A Characterisation of Economic Romanticism, Chapter 1 - Part 45

In other words, the fact that workers wages and living standards rise does not at all mean that they will continue to use them to simply buy proportionately more of the existing wage goods, so that the demand for materials to produce these wage goods rises proportionately along with it. The very fact of rising wages, and living standards, implies an increasing disproportion, and under-consumption of existing wage goods, relative to their increasing supply. The crisis arises both as a consequence of squeezes on the production of surplus value, and of realising it as profit, for a range of existing commodities. At a certain point, for example, workers stop buying more margarine, and use their higher wages, and savings from a lower price of margarine, to start to buy some butter instead. They may even stop buying margarine altogether, and replace it with butter. Under these conditions, even if margarine production remained constant, it would be overproduced, as a result of this under-consumption, an under-consumption not caused by insufficient revenues, but increased revenue. This is just the equivalent of the situation Marx describes in Theories of Surplus Value, in relation to the price elasticity of demand. 

“Say’s earth-shaking discovery that “commodities can only be bought with commodities” simply means that money is itself the converted form of the commodity. It does not prove by any means that because I can buy only with commodities, I can buy with my commodity, or that my purchasing power is related to the quantity of commodities I produce. 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.” 

(Theories of Surplus Value, Chapter 20, p 119) 

The situation in respect of rising wages is simply an example of the income elasticity of demand rather than price elasticity, i.e. the extent to which demand rises in relation to a rise in wages, rather than in relation to a fall in prices. In practice, both things go together. As production expands rapidly, the unit value of outputs fall, as in the example of knives. As prices fall, the demand expands, but, at some point, expands more slowly than the fall in prices. Similarly, as employment expands, along with this increasing output, wages rise. As wages rise, workers demand for existing staple wage goods rises, but, at a certain point, this demand rises more slowly than the rise in wages.

Workers look for other commodities to buy. Increasingly, as the output of the staple wage goods continues to rise, it can't be sold, as demand for these commodities does not rise proportionate to the fall in unit prices, or rise in wages. To sell the output, prices must be reduced below the price of production, resulting in large losses. This overproduction of commodities, therefore, also causes a partial crisis of overproduction of capital, as not all the profit can be realised, if any. But, it also comes alongside an overproduction of capital. As capital expands, employment expands, and wages rise squeezing profits.

The overproduction of commodities can be avoided provided that the demand for existing consumption goods by workers can be supplemented by their demand for new types of consumption goods. Initially, this takes the form of demand for existing consumption goods they previously considered luxury goods, i.e. butter in place of margarine. However, as Marx describes in Capital II, and in Value, Price and Profit, the rising wages of workers, in such periods, finds its corollary in falling profits for capitalists. The capitalists' profit is used both for his productive consumption (accumulation) and unproductive consumption (consumption of necessities and luxury goods). So, if their profits are squeezed, they have proportionately less to spend on unproductive consumption, and so tend to spend less on luxuries. They have to continue to accumulate, and indeed must do so at a faster rate, which also leads to rising interest rates, which further reduces the profit of enterprise. Production continues to increase, even as consumption begins to reach its limits. 

The range of luxury goods that workers can afford to buy is limited, and precisely because they are luxury goods that have been produced on a limited scale, their unit prices are high. In order to expand demand for these products, their price must fall, which requires the application of new technological methods of production – as for example happened with motor cars in the 1920's in the US. Its only after such technological revolutions that raise productivity, and so reduce values, as well as making available whole new ranges of consumer goods that this overproduction of commodities can be resolved.

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