[d)] Demand, supply, Over-Production
““A demand means, the will to purchase, and the means of purchasing… The equivalent” (means of purchasing) “which a man brings is the instrument of demand. The extent of his demand is measured by the extent of his equivalent. The demand and the equivalent are convertible terms, and one may be substituted for the other… His” (a man’s) “will, therefore, to purchase, and his means of purchasing, in other words his demand, is exactly equal to the amount of what he has produced and does not mean to consume” ([James Mill, Elements, pp. 224-25;] Parisot, pp. 252-53).” (p 100-01)
This is what came to be known as “Say's Law”, and was dealt with by Marx, in Chapter 17. The fallacy here, as Marx describes, is that this identity of supply and demand, only exists under conditions of barter. In other words, not only is this inapplicable under capitalism, but it is inapplicable even in systems of commodity exchange where money acts as an intermediary, in other words going back thousands of years.
As soon as money intervenes in the process of exchange, C – M – C, there is no reason why the first commodity owner, having accomplished the sale of their commodity, C – M, must then proceed to the second stage of the process, M – C, so that the second commodity-owner, having realised the exchange-value of the first commodity-owner's commodity, by handing over money, is unable to realise the exchange-value of their own, by having that money flow back to them. Even if the first commodity owner, having realised the exchange-value of their own commodity, only holds on to the money they have obtained for a period, before once again spending it, this may be sufficient to prevent the second commodity owner realising the exchange-value of their own commodity (for example, if its perishable). It will, in any case, prevent them from using the realised exchange-value of that commodity, so as to replace the commodities consumed in its production, and thereby prevent their own production from continuing.
Moreover, even if the value of C1 is equal to C2, there is no reason why the owner of C1, having realised its value in money, will then use all of this money to provide an equal amount of demand for C2. The owner of C1, with the money in their possession may now only have a demand for half of the C2 brought to market, or alternatively may have a demand for all of the C2 brought to market, but only at a price half of its market value.
All of these factors, which arise as a result of the separation of production from consumption, in a money economy, and which, thereby, separate demand from supply, are potential causes of crisis, as set out by Marx in Chapter 17. In pre-capitalist economies, they can only ever amount to a crisis for the individual producer. Even under capitalism, prior to machine industry, their potential to cause a generalised crisis of overproduction, is limited, because production rises only slowly, and more or less in proportion to population, so that supply expands only in proportion to demand. It is the development of large-scale, machine industry, at the end of the 18th/start of the 19th century, which changes this situation, and thereby leads to the first ever generalised crisis of overproduction, in 1825.
“The same abstract “reasoning” with which Mill demonstrates that buying and selling are but identical and do not differ; the same tautological phrases with which he shows that prices depend on the amount of money in circulation; the same methods used to prove that supply and demand (which are only more developed forms of buyer and seller) must balance each other. The logic is always the same. If a relationship includes opposites, it comprises not only opposites but also the unity of opposites. It is therefore a unity without opposites. This is Mill’s logic, by which he eliminates the “contradictions”.” (p 101)
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