaller the range of commodities that exists, for me to extend my range of purchases with the released revenue, and the more my needs for those commodities have already been met, the more likely it is that I will use any savings from lower price, to simply increase my savings.  Under such conditions, I may both increase the amount of savings I have, and simultaneously increase my consumption of these now cheaper commodities. It is then rather meaningless to describe any such excess of supply over demand as being caused by “under-consumption” rather than being caused by over-production. As Marx says, every such situation exists because consumption is less than production, but that does not really explain anything.

“It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e., consumers (since commodities are bought in the final analysis for productive or individual consumption).”

(Capital II, Chapter 20)

In Part 4, I will look at the real basis of this excess of supply over demand, which then leads to a sharp fall in prices such as seen in the price of oil, copper and other primary products recently.

Back To Part 2