Shoul- Karl Marx and Say's Law

8/3/2019 Shoul- Karl Marx and Say's Law

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Karl Marx and Say's LawAuthor(s): Bernice ShoulReviewed work(s):Source: The Quarterly Journal of Economics, Vol. 71, No. 4 (Nov., 1957), pp. 611-629Published by: Oxford University PressStable URL: http://www.jstor.org/stable/1885713 .

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KARL MARX AND SAY'S LAWBy BERNICESHOUL

I. Introduction, 611. - II. The four meanings of Say's Law, 614. - III.Marx on Say's Law as the circular flow, 616. -IV. The equality of aggregatedemand and supply and the "money veil"; Marx's answer to Say's Law, 618. -V. Marx's view of partial overproduction and the general glut, 623. - VI. Accu-mulation of capital and economic development; Marx's alternative to Say's Lawand the classical system, 625.I. INTRODUCTION

A. The Need for Systematizing Marx's Position on Say's LawFor one hundred and fifty years economic theory has built onthe cornerstone of classical economics - Say's Law of Markets.' Inone or more of its various meanings and implications this 'law" hasbeen involved in all economic analysis, and has been the source ofmuch needless controversy. This includes the long and inconclusivecontroversy concerning Karl Marx's position on Say's Law and hisrelated theories of crises and evolution.The reason for the present article on Marx and Say's Law is thatit still appears that Marx's position has not been clarified, any morethan the meanings and implications of Say's Law have been agreedupon. What follows is an attempt to show that differencesof opinionon Marx's position on Say's Law arise both from differences of em-phasis on the various meanings and uses of the "law" per se, andfrom differing views as to which arguments of Marx were directed1. This "law" bearing Say's name and attributed to him by Ricardo isgenerally credited to James Mill. Mill expounded the doctrine in his CommerceDefended (1808), which appeared between the first edition of Say's TraitW 'Econo-mie Politique (1803), where the doctrine is barely outlined, and the second edition(1814) where it is more fully developed. For this view as to priority, see the Intro-duction by Jacob W. Hollander and T. E. Gregory (ed.) to Ricardo's Notes onMalthus (Baltimore, 1928). That Say deserves priority is the view taken byJoseph Spengler in "The Physiocrats and Say's Law of Markets, II," Journal ofPolitical Economy, LIII (Dec. 1945), 341-42. This latter opinion seems reasonablesince in Say's first edition it is already stated that when a nation has too many

products of one kind the means of selling them is to create another kind (Traite, I,153-54), that "The demand of products in general is thus equal to the sum of theproducts" (ibid., II, 176), and that "A nation always has the means of buying allit produces" (ibid., II, 180). It was Mill, however, who developed Say's Law,especially in asserting the possibility of unlimited accumulation and the impossi-bility of general overproduction. (Commerce Defended, London, 1808, p. 85.)It was Ricardo who fully developed Say's Law and made of it the core of classicaleconomics. His role will be discussed further in this article.611


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612 QUARTERLY JOURNAL OF ECONOMICStoward these various interpretations of Say's Law. It is hoped thatthis discussion will show (1) that Marx's position on Say's Law wasnot a self-contradictory one, as has been alleged; and (2) that althoughhis position was a complicated one, it can be systematized from anexamination of his theoretical structures, some of which assumecertain aspects of Say's Law and some of which do not.2Inasmuch as Marx did develop several models of the capitalistsystem in order to analyze different essential features of this system,and inasmuch as Say's Law has several meanings, it is important toknow in which of his models and for what reasons Marx accepted orrejected the different aspects of the law. The Marxian models to beconsidered are the following: (1) the circular flow model which postu-lates Say's Law; (2) the model of monetary exchange which deniesSay's Law; and (3) the dynamic model which provisionally assumesSay's Law only as a means for demonstrating a tendency to break-down and the inevitability of crises and cycles in spite of the operationof Say's Law.IDifferences of opinion are found among recent experts on Marxas to the very existence, as well as to the nature, of his theory ofcrises and cycles. All are agreed that Marx denied the validity ofSay's Law; that is, that he argued against its central proposition thatthere could be no endogenously created crises.But on more than this there is no agreement and the debatecontinues as to "what Marx really meant." Schumpeter contendedthat although in Marx's work there are valuable insights into thenature of crises, and that Marx was, in fact, the first economist to see

2. Unfortunately Marx's own economic system was left in such an unfinishedstate and with so many apparent contradictions that until the last fifteen yearsor so reconstruction of this system generally has seemed insufficiently rewardingto attract the interest of professional economists. Only the first volume of Capitalwas prepared for publication by Marx himself, the remaining uncompleted twovolumes having been edited by Friedrick Engels. The standard English editionis the Kerr edition (Chicago, 1909). Marx's monumental work on the history ofeconomic thought from Sir William Petty to his own day, originally planned as afourth volume to Capital, was edited by Karl Kautsky, and published in threevolumes as Theorien fiber den Mehrwert (Stuttgart, 1905-10).Two partial English translations of this latter work are available. The firstvolume has been translated from the French (Molitor) edition by TerenceMcCarthyas A Historyof EconomicTheories;FromthePhysiocrats oAdamSmith(New York, 1952). Selections from the first two volumes have been translatedfrom the original German by G. A. Bonner and Emile Burns as Theories of SurplusValue (London, 1951).Marx's theory of evolution and of cycles, although nowhere stated in full, isdeveloped in part in Volume I, more specifically in Volume III of Capital (espe-cially in chap. 15). His most explicit treatment of Say and the classical econo-mists is in Theorien fiber den Mehrwert, II (2) and III,


