“Let us suppose that there are 100 bales of cotton on the market and at the same time purchasers for 1,000 bales of cotton. In this case, therefore, the demand is 10 times as great as the supply. Competition will be very strong among the buyers, each of whom desires to get one, and if possible, all of the whole hundred bales for himself. This example is no arbitrary assumption. We have experienced periods of cotton crop failure, in the history of the trade, when a few capitalists in alliance have tried to buy not one hundred bales, but all the cotton stocks of the world. Hence, In the example mentioned, one buyer will seek to drive the others from the field by offering a relatively higher price per bale of cotton. The cotton sellers, who perceive that the troops of the enemy army are engaged in the most violent struggle among themselves, and the same of all their hundred bales is absolutely certain, will take good care not to fall out among themselves and depress the price of cotton at the moment their adversaries are competing with one another to force it up. Thus, peace suddenly descends on the army of sellers. They stand facing the buyers as one man, fold their arms philosophically and there would be no bounds to their demands were it not that the offers of even the most persistent and eager buyers have very definite limits.” (p 23)
One limit has been mentioned, which is the effect on the rate of profit. As Marx sets out, in Capital III, Chapter 6, and elsewhere, the increase in the price of cotton affects the price of yarn, but does not change the amount of surplus value produced, in yarn production. So, the rate of profit would fall, meaning that capital could be better used elsewhere. In Chapter 6, the other limitation is also mentioned. That is that the resulting increase in the price of yarn would reduce demand for it, possibly to a level where production becomes unviable. Consumers of cotton yarn may switch to wool, or some other material, so that yarn producers would, therefore, switch to these other inputs.
“It is well known that the reverse case, with reverse result, occurs more frequently. Considerable surplus of supply over demand; desperate competition among the sellers, lack of buyers; disposal of goods at ridiculously low prices.” (p 23)
But, Marx notes that the terms high or low prices are themselves relative. High or low compared to what?
“And if the price is determined by the relation between supply and demand, what determines the relation of supply and demand? (p 23-4)
The same applies to profit. What determines that a given rate of profit is high or low? It requires some presumption of what is a normal rate of profit, in which case, what determines the normal profit? Why should it be, say, 20%, and not 10% or 30%? It is certainly the case, as Marx describes, in Capital III, that, if firms see that, in their current line of business, they can only make, on average, 10% profit, whereas, in some other line of business, the rate of profit, on average, is 30%, capital will, gradually, move to the latter, and away from the former. As a result, supply, in the latter will rise, prices and the rate of profit will fall, whilst supply, in the former, will fall, and prices and the rate of profit will rise.
This very process results in an average rate of profit, in this case, of 20%, and is the process by which prices of production are determined as cost of production plus average profit. But, this still does not explain why this average is 20%, rather than 10% or 30%. Orthodox economics would explain it by saying that firms take their cost of production and add a percentage of mark-up, as profit. This is, superficially, what does happen. The result is then the selling price. What they can add as mark-up, this subjectivist theory would argue, is determined by what consumers are themselves prepared to pay. In this subjectivist theory, prices, and consequently profits, are determined by demand, by what the consumer is prepared to pay. But, then, we are back to the original question of what determines what the consumer is prepared to pay? It does no good to say its whether the consumer thinks the price is high or low, because high or low compared to what?
And, if the consumer thinks the price of yarn is too high, and so refuses to buy yarn, this sudden glut of yarn would lead to yarn producers slashing prices to clear their stocks, but, what then? If the price that consumers think is reasonable is below the cost of production, yarn producers will simply stop producing yarn. They do not produce it for some altruistic reason, or to satisfy the needs of consumers, but, only, to make profit.
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