Here, in the Critique, as in Capital, Marx also assumes that demand and supply balance, and that there is no disproportion, in order to analyse the fundamental nature of value and exchange-value.
“To be a use-value is evidently a necessary prerequisite of the commodity, but it is immaterial to the use-value whether it is a commodity. Use-value as such, since it is independent of the determinate economic form, lies outside the sphere of investigation of political economy. It belongs in this sphere only when it is itself a determinate form. Use-value is the immediate physical entity in which a definite economic relationship – exchange-value – is expressed.” (p 28)
In other words, political economy cannot determine why chocolate is a use-value for A and not for B, or why it may give more use value/utility for A than C. These are questions for behavioural science not political economy. Yet, neoclassical economics has built its entire model on the basis of such ephemeral and subjective factors of utility. Marx's theory of objective value can be summarised as follows. The market value of each commodity unit is determined by the average labour-time required for its production. However, production/supply consists not of individual commodity units but of a mass production of commodities in advance of consumption. Ricardo's argument that no one would continue producing things they cannot sell, is irrelevant, because a huge supply has already been created, and the producer must sell, at whatever price they can obtain.
Competition between producers requires them to continually reduce unit values, and the means of doing that is to produce, on a larger and larger scale, and because this production is ahead of consumption/demand, its never known how much of this production, and the labour expended on it was actually socially necessary, i.e. how much demand there was for this production. Demand is always demand at a given price. If 1,000 units are produced with a market value of £1 each, but there is only demand for 500 units at that price, 500 units were overproduced. There is a disproportion, and the labour expended on this production was not necessary, and so not value creating. It is as though 500 units had no value. But, the producers of the 1,000 units will still need to dispose of them. They will have to reduce the market-price of each unit below its market value, to clear the market. It may even not be enough to reduce the price to £0.50, because, as Marx describes in relation to the demand for knives, above, there is no reason for demand to double, just because prices are halved. Marx understood elasticity of demand long before the marginalists theorised it.
The fact that the market price falls, however, does not change the market value of each individual unit. This is where orthodox economics falls down. It assumes that market prices can be reduced simply as a result of increasing supply relative to demand, forgetting that producers do not produce for the fun of it, but to make profits, and that they will not increase supply if the price is then below their costs of production. Because orthodox economics ignores the role of production it ignores the objective factors that determine the cost of production that form the basis of decisions of production and supply.
A commodity that sells at a price equal to £0.50, might still have a cost of production equal to £1. It still requires the same amount of labour for its production, so supply of these commodities would be reduced. However, the labour-time required for production is itself a function of the scale of production. Reducing output will reduce efficiency so that the average labour-time required will rise. If output is reduced to 500 units, the market value might, then, rise to £1.10, so that there is still insufficient demand at this price, requiring supply to be reduced further.
However, because the market value is an average of the individual values of different producers, the consequence is that the least efficient producers, i.e. the smaller producers, will make little or no profit, and will cease production entirely. That means that the larger producers will fill the demand instead. They will not have to cut back their output and may even be able to expand. As the least efficient producers disappear from the calculation of the average market value, it is itself reduced, and so, now, this means that, at this lower market value, demand will be higher.
“Supply and demand determine the market-price, and so does the market-price, and the market-value in the further analysis, determine supply and demand. This is obvious in the case of demand, since it moves in a direction opposite to prices, swelling when prices fall, and vice versa. But this is also true of supply. Because the prices of means of production incorporated in the offered commodities determine the demand for these means of production, and thus the supply of commodities whose supply embraces the demand for these means of production. The prices of cotton are determinants in the supply of cotton goods.
To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.”
(Capital III, Chapter 10)
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