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KARL MARX AND SAY'S LAW 613the cycle as a whole, no single cycle theory can be found in, or recon-structed from, his work without many additional hypotheses.3MauriceDobb, on the other hand, argued that, "Undoubtedly, for Marx themost important application of his theory was in the analysis of thecharacter of economic crises,"4 and that Marx's cycle theory wasspecifically based on the interaction of the falling tendency of the rateof profit and the countertendencies to this law.' Paul Sweezy wrotethat in Marx there are elements of two cycle theories; one, somewhatinconclusive and unconvincing, based on the falling tendency of therate of profit, and the other, more important, but not systematizedby Marx himself, based on a disproportion between the growth inoutput and demand for consumption goods.' Joan Robinson arguedthat this disproportion between the output of consumption goods andeffective demand is the cycle theory that Marx wouldhave developedhad he not been taken up by the "false scent" of the falling rate ofprofit which, she argued, explains nothing at all.7The conclusions of the present essay on Marx are (1) that he wasindeed "opposed" to Say's Law for the reasons (primarily monetary)generally adduced; (2) but that his position was more complicatedthan that of simple opposition, since some of his models postulateSay's Law; and (3) that the theory of crises and cycles for which thereseems the best evidence in Marx is one of inadequate profits, inde-pendent of any shortage of demand, a consequence of more funda-mental contradictions than those arising from the nonfulfillment ofSay's Law. In other words, according to the present writer, Marxrejected Say's Law in so far as it generalized both the essential natureof the capitalist system and the mechanisms of its equilibration, buthe accepted Say's Law merely as a formal statement of the logic ofthe economic circular flow, and also used -it in the initial developmentof his own theory of "breakdown." Thus, Marx rejected the premisesand implications of Say's Law as concealing the essential nature of thecapitalist system. Yet, at the same time, he built an economic modelhimself in which crises and cycles would occur in spite of the operationof Say's Law, in spite of the assumption of equilibrium between supplyand demand.

3. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York,1942), pp. 38-42.4. Maurice Dobb, Political Economy and Capitalism (New York, 1945), p. 79.5. Ibid., chap. 4.6. Paul M. Sweezy, The Theory of Capitalist Development (New York, 1942),chaps. 8-10, esp. pp. 179-84.7. Joan Robinson, An Essay on Marxian Economics (London, 1947), p. 42.


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614 QUARTERLY JOURNAL OF ECONOMICSB. The "Duality" of Marx's Position on Say's Law

The duality of Marx's position on Say's Law has been noted byJoan Robinson as follows:Marx evidently failed to realize how much the orthodox theory stands or fallswith Say's Law and set himself the task of discovering a theory of crises whichwould apply to a world in which Say's Law was fulfilled, as well as the theorywhich arises when Say's Law is exploded. This dualism implants confusion inMarx's own argument, and, still more, in the arguments of his successors.8

Could it not be the case that the confusion to which Mrs. Robinsonrefers arises from a failure to see that for Marx the world dominatedby Say's Law and the world in which it is exploded are, in fact, twomodels of the capitalist system, each constructed for a different pur-pose? Marx's theoretical world in which Say's Law dominates is anabstract model of pure, competitive capitalism. This ideal capitalismis so purere" in fact, that all but industrial capital is excluded, com-modities exchange at their normal labor values without price devia-tion, there are no problems of lags, frictions, or monetary difficulties.The theoretical world in which Say's Law is exploded is a closerapproximation to reality but it is still a theoretical model whichassumes away any "faulty distribution of social labor among theindividual spheres of production."9The contradiction in the two models is no accident, although it isunfortunate that Marx did not make his method clear. The purposeof establishing the first model, the world in which Say's Law domi-nates, was to demonstrate that the "law of motion" of capitalistsociety produces not only a tendencyto ultimate stagnation, or break-down, but crises and business cycles as well, evenwhen theequilibriumconditions of Say's Law are fulfilled. The purpose of establishing thesecond model was to point out the ever-present possibility of crisesoccasioned by the fact that the capitalist economy is one of monetaryexchange,not of barter. In the world dominated by Say's Law, thedrive for profits produces cycles endogenously in spite of the fulfill-ment of the equilibrium conditions postulated by the law. In theworld where Say's Law is exploded crises occur because of the verynature of commodityexchange.

II. THE FOUR MEANINGSOF SAY'S LAWIt is possible that much of the confusion about Marx's positionon Say's Law arises from the failure to specify the various meaningsand implications of Say's Law, on which Marx did take different but8. Ibid., p. 51.9. Theories fiber den Mehrwert, II(2), 301.


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KARL MARX AND SAY'S LAW 615not contradictory positions. It may be useful to recall the four essen-tial meanings of Say's Law, as developed by Say and, more fully, byMill and Ricardo. These are as follows. (1) Supply creates its owndemand; hence, aggregate overproduction or a "general glut" isimpossible. (2) Since goods exchange against goods, money is but a"veil" and plays no independent role. (3) In the case of partial over-production, which necessarily implies a balancing underproductionelsewhere, equilibrium is restored by competition, that is, by the pricemechanism and the mobility of capital. (4) Because aggregate demandand supply are necessarily equal, and because of the equilibratingmechanisms, output can be increased indefinitely and the accumula-tion of capital proceed without limit.It was Ricardo's explicit formulation of Say's Law to whichMarx's primary criticism was directed. In Ricardo all four meaningsof the law are clearly stated. In regard to the first two meanings ofthe law, those relating to aggregate demand and the role of money,Ricardo asserted,Productions are always bought by productions, or by services; money is only themedium by which the exchange is effected. Too much of a particular commoditymay be produced, of which there may be such a glut in the market as not to repaythe capital expended on it; but this cannot be the case with respect to all com-modities;'Of the third meaning of the law, relating to partial overproduction,he wrote,Mistakes may be made, and commodities not suited to the demand may be pro-duced - of these there may be a glut; they may not sell at their usual price; butthen this is owing to the mistake and not to the want of demand for production.2Ricardo's view on the fourth meaning of the law regarding accumula-tion was that,There cannot, then, be accumulated in a country any amount of capital whichcannot be employed productively until wages rise so high in consequence of therise of necessaries, and so little consequently remains for the profits of stock, thatthe motive for accumulation ceases.3

