Tuesday, 14 July 2015

Capital III, Chapter 10 - Part 9

It can only be the case that a large proportion of the supply is accounted for by the least efficient producers because demand is so great that it can only be met by producing under those conditions. Ricardo's theory of Differential Rent, and from it the subsequent theories of marginal cost, are based on precisely this assumption that current production must be undertaken by the most efficient means, and so any increase in demand can only be met by a supply that requires additional production under more adverse conditions. But, Marx demonstrates in his theory of rent, that this is not a valid assumption. All experience shows that higher levels of production benefit from economies of scale. As demand rises, and supply rises to meet it, this increased supply benefits from falling marginal costs of production.

The market price of commodities continues to fluctuate around the market value, whether it is the production of the least or the most efficient firms that exert most influence upon it. So, if the demand can only be met by the inclusion of the least efficient firms, it will still be the case that if demand rises further, the market price will rise above this market value, and vice versa.

Marx also seems to confuse himself by the introduction of the term “normal demand”, rather than recognising, as he does elsewhere, that demand is a function of use value (which can vary over time as a result of consumer preferences), and this demand, is only a demand at given prices. Given any set of consumer preferences, therefore, demand will rise with a fall in price, and fall with an increase in price. Marx himself makes this point,

“It would seem, then, that there is on the side of demand a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social wants are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money-wages higher, the labourers would buy more of them, and a greater social need would arise for them, leaving aside the paupers, etc., whose demand is even below the narrowest limits of their physical wants. On the other hand, if cotton were cheaper, for example, the capitalists' demand for it would increase, more additional capital would be thrown into the cotton industry, etc.” (p 188)

The concept of “normal demand” seems to be related to this concept of “social need”, which Marx above shows is quite different to effective demand, i.e. demand backed by the ability to pay the market price. As he says, elsewhere, capitalism knows no other demand than effective demand. If the concept of “normal demand” is abandoned, we can simply use Marx's original definition of market value as the mean value of all commodities supplied to the market, as a pivot around which the market price rotates. If consumer preferences change so that there is a shift in the demand curve, market price will still rise above or fall below that market value. Additional supply will be introduced, or excess supply will be removed. If additional supply is provided, its individual value will be either above, below or equal to the existing market value. It will then cause the market value to rise, fall or stay the same, but either way this additional supply will cause the market price to fall. 

The same may be true in reverse. If supply is withdrawn, it may not be the least efficient producers that withdraw. The basis of the lower costs of the most efficient producers is their ability to produce on a large scale. But, if demand falls sufficiently, there may not be any basis for such large scale production. It is only efficient if it is fully utilised. Under utilised, very expensive fixed capital may impose huge costs on such producers leading them to withdraw their capital, leaving the remaining production in the hands of smaller, less efficient producers, thereby causing the market value to rise.

Marx also here introduces his theory of demand, more of which is elaborated in Theories of Surplus Value. I will come back to it later, after dealing with Marx’s actual analysis of these situations where demand is higher or lower than supply, and the bulk of production is produced under average, better or worse conditions.

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