Marx deals with this fallacy, also, in Theories of Surplus Value, Chapter 20, in dealing with Say's Law, and its application by Ricardians. The fallacy derives from a failure to understand that demand is a function of use-value, as set out earlier. If no consumer finds any use-value in a given commodity, then, no matter how cheaply it is produced, the supply will exceed the demand. Similarly, if no consumer finds adequate use value in a commodity, at its market value, supply will exceed demand.
But, Proudhon needs this relation, because it is the basis of his schema for the operation of his future society, in which small commodity producers continue to produce commodities, which are then sold at these labour values, and for which there is always, then, adequate demand at these prices. It requires a law, such as the following, to that effect.
“Products will in future be exchanged in the exact ratio of the labour time they have cost. Whatever may be the proportion of supply to demand, the exchange of commodities will always be made as if they had been produced proportionately to the demand.” (p 58)
In effect, this is what the Stalinist states did, in using administrative prices. The consequence was huge waste, as large quantities of unwanted products were produced, and, on the other hand, unsatisfied demand for other products led to the development of black markets, and a search for foreign currency. A similar thing was seen in the EEC's Common Agricultural policy that introduced guaranteed prices to farmers, and led to the creation of huge wine lakes, butter mountains and so on.
This same irrationality is seen in the demands of petty-bourgeois socialists, and reformists for nationalisation of this or that failed firm or industry. The basic reason for the failure is that it produced commodities for which there was insufficient demand at the prices it needed to produce an adequate profit. That is not changed by nationalising it, and, as with Proudhon's schema, to continue on that basis would require the state to buy up its overproduction. To do so requires draining surplus value from the rest of the economy, and, thereby, dragging it down too. It is replacing economic laws with government diktat.
“Let M. Proudhon take it upon himself to formulate and lay down such a law, and we shall relieve him of the necessity of giving proofs. If, on the other hand, he insists on justifying his theory, not as a legislator, but as an economist, he will have to prove that the time needed to create a commodity indicates exactly the degree of its utility and marks its proportional relation to the demand, and in consequence, to the total amount of wealth. In this case, if a product is sold at a price equal to its cost of production, supply and demand will always be evenly balanced; for the cost of production is supposed to express the true relation between supply and demand.” (p 58)
That would, of course, as Marx set out above, be completely backwards and absurd. But, Proudhon does try to establish this absurdity by arguing that the labour-time required for production indicates its correct proportional relation to needs “so that the things whose production costs the least time are the most immediately useful, and so on, step by step. The mere production of a luxury object proves at once, according to this doctrine, that society has spare time which allows it to satisfy a need for luxury.” (p 58)
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