Ricardo's explicit limit to capital accumulation, the adequacy ofprofits, is not a contradiction of Say's Law, in so far as the law con-cerns the adequacy of demand at any level of output and assumes anadequate motive for continued supply. The tendency to stagnation1. David Ricardo, Principles of Political Economy and Taxation (Everymaned., New York, 1943), p. 194.2. Ricardo, Notes on Malthus (Baltimore, 1928), p. 160.3. Ricardo, Principles, p. 193.


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616 QUARTERLY JOURNAL OF ECONOMICSwhich Ricardo indicated is theoretically possible even while Say'sLaw in its other aspects is fulfilled. This tendency to stagnation wasdeduced by appealing to additional postulates, those relating to popu-lation growth and the physical productivity of land. Say's Law initself implies the possibility of equilibrium at all levels of output andthe unlimited development of an inherently adaptive economy.4Marx's position, as distinct from that of Ricardo, essentially wasthat (1) general overproduction becomes possible precisely because(2) money, while a "veil" only in the sense that it is a medium ofexchange, is also a store of value in commodity exchange, and thatthis exchange is a dual one whose parts may be separated in time andplace. As a consequence, (3) partial overproduction is almost inev-itable and easily can produce a cumulative downward spiral. And,most important, (4) even if Say's Law werefulfilled, unlimited accumu-lation is impossible because of (for reasons other than those advancedby Ricardo) the fall in the rate of profit.

III. MARXONSAY'SLAW AS THE CIRCULARFLOWMarx's reproduction models5 postulate the operation of Say'sLaw. What is involved is his explicit recognition of the economiccircular flow. In these models, aggregate output is divided into twodepartments, Department I representing producers' goods and De-partment II representing consumers' goods. The output of eachdepartment equals the inputs of "constant" capital (machinery andraw materials) and "variable" capital (wages) plus the "surplusvalue" (profit) created.The equilibrium conditions for "simple reproduction" and foraccumulation are that in each case the constant capital of the second(consumers' goods) department is equal to the variable capital plusthe surplus value of the first department (producers' goods).Marx's reproduction models express the same tautologies as are

contained in Say's Law, that aggregate demand is elicited by and isidentically equal to aggregate supply, that consumption equals pro-duction, and that revenues equal sales. The equilibrium conditionsare met via the exchanges within and between the two departments.So far Marx used a familiar tool, although his was the first (and moreelaborate) exposition of the circular flow since Quesnay.

4. In the final formulation of Say's Law by John Stuart Mill, there was con-siderable modification, since, according to Mill, "This argument is evidentlyfounded on the supposition of a state of barter; . . . If, however, we suppose thatmoney is used, these propositions cease to be exactly true." (Essays on SomeUnsettled Questions of Political Economy, 2d ed., London, 1874, p. 69.)5. Capital, II, chaps. 20, 21.


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KARL MARX AND SAY'S LAW 617In setting up his formal reproduction schemes and their condi-tions of equilibrium, Marx thus followed in the classical tradition.

His criticism of classical economists, particularly of Say, is entirelydifferent from that of the classical critics of Say's Law - Malthusespecially - and some of Marx's own successors, notably RosaLuxembourg, who tried to negate Say's Law by proving an error inthe logic of Marx's own reproduction models.It might seem unnecessary to deal with the economic logicbehind both Say's Law as a model of the circular flow and Marx'sown reproduction schemes, in view of the fact that Schumpeter'sanalyses of the circular flow and Leontief's input-output analyseshave once more made the "tableau economique" a basic instrumentof economic reasoning. However, it was the central issue in the oldclassical controversy on Say's Law, notably in the debates betweenMalthus and Ricardo, and in the controversies among Marx'sfollowers.Malthus believed he negated Say's Law and proved the possi-bility (and likelihood) of general gluts with his arguments concerning(1) the exchange of commodities against money and labor, as differentfrom exchange against other commodities,6 and (2) the limits toaccumulation arising from the falling rate of profit.7 However, theinadequacy of effective demand which, in Malthus' view, made forthe general glut, was fundamentally an inadequacy built into his owntheoretical system. This is because of his very definition of value,which he measured by the labor which commodities could command,not as with Ricardo, by the labor which commodities embodied.According to Malthus' definition, aggregate demand (subsistencewages, or labor "commanded") is defined in terms of the labor con-tained in commodities, and aggregate supply in terms of this quantityplus the surplus, or profit, created in production. Thus, givenMalthus' particular theory of value, Say's Law could not hold, and,

6. T. R. Malthus, Principles of Political Economy (London, 1819), pp. 353-54. Say removed part of this objection by admitting that labor is a commodity.(J. B. Say, Letters to Malthus, London, 1821, pp. 22-23.) Malthus' argumentagainst the idea of money as a veil was not answered, and he is rightly regardedas a contributor to monetary analysis and the theory of liquidity preference.7. Malthus, op. cit., pp. 9, 370. Malthus developed a concept of an optimumrate of accumulation defined by the acceptable rate of profit. It should be pointedout that this argument about the rate of profit concerns lack of profitability dueto a shortage of demand. Ricardo admitted a falling rate of profit could lead toeventual stagnation, but with him the only reason for a falling rate of profit wasthe increase in wages occasioned by the increased costs of producing subsistencegoods. Marx, like Malthus, stressed the fall in the rate of profit, but for entirelydifferent reasons than those adduced by Malthus and Ricardo. For Marx'scritique of Malthus, see Theorien fiber den Mehrwert, III, 9-10; 43-49.


