In fact, its not only the Keynesians and Malthusians that fall into this error. Some Marxists, motivated by the same kind of catastrophism, who are continually looking for the next recession, brought about by The Law of The Tendency for the Rate of Profit to Fall, also fall into the same kinds of errors. Sismondi's argument was that the ruination of this mass of independent producers necessarily results in shrinkage of the home market, because these producers, now as wage labourers, have less revenue (as independent producers their revenue took the form of their own unproductive consumption). Whilst the capitalists have more revenue, their small numbers means that they cannot increase their consumption sufficiently to soak up the excess production that now also results from production on a much larger scale. The capitalists could devote some of this production to accumulation, but this would only result in yet even greater volumes of output that could not be sold. Consequently, Sismondi concludes, any continued expansion depends on the expansion of foreign markets, where this surplus production can be sold and the profit realised.
In the 20th century, Stalinists and Third Worldists have used this fallacious argument to explain the development of colonialism and neocolonialism, which they also wrongly place under the generic heading imperialism.
The variant that explains overproduction on the basis of The Law of the Tendency for the Rate of Profit to Fall uses a similar argument, but takes an argument used by Marx as a starting point. Marx's analysis of The Law of the Tendency for the Rate of Profit to Fall shows that it is driven by rising social productivity. As productivity rises, the technical composition of capital rises. A given amount of labour processes a greater volume of raw material. Even if the unit value of raw material falls, also because of rising productivity, it does not fall by the same proportion as the rise in the technical composition. Consequently, c rises relative to v + s, i.e. dead labour rises relative to living labour. Therefore, unless v falls relative so s, i.e. the rate of surplus value rises, s must fall relative to c + v, so that the rate of profit falls.
Now, Marx argues that the rate of surplus value does rise, because of this same rise in productivity, as wage goods become cheaper, the value of labour-power falls, and so surplus labour rises in proportion to necessary labour. However, Marx notes, pointing to the same argument made by Hodgskin, there is a limit to this, because whilst 10 workers producing 12 hours of surplus value each will produce more surplus value than 20 producing only 5 hours each, 2 workers, even producing 20 hours of surplus value each, will produce less. This, of course, is undeniably true, and so this 40 hours of surplus value would result in a much lower rate of profit, and potential, in any given sphere, for losses to be incurred, as a result of market fluctuations, or in another variant, even the lower profit rate acts to dissuade firms from investment, which one would think, however, ought to lead to underproduction rather than overproduction!
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