It may be that the demand for some commodities exceeds their supply, causing their market price to rise, but the necessary concomitant of that is that the aggregate demand for other commodities falls below their aggregate supply, causing their market prices to fall, leaving no overall change in the general level of prices. Indeed, expanded reproduction implies a proportional rise in productive consumption (demand for constant and variable-capital), and an equivalent proportional fall in unproductive consumption by capitalists – although absolute levels of both increase. As Marx describes, such disproportions in respect of different use-values are endemic to capitalist production, leading to continual fluctuations in market prices, sometimes above, and sometimes below their price of production/equilibrium price.
What is really behind this Keynesian argument is that wages rise, and it is these higher wages, which then lead to a higher level of aggregate demand for wage goods, causing their prices to rise. But, this is nothing other than the argument put by the Owenite member of the First International, John Weston. Weston argued that rising wages, lead to higher prices/inflation, but Marx shows why this is false, as set out in Value Price and Profit, Chapter 2. Marx's argument is simple. The value of a commodity resolves into c + v + s, and this applies also to total national output. We have discounted c, as its value is merely transferred to total output, and the demand for its replacement is, thereby, automatically, generated from the value of that output. It is demand that comes from capital not revenues.
That leaves us simply with revenues – v + s – which is, on the one hand, equal to the new value created by labour during the year (supply), and, on the other hand, resolves into wages, profits, interest, rent and taxes (demand). These are the components of GDP on the one hand (supply), and National Income (demand) on the other. If wages rise, Marx says, this does not at all change the amount of new value created by labour, which is a function of the quantity of abstract labour, which is embedded in the output. It is equal to the social working-day. A rise in wages does not change this quantity of new value, it simply changes the proportions in which it is then resolved into wages as against the other revenues – in the first instance profit. In essence, the proportion going to wages rises, whilst the proportion going to profits falls.
But, in that case, aggregate demand has not changed, its components in terms of demand from workers, as against demand from capitalists, landlords and the state is what has changed. So, now, workers having a bigger share of the pie, increase their demand for wage goods, and, assuming the supply of these commodities cannot be increased sufficiently, in time, there would, indeed, be an excess of demand over supply for these wage goods, causing their market prices to rise. However, by the same token, profits would have fallen. So, now the spending by capitalists on their own consumption requirements, and luxury goods is reduced, so that the aggregate supply of these commodities exceeds the demand, and the prices of these commodities falls. That leaves the general price level unchanged.
Moreover, as the value of the commodities, in total, has not changed, the higher prices of wage goods, resulting from the excess of demand over supply, means that profits in that sector will rise above the average, whilst the profits in the luxury goods sector, where prices have fallen, will drop below the average. Consequently, capital will move into the former and out of the latter. The production of wage goods will rise, so that aggregate supply now meets aggregate demand, and the prices of wage goods will fall back, at least, to where they were (they may be lower as a result of production costs falling due to economies of scale), whereas, the supply of luxury goods will fall, removing the excess supply, and these prices will rise back to their original level, at least (they may be higher as a result of higher production costs resulting from a loss of economies of scale).
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