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618 QUARTERLY JOURNAL OF ECONOMICSas Ricardo finally pointed out, Malthus' debates with Ricardo couldlead nowhere because they started from different premises.8

In the case of Rosa Luxembourg who believed Marx should havebeen completely opposed to Say's Law, the argument (although basedon the labor-embodied theory of value) also concerns difficulties inthe "realization" of aggregate output, not in the case of simple repro-duction, but only of expanded reproduction, or accumulation.9 How-ever, in Marx, accumulation itself furnishes the demand for theseadditional commodities although Luxembourg did not see this. Henceher own logically impossible solution - the noncapitalist marketwhich somehow buys without ever selling anything.Thus Luxembourg's "correction" of Marx's reproduction model,which itself formally expresses one aspect of Say's Law, rests on mis-understanding,1rather than on a logically alternative economic model.On the level of abstract economic logic, both Say's Law and Marx'sreproduction models are but tautological expressions of the necessaryequality of aggregate supply and demand. On this level a logicallyalternative model is not possible. It is in this sense that, as a firstapproximation, Marx constructed a theoretical world where Say'sLaw dominates.IV. THE EQUALITYOF AGGREGATEDEMAND AND SUPPLY AND THE

"MONEY VEIL"; MARX's ANSWERTO SAY'S LAWIn a different model from that discussed above, however, Marxargued that Say's Law could not operate. This is precisely because,while in the circular flow model it appears that commodities do

exchange against commodities, in a model concentrating on themonetary exchange of commodities, it becomes clear that commoditiesmust first exchange against money before they can exchange against8. "Allowing you your premises, I see very few instances in which I canquarrel with your conclusions. I agree with all you say concerning the glut ofcommodities; allow to you your measure, and it is impossible to differ in theresult." (Letters of David Ricardo to Thomas Robert Malthus, ed. James Bonar,Oxford, 1887, p. 216.)9. Rosa Luxembourg, Die Akumulation des Kapitals (Leipzig, 1921), pp. 60-

75. Luxembourg objected in addition that the reproduction schemes do notcorrespond to reality, where proportional accumulation does not prevail, andfurther objected to Marx's giving the impetus to accumulation to Department I(means of production) to whose scale of accumulation Department II adapts.(Ibid., pp. 102-3.) Her fundamental objection to Marx's model of expandedreproduction is that a necessary shortage of demand would make accumulationimpossible.1. Luxembourg's misunderstanding of the whole concept of the circularflow is illustrated by her criticism of Marx's model of expanded reproduction ofwhich she wrote, "Obviously, we turn in a circle." (Ibid., p. 104.)


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KARL MARX AND SAY'S LAW 619each other. Marx's contention was that it is this dual exchange thatgives the ever-present possibility of crises.

The fundamental theorem of Say's Law that, because commod-ities really exchange against each other, money is merely an instru-ment of exchange, represented for Marx a complete misapprehensionof the fundamental nature of the capitalist economy. He believedthat it is the specific peculiarity of the capitalist system that com-modity exchange is a dual one, an exchange of qualitatively differentuse values which are at the same time quantitatively equal exchangevalues. It is this duality, he argued, that gives rise to problemsunknown in a barter economy, where use values are exchanged directlywithout being transformed and circulated as exchange values via theinstrument of money. It is this du#1 nature of the commodity (asuse value and as exchange value), which-he called the key to thecapitalist system the "pivot on which a clear comprehension ofpolitical economy turns."2 According to Marx it was because theclassical economists worked only within a model suitable for a bartereconomy that they failed to see this duality and thus failed to see thepossibilities of endogenous crises. Marx's critique of the classicalmodel, contained in his analysis of Ricardo, is as follows:

In order to prove that capitalist productioncannot lead to generalcrises, allconditionsand determining orms,all principlesanddifferentiaepecificae,n short,capitalist productionitself, is denied. In fact, it is proven that if the capitalistform of production,instead of a specificallydeveloped, particular form of socialproduction, were rather a form of production more elementary than its earliestbeginnings, then its particular opposition and contradictions, and, therefore,their eruptionin crisis,wouldnot exist.According o Ricardo,following Say, productsarealwaysbought by productsorservices;money is only the mediumthroughwhich the exchange saccomplished.Thus, in the first place, the commodity, in which there is an oppositionbetween use value and exchangevalue, is transformed nto a mere product'(isovalue), therefore, the exchange of commoditiesinto mere exchange of products,that is, mereusevalues. That means not only going backto a stage before capitallist production,but even before the mereproductionof commodities;and it meansassuming away the most complicatedphenomenonof capitalist production theworld market crisis- by denying the first condition of capitalist production,namely, that the product must be a commodity, must thereforeappear in'the

form of money, and must go through the process of metamorphosis. Instead ofspeaking of wage-labor, he speaks of "services," a word in which the' specificcharacteristicsof wage-labor,and its use - namely, to increase the value of thecommoditiesagainst which it is exchangedand thus to generate surplusvalue-is again omitted, and thereby,also, the specificrelationshipthroughwhichmoneyand commodity are transformed into capital.... Money ... is considered onlyas a means of exchange,not as an essentialand necessaryform of existence of the2. Capital, I, 48.


