Harvey Chapter Three

Chap. 3
The question here will be of the equilibrium between supply and demand. In Marx’s time the main controversy was over the question whether supply creates its own demand.

‘Say’s Law’: The incomes paid to the suppliers of the factors of production (land, labor, and capital) in the form of wages, profits, and rent, must equal the total price of the goods produced with these factors. I.e., “The income generated during the production of a given output is equal to the value of that output.” This means that “supply creates its own demand.” This means that if I create x value, I create x income for myself, and so on economy-wide.

According to this, there can be no overproduction, save in a localized sense as a result of imbalances due to inefficiency in allocation of resources, and shortages can only come as a result of ‘exogenous shocks’ such as war or blight. Overproduction in one industry=underproduction in another, so there can be no generalized crises of overproduction.

Marx dismissed Say’s law as ‘pitiful claptrap,’ decrying Say’s ‘trite assumption, that the capitalist produces use value directly for consumption…[and] overlooks the fact that the commodity has to be converted into money.’ This, in addition to suggesting a possibility for greater inefficiency than Say perhaps acknowledged, seems to suggest that general crises could occur as a result of underconsumption. And indeed, in Capital III Marx says ‘the ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.’

On the other hand, Rosa Luxemburg complains that Marx’s analysis of social reproduction in Capital II suggests that the only limit to aggregative demand is that imposed by production itself—capital can expand without limit and demand will always keep up.

Harvey maintains that Marx never really developed a theory of growth and demand. He proposes to go over the clues in Marx’s work and see where he might have been headed.

I. Production and Consumption, Demand and Supply and the Critique of Say’s Law

In the Intro to the Grundrisse, Marx says that ‘production, distribution, exchange and consumption…all form members of a totality, distinctions within a unity.’ The relation between production and consumption in particular can assume three fundamental forms:

1. An immediate identity, first because production is productive consumption, as we’ve seen. Secondly, Harvey weakly points out that consumption requires simultaneous production, such as preparing food, but this appears nowhere in Marx, and it falls apart with a little scrutiny. (What Marx actually says is that consumption produces the human being in a certain aspect. Consumption is the production of workers, of course, but also consumption of heroin produces, for instance, a drug addict. In production the producer objectifies himself; in consumption the object personifies itself.)

2. Secondly, P and C are in a mediating relation to each other. Production provides consumption with its material, dictates the mode of consumption, manufactures new social wants and needs. Consumption also dictates to production what current social wants and needs are, however.

3. ‘Each creates the other in completing itself, and creates itself as the other.’ Harvey does not explain this very well at all, merely emphasizing that they are both moments of a process. The idea seems to be that production and consumption, in both their mediate and their immediate unity, are inseparable and cannot be distinguished save analytically. Thus the above two ways of relating production and consumption now appear as two ways of dividing them. In other words, they form a dialectical unity. But we will see that this unity can be riven in practice after all.

Thus value must be understood on the basis of the unity of production and consumption. This will give us our sue to “unravel the secrets of supply and demand and lay the basis for a critique of Say’s Law.” (81)

Marx perorates against the idea that every purchase is a sale and vice versa, so the market must be in equilibrium. Again, we are reminded that commodity circulation involves continuous transformations from use value to exchange value form. Every sale or purchase stands as an isolated transaction whose complementary transaction may be separated in time or space. In other words I may not realize the value of my purchase or capitalize what I make on my sale—there’s many a slip twixt cup and lip. This creates the possibility of crises.

Money, again, is what makes this separation possible—someone who has just sold can hoard the money, it is not in the form of a use value and can be stored indefinitely.

In other words, production and consumption which are properly a unity can nevertheless be divided due to the mediating factor, money. Crises are the forcible assertion of the unity of these two processes (P and C) which have become independent of each other.

Equilibrium for Marx means that supply and demand balance each other in an ideal state, thus have no explanatory value for imbalances and crises. Thus equilibrium is only achieved by a reaction (crisis) against forces other than supply and demand.

Thus for Marx disequilibrium is the normal state of affairs. In order to explain this we must examine value theory which operates on a deeper level than an analysis of supply and demand.

II The Production and Realization of Surplus Value

Here Harvey invokes the circuits of capital. In each of these, value takes on a different guise: as money, as a labor process, as a commodity. The circulation of capital presupposes that value flows from one phase to the other without loss, but of course this is not always the case. Blockages can occur at any point, and crises may ensue.

