GDP, or Gross Domestic Product, is not a Marxist term, but it is a term used by Marxists, as well as orthodox economists. However, although Marxists, superficially, define GDP in the same way as orthodox economists, as being the amount of new value created in a year (value added), they actually mean something quite different to what orthodox economists mean by this definition. Orthodox economics means by the new value created in the year, also the value of output for the year. They equate output value with consumption plus net investment, in the Keynesian formulation Y (National Income) = C + I. Marxists do not. That is because orthodox economics (both neoclassical and Keynesian) follows Adam Smith, in resolving the value of commodities, and so of total output, entirely into revenues, i.e. incomes from wages, profits, rent and interest. On this basis, total income equals total expenditure, equals total output value. GDP measured on any of these bases should always be the same – it never is, because of statistical discrepancies. This is also the basis of Say's Law, that supply creates its own demand. In other words, supply results in the sale of output; the sale of output means that those that participated in the production of that output (capitalists, workers, landlords, money-lenders) each receive an income for their contribution to production (profit, wages, rent, interest), which should equal the marginal revenue product, of each of these factors of production, in a condition of general equilibrium; the owners of these revenues then spend them, and, in so doing, create an equal amount of monetary demand for what has been produced.
“... the fantasy of men like Say, to the effect that the entire yield, the entire gross output, resolves itself into the net income of the nation or cannot be distinguished from it, that this distinction therefore disappears from the national viewpoint, is but the inevitable and ultimate expression of the absurd dogma pervading political economy since Adam Smith, that in the final analysis the value of commodities resolves itself completely into income, into wages, profit and rent.”
(Capital III, Chapter 49)
In Capital II and III, Marx shows that Adam Smith's proposal that the value of commodities, and so of total output, resolves entirely into revenues was an “absurd dogma”. In Theories of Surplus Value, Chapter III, Section 10, Marx demonstrates the fallacy of Smith's proposal at even greater length. Essentially, Marx says, its clear that the value of commodities, and also, thereby, of total output cannot resolve entirely into revenues (added value), because the value of all commodities includes an element of value from raw materials, and the wear and tear of fixed capital, which were not produced in the current year. In other words the value of total output consists not just of new value added by current labour, but also of a quantity of value from dead or congealed labour contained in these commodities consumed in production. In Theories of Surplus Value, Chapter 17, Marx, not only shows that Say's Law, based on this “absurd dogma” is wrong, because, revenues cannot then possibly be equal to the value of total output, so demand cannot equal supply, on that basis, but, also, it is wrong because it does not take into account saving.
“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.”
(Theories of Surplus Value 2, p 505)
As Marx puts it, it takes the rules that apply under systems of barter and applies them to systems of commodity production and exchange in a money economy, which itself is the foundation of a capitalist economy.
Keynes addressed this latter deficiency of neoclassical economics, but only by making savings equal to investment spending, and, even to make this work, its necessary to include an unplanned increase in inventory levels as “investment”. So, as Hansen says, although saving and investment may then be equal, they will not necessarily be in equilibrium. But, Keynes continued to accept the “absurd dogma” of Adam Smith, as have all orthodox economists after him, that the value of output resolves entirely into revenues.
“The classic statement of Say's Law maintained the thesis that the free price system tends to provide a place for a growing population and an increase in capital. In an expanding society, new firms and new workers wedge their way into the productive process, not by supplanting others, but by offering their own products in exchange. The market is not regarded as fixed or limited – incapable of expansion. The market is as big as the volume of products offered in exchange. Supply creates its own demand. Viewed as a broad generalisation, this statement presents in the large a picture of the exchange economy... (p 4)
Keynes was careful to state that he was making no attack on the neoclassical theory of value and distribution. This part of classical theory had been erected, he said, ' with great care for logical consistency.' (p 19)”
(Alvin H. Hansen “A Guide To Keynes)
What Keynes was attacking, Hansen says, is not Say's Law itself, but the Pigovian version of it. According to Pigou, the original version of Say's Law as presented by Mill, Say and Ricardo was not relevant to a capitalist economy, because it was formulated in relation to the kind of economy based upon petty commodity production that still existed in their time, but which had disappeared. In other words, it was based upon an economy where a multitude of independent, small commodity producers, produced goods, and exchanged them for the other commodities they required for their own consumption. This was no longer the case with capitalism based upon the large-scale, employment of wage labour.
But, as Marx describes in Theories of Surplus Value, Chapter 17, as indicated in the quote provided earlier, it is not the difference between the conditions of generalised commodity production, as against capitalism, that explains the deficiency of Say's Law, it is the difference between barter and generalised commodity production, in a money economy. It is the fact that a seller, be they a capitalist or a petty commodity producer, obtains money, and has no need to then use it to buy other commodities that means that supply does not automatically generate its own demand. C-M, does not necessitate, M-C. Indeed, its this fact that the petty-commodity producer can hoard money, rather than spend it, which means that it can be converted into capital, which forms the process of the differentiation of the peasantry into a bourgeoisie and proletariat.
The point that an expanding population, or an increase in living standards, leads to an expansion of the market is quite true, and the driver of this expansion is indeed anticipation of such increased demand. Marx was aware of that, and sets it out long before Keynes incorporated it into his General Theory. Ricardo argued that additional investment would only occur if prices rose causing profits to rise, but Marx sets out why this is wrong, for the simple reason that capital accumulation is driven by competition, and need to capture market share. But, that does not at all mean that the increased demand is equal to the increased supply, which occurs in advance of it. The market continually expands, but not smoothly, only via repeated crises of overproduction.
“Finally, the extension of cultivation to larger areas — aside from the case just mentioned, in which recourse must be had to soil inferior than that cultivated hitherto — to the various kinds of soil from A to D, thus, for instance, the cultivation of larger tracts of B and C does not by any means presuppose a previous rise in grain prices any more than the preceding annual expansion of cotton spinning, for instance, requires a constant rise in yarn prices. Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.”
(Capital III, Chapter 39)
Lenin makes this same point in his polemics with the Narodniks, who used the same under-consumptionist arguments of Sismondi and Malthus, to argue that capitalism could not develop naturally in Russia, because there were limits to the expansion of the market, necessitating the existence of a foreign market. (See: On The So Called Market Question).
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