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620 QUARTERLY JOURNAL OF ECONOMICScommodity,whichmust presentitself as exchangevalue, namely as generalsociallabor. By striking out the essence of exchange value through transformingthecommodity nto a mere use value (product)one caneasily deny, and, in fact, mustdeny, an essential, independentformwhich also has an independentexistence, asagainst the originalformof the commodity, in the processof the metamorphosis.Here the crisesare reasonedaway by forgetting or denying the first prerequisitesof capitalistproduction,the existenceof the productas a commodity,the duplica-tion of the commodity in commodityand money, the resultingseparationin theexchangeof commodities,and, finally,the relationshipof moneyorthe commodityto wage labor.3

Instead of the classical picture Marx's second model is of a worldin which crises are always possible precisely because of the dual natureof the commodity and the "metamorphosis" of its exchange valuefrom commodity to money and back again to commodity. Marxclaimed that it is this necessary transformation of value which givesrise to what he called the two abstract orms of crises.Underlying the metamorphosis of the commodity there was, forMarx (and in his view not understood by the classical economists),the metamorphosis of "social labor." This is the abstract, undiffer-entiated labor whose quantitative equality in the exchange process iswhat transforms qualitatively different use values, produced by laborof specific skills, into quantitativelyequivalentexchange values. Thus,the dual nature of the commodity was traced to the dual nature oflabor in capitalist society, and, consequently, the dual nature ofexchange to the dual nature of the commodity form itself. Marxexplained this theoretical foundation of his system in great detail inthe first two chapters of Capital, I. It is the very basis of his critiqueof Say's Law and classical economics in Theorienuiberden Mehrwert.This foundation deserves emphasis lest it be concluded thatMarx's opposition to Say's Law was a purely monetary one, and thathe considered the structure and disruptions of the monetary system,or the "behavior of money" to be an independent cause of crises.Marx's criticism of Say's Law may be called "monetary criticism"only to the extent that it stresses the difficulties inherent in monetaryexchange. But it must be made clear that this "monetary criticism"refers not simply to "unneutral money" (as opposed to the classical''money veil") but arises from Marx's theory of the dual nature oflabor and of the commodity in the capitalist economy.In his most succinct analysis of the possibilities of crises, Marxdid not give details but presented rather a purely formal case. Theanalysis specifies the two essential features of the exchange of com-modities that make crises Dossible. These are (1) the separation of

3. Theorien fiber den Mehrwert, II (2), 275-76 (my translation).


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KARL MARX AND SAY'S LAW 621purchase and sale, and (2) the fact that money is used as a means ofpayment to bridge this separation. It is a specification of the "formalpossibilities" of crises rather than a theory of the causes of crises, assometimes has been inferred. Marx's argument is as follows.The most abstract form of the crisis, and, therefore, the formal possibility ofcrisis, is, thus, the metamorphosisof the commodityitself, which ... containsthecontradictionsbetweenuse value and exchangevalue includedin the unity of thecommodity, and between money and commodity...4The crisis in its second form arises from the function of money as a means ofpayment, wherebymoneyfigures n two differentmomentsseparated n time, andin two differentfunctions.... Both of these formsareentirelyabstractalthoughthe secondis moreconcretethan the first.5

(1) TheSeparation of Purchase and Sale. The metamorphosis ofcommodities, the transformation of exchange value from commodityto money to commodity, means that sale and purchase are distinct inboth time and place. Commodity exchange, unlike barter, the directexchange of use values, presents the ever-present possibility that thecommodity which exists actually as a use value, and only ideally as anexchange value may not be realizedas an exchange value. "No onecan sell unless some one else purchases. But no one is forthwithbound to purchase because he has just sold."6The metamorphosis of commodity-capital, C-M-C, presupposesthe inverse metamorphosis of money-capital, M-C-M. A disturbanceof the latter metamorphosis thus means a disturbance of the former.If the interval in time between the two complementaryphases of the completemetamorphosisof a commodity becomes too great, if the split between the saleand the purchasebecomes too pronounced, he intimate connectionbetweenthem,their oneness,asserts itself by producing a crisis.7And, according to Marx, the crisis is nothing more than the processby which the unity of production and circulation, of purchase andsale, is forcibly restored.8(2) Money as Means of Payment. The fact that money servesnot only as the means of circulation, but also as a means of payment(since it is a store of value), gives rise to the second possibility ofcrises. Thus if any commodity cannot be sold in a given period oftime, whether because of changes in tastes or savings habits, moneycan no longer fulfill its function as a means of payment. A single

4. Ibid., II (2), 282.5. Ibid., II (2), 283.6. Capital, I, 127.7. Ibid., I, 128.8. Theorien fiber den Mehrwert, II (2), 282.


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622 QUARTERLY JOURNAL OF ECONOMICSproducer cannot pay his debts or realize the value of his commodities.This means that the whole network of mutual debts and obligationsis disturbed. According to Marx, this second possibility of crises isalways accompanied by the first, the separation of purchase and sale.But the first possibility may exist without the second, that is, inde-pendently of the fact that money serves as a means of payment andindependently of the use of credit. This second possibility of crisesis realized not because commodities are unsaleable as such, butbecause they are unsaleable within a given period. Marx assertedthat all monetary crises are, in fact, the realization of this secondabstract form of crisis.9Marx's summary discussion of the possibilities of crises is usefulnot simply as a summary, but also because it contains a warningagainst confusing the formal possibilities of crises with their cause.