Capital is realized by passing through all of its phases—money capital must be realized through production, productive capital is realized in commodity form, commodities must be realized as money, and back again. Because these phases are separated in time and space, realization is not automatically achieved.

(in Harvey’s terminology) Destruction of capital: physical loss of use values. Depreciation of capital: changing monetary valuation of assets (exchange values). Devaluation: the SNLT is lost without the material integument necessarily being lost with it (values). (see page 84) The distinction between the second and third is not clear to me here.

All crises are crises of realization and result in the devaluation of capital. This can take various forms such as 1. idle money capital; 2. unutilized productive capacity; 3. un- or under-employed labor power; 4. a surplus of commodities.

1. the time structure and costs of realization

Grundrisse: When capital takes on a particular form, it is ‘virtually devalued.’ Example: ‘as long as capital remains frozen in the form of finished product, it cannot be active as capital, it is negated capital.’ This ‘virtual devaluation’ is ‘suspended’ as soon as capital resumes its movement. This is a photographic negative of Say: a snapshot of capital at any point shows it devalued, separated from the identity it must achieve in realization. Thus the possibility of crises; in a sense, capital is always in crisis.
What capital needs to avoid crisis is a certain velocity of circulation. Crisis ensues if inventories build up, if money is hoarded or lies idle for too long, if stocks are held longer during production, etc.

There is pressure to increase the velocity of the circulation of capital.

Necessary costs of circulation that do not produce value include accounting, storage, marketing, transport, also costs involving banking, state costs. Marx calls these ‘faux frais’ (Harvey translates this as ‘necessary costs’—isn’t it literally ‘false costs’?) of circulation. Part of the historical mission of the bourgeoisie is to reduce these costs.

2. the structural problems of realization

At each phase of ‘circulation’ (i.e., here the full circuit of capital) there is a particular kind of problem.
a. If capitalists can’t find sufficient constant and variable capital on the market at the right price, their money is not realizable as capital.
b. Within production, the capitalist must have an adequate rate of exploitation commensurate with the technology employed.
c. Capitalists must find a market.

Effective demand=need plus ability to pay.

Problem: “If the capitalist mode of production is characterized by perpetual expansion of value through the production of surplus value, then where does the aggregative effective demand come from to realize that expanding value through exchange?” (89)

III The Problem of Effective Demand and the Contradiction Between the Relations of Distribution and the Conditions of Realization of Surplus Value

There is an underlying contradiction between the distributional arrangements characteristic of capitalism and the creation of an effective demand sufficient for the realization of capital.

This is partly because capital drives to increase the rate of exploitation, which drives wages down and thus reduces consumer power. But of course the working class itself cannot account for more than a fraction of the necessary demand.

Capital generates effective demand for raw material, equipment, etc.

Total aggregative demand at one time is C+V, whereas the value of the total output is C+V+S. Even in conditions of equilibrium, we are left with the question of where the demand for the surplus value created comes from.

Consumption of luxuries: the capitalist class must purchase goods for consumption equal to S (or there must be a ‘consuming class’). But this leads us to a tautology: the financial resources needed to realize surplus value come from the production of that same surplus value. Harvey lets this dangle for now, taking a circuitous route.

Capital produces to the limit of its capacity without consideration of the market or effective demand, hence crises of overproduction. One solution: foreign (non-capitalist) markets. But this is only a temporary solution, since capital constantly expands and will eventually prevail everywhere.

Another solution: perhaps the extra effective demand required to realize the surplus value produced by capital can come from an expansion of the quantity of money. But Marx rejects this solution.

The main argument is that the quantity of money required at given velocity of circulation is related to the total value of the commodities being circulated, and it matters not whether this mass of commodities contains any surplus value or not. I don’t get this argument, I remember we read it in V II a couple of weeks ago.

The real solution: it is the further conversion of money into capital that furnishes the effective demand required to realize surplus value in exchange.

Money must exist before it can be converted into capital, but the existence of money doesn’t guarantee its conversion into capital. This conversion involves the creation of ‘fictitious capital’—money that is thrown into circulation as capital without any basis in commodities or productive activity. Because this capital has no material basis, it can be exchanged against the surplus value embodied in commodities. Problem solved. I have no idea what any of this means.

This solution to the effective demand problem means the creation of new money capital, which must now be realized in production. The solution to the problem of realization in exchange is converted into the problem of realizing surplus value through the exploitation of labor power in production. What does all this mean?

Under capitalist conditions a balance between production and consumption can only be achieved through perpetual accumulation. This depends on the existence of labor power capable of producing surplus value. I have no idea what the argument is here.