Chapter 2.2 – Medium of Exchange
There is a difference between the barter of commodities and the circulation of commodities. The barter of commodities is represented by C – C. The producer of, say, wine exchanges a litre of it for a metre of linen, produced by a weaver. The basis of this exchange is that a litre of wine requires the same quantity of labour for its production as a metre of linen. This exchange, on the basis of The Relative Form of Value, requires the producers of each pair of traded commodities to have an approximate knowledge of these different values, a process that is facilitated by the fact that different tribes and communities appoint merchants to be responsible for organising the exchanges between them.
The fundamental basis of these exchanges, under barter, is the acquisition of use values. The trade simply exchanges one use value, wine, for another use value, linen, on the basis that the wine producer has wine, which, for them, has less use value than the linen they seek to obtain, and vice versa. The wine producer hands over wine to the weaver, who consumes it, and its existence comes to an end, whilst the weaver gives linen to the wine producer, who consumes it, and its use value disappears with its consumption.
James Mill assumed that this condition, existing under barter, essentially, as Marx says an exchange of products, remains the same with the circulation of commodities, in a money economy, so that the supply always creates its own demand. He assumed that money only intervenes as medium of exchange, so that C – C becomes C – M – C. The purpose of production remains the same, the acquisition of use values for consumption (products) – personal or productive – and money is invented simply to facilitate the exchange, and overcome the limitations imposed by barter.
As Marx discussed in Theories of Surplus Value, Chapter 17. this assumption by Mill (The Law of Markets), adopted by Ricardo, and popularised by Say (Say's Law), is fundamentally flawed. It is flawed because of the difference between barter and circulation of commodities, in a money economy. In a system of barter, its true that supply creates its own demand. The supplier of wine only supplies it on the basis that they also have a demand for the linen they obtain in exchange for it, just as the supplier of linen only exchanges it on the basis that they also have a demand for wine. The exchange between the two simply equates the demand and supply on both sides. If the wine producer could not find a weaver who would exchange linen for wine then they would not supply wine, because the condition of their supply is that they satisfy their own demand for linen in the process.
In such conditions, they might exchange their wine for, say, wheat, instead, if they also have a demand for wheat, but that does not change the fundamental relation. It simply expresses it in different use values. In the end, the wine producer, as with the producer of any other commodity, might simply retain their supply for their own consumption, or take it to another market, on another day. This is the basis of the assumption made by Ricardo, quoted by Marx in Theories of Surplus Value, Chapter 17, that a producer of commodities will not continue to produce them if they do not have a use for them themselves, or if they are not demanded by someone else, for whom they are useful. As Marx sets out, this assumption, valid under barter, is not at all valid under commodity circulation, with a money economy.
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