The generalpossibility of crises s the formal metamorphosisof capital itself,the separationof purchaseand sale in time and space. But this is not the causeofcrises. It is nothing more than the most general form of crises, thus of the crisisin its most general expression. Onecannot say that the most abstract orm of thecrisis is the cause of crises. If one seeks the cause, it is precisely to understandwhy the form of its possibility becomes a reality.The generalconditionsof crisis ... must be developedrom thegeneralcondi-tions of capitalistproduction.'In his specific discussion of Say's Law and of the formal possi-

bilities and realization of crises, Marx did not develop the cycle theorythat would indicate the fundamental "cause" of crises. This can befound in Capital, III, although it requires considerable reconstructionto make Marx's meaning clear.Marx held that in the crises of reality the "formal possibilities ofcrises" become realized in a variety of ways. As a consequence, theprecipitating factor which actually sets off any given crisis thusappears to be causal. But, according to Marx, such a precipitatingfactor is more superficial and should not be confused with the morefundamental "cause" of crises, the "general conditions of capitalistproduction." He gave numerous examples of such disturbances ofequilibrium. For instance, the crisis can be set off by a monetarystringency. Or it might be precipitated by an inequality of deprecia-

9. Ibid., II (2), 288.1. Ibid., II (2), 289 (my emphasis). This passage is of key importance.Study of the chapter on crises in the Theorien uiberden Mehrwert, and especiallyof this passage avoids misunderstanding of Marx's cycle theory. The populartheories of crises and cycles attributed to Marx, which are based on "dispropor-tions" or "realization" difficulties, rest on the very confusion Marx warned against,the confusion between the abstract form, and the cause, of crises.


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KARL MARX AND SAY'S LAW 623tion reserves and the replacement needs of fixed capital. Or changesin the period of capital turnover, or of consumers' tastes, or of savingshabits - all these can precipitate a crisis, make a formal.possibilitya reality, and by so doing give the crisis its unique historical features.Marx did not develop his argument to deal with the details of theconcrete and varying disturbances of equilibrium. This is becausehe was more concerned with showing that, contrary to Say's Law, thevery nature of the system makes crises always possible. However,Marx noted that the real crisis, when it did appear, whatever its pre-cipitating factors, always seems to be due to partial overproductionsomewhere in the system which is not corrected according to Say'sLaw, but spreads and cumulates into general overproduction.

V. MARX'SVIEWOF PARTIAL VERPRODUCTIONANDTHEGENERALGLUT

The theorem that partial gluts cannot lead to a general glut iscentral to Say's Law. The general acceptance of this theorem amongnineteenth century economists, despite its blatant contradiction byreality, can be explained only by the facts that at the time whenclassical economics was in full flower the business cycle was in itsinfancy and that early crises were, in fact, associated with monetaryand trade difficulties, which, it could be argued, arose from exogenoussources, from wars, politics, and errors in banking and trade policy.2In logic the theorem follows directly from the postulate that aggregatesupply and demand are equal and from the theorems of competitiveprice adaptations and of factor mobility. Thus in theory no endoge-nously created crises are possible.The inadequacy of the explanation brought forth criticism at thetime, long before that of Marx. One of the chief critics was Malthus.Another was Sismondi, who, writing at the same time (1819) asMalthus, denied the self-regulating feature of the classical model.His arguments arebased on various grounds, including the inadequacyof mass purchasing power and, more specifically, on the time lagbetween production and consumption and on frictions which preventthe equalization of supply and demand for specific commodities.3

2. From the French Revolution until the 1820's the English economy wasdisturbed by wars, blockade, and consequent inflation. These events couldrightly be regarded as exogenous as could the monetary crises of later years beconsidered a consequence of currency mismanagement. It should be recalledthat Ricardo, the abstract theorist, was also deeply concerned with practicalmatters, as in The High Price of Bullion (1810). Ricardo's theories of money andof international trade ultimately became the basis for Bank of England policy.3. Jean Charles Leonard Simonde de Sismondi, Nouveaux principes del'Vconomiepolitique, I (Paris, 1819), esp. 303-11, 374-81. It should be recalled


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624 QUARTERLY JOURNAL OF ECONOMICSMarx's view of the general glut differsfrom that of Sismondi in sofar as he considered the "contradictions"of capitalism to be more fun-

damental than those of lags and frictions, and further disagreed withthe assumption, implicit in Sismondi, more explicit in Rodbertus,4thatcrises could be avoided by a different distribution of purchasing powerwithin the capitalist economy. Because his interest in capitalism wasin its fundamental tendencies, Marx had little to say about the failureof the competitive mechanism to adjust the malallocation of resourcesresponsible for partial overproduction. What he did say was that,by its very nature, an unplanned economy would produce too muchor too little of specific commodities, and that price adjustments andfactor mobility were inadequate to prevent such errors from leadingto a general glut. Moreover, Marx argued that not only was therecontinual price deviation from value, but there was also an additionaldifficulty in the fact that changes in productivity continually altervalues themselves.5 In any case, if overproduction appears in asector of some importance and it becomes necessary to sell commodi-ties at prices which do not cover costs, the difficulty multiplies and theresult is - the general glut.Marx's description of what happens is classic:

But underall circumstances he equilibrium s restored by making moreorless capital unproductiveor destroyingit. This would affect to some extent thematerialsubstanceof capital, that is, a part of the meansof production,fixed andcirculatingcapital, would not performany service as capital; a portion of therunningestablishmentswould then close down. Of course, time would corrodeand depreciateall means of production(exceptland), but this particularstagna-tion would causea farmore seriousdestructionof meansof production. However,the main effect in this case would be to suspendthe functions of some means ofproductionand prevent them for a shorteror longertime from servingas meansof production.The principal work of destruction would show its most dire effects in aslaughteringof the valuesof capitals. That portionof the value of capital whichexists only in the formof claims on futuresharesof surplus-valueor profit,whichthat Sismondi was primarily an historian rather than an economist. As such hiscontribution to economics was not one of logical analysis, but rather of a broadhistorico-economic vision which led him to see the capitalist economy as but oneof several historical stages of economic progress and to be highly critical ofcapitalism.4. Karl Rodbertus, Overproductionand Crises (New York, 1898), pp. 123-32.The first German edition with which Marx was familiar appeared in 1850-51.Marx countered Rodbertus' underconsumption idea by pointing out that theworking class enjoys its greatest prosperity just before the outbreak of the crisisand that "advocates of the theory of crises of Rodbertus are requested to make anote of this." (Capital, II, 476n.)5. Theorien iberden Mehrwert, I(2), 300-14.


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KARL MARX AND SAY'S LAW 625consists in fact of creditor'snotes on production in its various forms, would beimmediately depreciatedby the reduction of the receiptson which it is calculated.Oneportion of the gold and silver money is renderedunproductive, cannot serveas capital. One portion of the commoditieson the marketcan complete its processof circulation and reproductiononly by means of an immense contractionof itsprices,which means a depreciationof the capital representedby it. In the sameway the elements of fixed capital are more or less depreciated. Then there is theadded complication that the process of reproduction s based on definite assump-tions as to prices, so that a general fall in prices checks and disturbsthe processof reproduction. This interference and stagnation paralyses the function ofmoney as a medium of payment, which is conditioned on the development ofcapital and the resulting price relations. The chain of payments due at certaintimes is broken in a hundredplaces, and the disaster is intensified by the collapseof the credit-system. Thus violent and acute crises are brought about, suddenand forcible depreciations, and actual stagnation and collapse of the process ofreproduction, and finally a real falling off in reproductions

Marx followed this description of the crisis and downswing phasesof the cycle with an equally vivid description of the recovery andupswing phases. He referred to the work of "other agencies," towage, cost, and price reductions, to the "new combinations" whichraise productivity, restore profitability, and pave the way for a newcycle under "expanded conditions of production in an expandedmarket, and with increased productive forces."7Obviously, Marx saw that crises appeared as a state of generaloverproduction, the very state which Say's Law denied to be a conse-quence of endogenous economic forces. What caused the periodicappearance of this state of general overproduction is another questionwhich can be dealt with only in considering Marx's theory of capitalaccumulation and capitalist evolution.

VI. ACCUMULATION OF CAPITAL AND ECONOMIC DEVELOPMENT;MARX'S ALTERNATIVE TO SAY'S LAW AND THE CLASSICAL SYSTEM

Marx's theory of economic development is the core of his work,and in that theory capital accumulation plays the central role. Thistheory is a large subject, beyond the scope of the present article.What is of interest here, however, is the fact that this theory isdeveloped initially within a model which postulates Say's Law. Inthe previously discussed model emphasizing monetary exchange Marxargued that, contrary to Say's Law, endogenous crises are alwayspossible. In the model emphasizing capital accumulation Marxargued that even if Say's Law could operate, crises and ultimatebreakdown would be inevitable.6. Capital, III, 297-98.7. Ibid., III, 299.


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626 QUARTERLY JOURNAL OF ECONOMICSThere are three points to be emphasized concerning the relationbetween Marx's theory of economic development and Say's Law.

(1) Marx's model does not contradict the "law" in any of its meaningsin so far as it postulates Say's Law in assuming that demand andsupply are everywhere equal and that equilibrium prevails in thevalue system. (2) Marx's theory of evolution, while an alternativeto the Ricardian theory of stagnation (itself no contradiction to Say'sLaw), is also an alternative to the stagnation theory adumbrated bysuch critics of Ricardo and Say as Malthus and Sismondi. (3) Thelimit to capital accumulation deduced in Marx's model, like that indi-cated by Ricardo, is no contradiction to Say's Law, in so far as thislimit in each case arises from the side of capital supply, whereas Say'sLaw asserts the existence of adequate demand at any level of output.Marx's dynamic model postulates Say's Law for an obviousmethodological reason - to examine the fundamental tendencies ofthe system underlying the disturbances of the market. It is as ifMarx were determined to show, by ruling out of the model the diffi-culties which he elsewhere acknowledged to be inherent in exchange,that his basic disagreement was on a much deeper level. Thus, withthe assumptions of Say's Law, Marx deduced what he considered theinevitability of capitalist breakdown.8In so far as Marx's dynamic model starts with the assumptionsof Say's Law and ends with a theory of cycles and stagnation, it isentirely distinct from the models of other critics of the classical sys-tem. In Malthus (if we ignore the fact that disequilibrium is almostbuilt into the system because of his definition of value), the generalglut emerges because of oversaving. In Sismondi, the general glut is

8. Marx's model does not specify the exact conditions or timing of capitalistbreakdown. It deduces only a tendency to breakdown, expressed in periodiccrises, due to the increasing contradictions of the economic system. Apparently,Marx expected crises to become more severe. However, crises alone would notbring the end of capitalist production. The transformation from capitalism tosocialism, like that from feudalism to capitalism, was expected to be a prolongedsocial transformation made necessary by the inability of capitalism to continueto develop the "productive forces," and made possible by the action of theworking class.Although Marx did not work out his theory of specifically economic break-down, except in the most general terms, such a theory can be reconstructed fromhis work. Most of the controversy on Marxian economics from the end of thenineteenth century on was concerned with just this problem. Unfortunately foreconomic analysis, however, most of the discussions confused theoretically deducedtendencies with historical prediction. Moreover, in much of the literature "break-down" seems to suggest some very specific moment of economic chaos and thecrumbling of bank walls. A more reasonable interpretation would be that thebreakdown of the system would mean stagnation, since a stagnant capitalistsystem is a contradiction in terms.


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KARL MARX AND SAY'S LAW 627a consequence of lags and frictions. In Marx, it follows from theconditions of accumulation even when there are no disturbances inthe savings-investment process and no other lags or frictions. Marx'sown analyses of the systems of Malthus and of Sismondi9 make itclear that while he too shared their disapproval of the classical refusalto see the effects of capitalist income distribution, of monetary dis-turbances, of lags and frictions, his explanation of crises and ultimatebreakdown is based on entirely different considerations. It is impor-tant to recognize this, since two of the three leading interpretationsof Marx's theory of economic development see in it as basic the veryfactors stressed by earlier critics of the classical system - "dispro-portionality" and underconsumption,' recognized by Marx, but notconsidered causal.In Marx, as in Ricardo, the fundamental causal element ineconomic development is the rate of profit, whose long-run tendencyis to fall. However, the falling tendency of the rate of profit wasattributed by Marx not to the decline in the fertility of land and conse-quent rise in rents and wages but instead to technological improve-ment of the labor-saving kind. The motivation for such improvementis the drive for profit, but its consequence defeats the profit motivethrough the reduction, within the total means of production, of theproportion of labor - the only value and surplus value, or profit,creating element. The increasing ratio of nonwage or constantcapital(machinery and raw materials) to variable capital (wages), or theincrease in the "organic composition of capital," was, according toMarx, the inevitable consequence of the drive for profit, but also thereason for the fall in the rate of profit.2Marx considered his development of the law of the falling tend-ency of the rate of profit to be of paramount importance and hisspecial contribution to political economy. He wrote:Simple as this law appears . . . all of political economy has so far tried in vain todiscover it.... Since this law is of great importance for capitalist production,it may be said to be that mystery whose solution has been the goal of the entirepolitical economy since Adam Smith. The differencebetween the variousschoolssince Adam Smith consists in their different attempts to solve this riddle.'

The riddle to which Marx referred is that the law of the fallingtendency of the rate of profit is a "two-faced law" which explainsboth the fall in the rate of profit and the rise in the mass of profit.9. Theorien fiber den Mehrwert, III, 43-55.1. An excellent survey of the crisis and breakdown theories ascribed toMarx appears in Sweezy, op. cit., chaps. 9-11.2. Capital, III, 247-49.3. Ibid., III, 249-50.


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628 QUARTERLY JOURNAL OF ECONOMICSThe falling rate of profit is a long-run tendency n Marx's view, atendency which the accumulation process restrains with various

"counteracting causes."4 Their effect is chiefly to cheapen the ele-ments of capital, that is, to reduce the costs both of subsistence goodsand material means of production, whether through increasing pro-ductivity at home or the advantages of foreign trade.However, the long-run tendency of the rate of profit to fall wasseen by Marx as a fundamental law, the source of periodic crises,themselves overcome by the effects of the counteracting causes, andhence of cyclical development.5 Moreover, although Marx did notdevelop this analysis very far, the implication is clear that the fallingrate of profit is inexorable, because the accumulation process developson the basis of an ever increasing proportion of nonwage (and non-value creating) capital, and because the countertendencies to thefalling rate of profit become less effective.6 Thus the logical develop-ment of the Marxian model would be that the capitalist system is oneof cycles induced by this tendency of the rate of profit to fall and ofultimate stagnation as the tendency of the falling rate of profitbecomes stronger and the countertendencies weaker.7The Marxian model of evolution is thus quite different from thatof Ricardo. Like the latter it postulates Say's Law and deduces atendency to stagnation due to the falling rate of profit. UnlikeRicardo's model, however, it deduces the falling rate of profit directlyfrom the labor theory of value alone, with no additional postulatesbut that capitalists seek to maximize their profits. Also, unlikeRicardo's model, Marx's model offers an explanation of crises andcycles as well as a theory of secular trend.From this discussion of Marx's different models it thus appears

4. These are discussed in Capital, III, chap. 14.5. Marx referred to a "decennial cycle (interrupted by smaller oscillations)."(Ibid., I, 694.) His view was that the system automatically responds to crises ina cyclical pattern. "Effects, in their turn, become causes, and the varying acci-dents of the whole process, which always reproduces its own conditions, take onthe form of periodicity." (Ibid., I, 695.)6. As examples, cost minimization has limits, particularly in the case ofwages. Similar limits prevail in the possible gains from foreign trade, particularlyas several countries compete for gains in trade with, or capital export to, backwardareas, and as these areas are themselves industrialized.Marx did not develop this argument but it is implied. On the other hand,he did not consider the effects of other countertendencies which had not made theirappearance historically and would not fit into his abstract model of pure, competi-tive capitalism, such as the effects of trade unions, monopolies, and governmentstimulation and support of the economy.7. An elaborate reconstruction of the Marxian model along similar linesappears in Henryk Grossman, Das Akkumulations- und Zusammenbruchs-gesetzdesKapitalistischen Systems (Leipzig, 1929).


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KARL MARX AND SAY'S LAW 629that his position on Say's Law was indeed complicated. In somemodels he used Say's Law for specific analytic reasons. In anothermodel he directly opposed it. The difference between the modelsarises from the intention to isolate and emphasize specific features ofthe economy. Hence the complicated "position" on Say's Law is notone of inconsistency but the consequence of deliberate methodology.

BERNICE HOUL.BARD COLLEGEANNANDALE-ON-HUDSONNEw YORK

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