Say’s Law, Marxian Crisis Theory and the Interconnectedness of the Capitalist Economy

ABSTRACT

Scholars have long debated exactly why Marx felt that general gluts were not just possible, but inevitable. This article argues that Theories of Surplus Value anchored that necessity in the complex interconnectedness that characterizes capitalist production. There, Marx’s criticism of Say’s Law builds on a version of crisis theory that begins with raw material shortages in a leading sector. The disturbance is then transmitted through the many inter-industry linkages in the capitalist economy. What starts as a supply-side shock in a leading sector is transformed into a broad crisis of aggregate demand as workers are laid off and businesses fall into insolvency. This article argues that Marx’s later discussion of other types of crises in Capital can be read as consistent with this approach. A severe profit squeeze in a leading sector (whether originating in intermediate good prices, market demand, rising wages or rising use of fixed capital) necessarily turns into a general glut. In this context, Say’s Law becomes an irrelevant theorem concerning an imaginary economy. What Marx sees as fundamentally new under capitalism is not the use of money and the separation of sale and purchase, but massive interconnectedness.

KEYWORDS:

• Marx
• Say’s Law
• interconnectedness
• crisis theory

JEL CODES:

• B14
• B24
• E32

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 The article focuses on these three leftist economists because they consider Marx’s discussion of Say’s Law sympathetically.

2 Sweezy ([1942] 1956, p. 133) observes, ‘[T]hroughout the three volumes of Capital and the three volumes of Theories of Surplus Value, the problem of crises continually recurs. Nevertheless, there is nowhere to be found anything approaching a complete or systematic treatment of the subject in Marx’s writings.’

3 See the discussion in Section Five.

4 To the best of my knowledge Marx never uses the term ‘shock’ in its modern macroeconomic sense. However, he clearly uses the concept in several contexts. The most obvious ones, like that discussed here, occur as the result of ‘natural conditions’; i.e., ‘bad harvests’ (Marx [1861–63] 1969, p. 770a).

5 Marx’s term, ‘leitenden Handelsartikeln’, is usually translated as ‘leading articles of commerce’. (See, for example, the translation of paragraphs 6–8, Ch. 17, Section 14 of Marx ([1861–63] 1969) and the German original, Theorien uber den Mehrwert, available in the Marxists’ Internet Archive, Deutschsprachiger Teil at: https://www.marxists.org/deutsch/archiv/marx-engels/1863/tumw/standard/ch17.htm#mew26.2p528_ch17-14). Marx treats these as fundamentals and does not offer a formal definition. In what follows, ‘leading sectors’ is defined as large industries with extensive forward and backward interconnections in the economy.

6 A similar observation on the interaction of prices, credit and interconnectedness is made by Marx in Volume III of Capital, where he suggests ‘[P]rice fluctuations, which prevent large portions of total capital from replacing themselves in their average proportions and which, owing to the general interrelations of the entire reproduction process as developed in particular by credit, must always call forth general stoppages of a transient nature’. (Marx [1894] 1967, pp. 483–484) As so often in his work on crisis theory, Marx does not go on to formally develop this key observation.

7 Surprisingly, Sweezy ([1942] 1956, pp. 211–212) is extremely critical of Grossman’s approach. A more recent and interesting attack on the Shoul–Grossman position that Marx’s falling rate of profit position does not violate Say’s Law can be found in Trigg (2006, pp. 61–62), which emphasizes the role of finance.

8 The point is also well made by Kenway (1990, pp. 328–329), who states that, in developing the reproduction schemes, ‘Marx was refuting economists such as Sismondi who thought that expanded reproduction was impossible’. Of course, this doesn’t mean crises cannot occur. As Kenway goes on to observe, the reproduction schemes show the possibility of expanded reproduction, but at the same time clarify the perennial realization problem that faces the capitalist economy: ‘The constant recurrence of the realization problem means that the potential of the general glut is constantly renewed’.

9 In effect Mill had anticipated modern versions of Walras’ Law; i.e., excess demand in financial markets can leave a general inadequacy of demand in commodity markets. It should also be noted that a similar argument was made a bit later by Wilhelm Roscher (See Hagemann 1995). Marx doesn’t respond in detail to Roscher’s position, perhaps considering his own treatment of Mill sufficient. He does criticize Roscher’s effort, similar to Mill’s, to distinguish between over-abundance of capital and over production (Marx [1861–63] 1969, Vol. 2, p. 498). That said, Marx may have been influenced by the German historical school’s less dogmatic and more open take on Say’s Law.

10 A similar observation is made by Wolff (1978, pp. 48–52): ‘The Marxian theory of crisis as understood here neither looks for nor finds any one feature or relationship, such as excess savings, to account for crisis’. Wolff goes on to hint at what here is called interconnectedness. After an initial squeeze on some less-efficient firms ‘all other capitalists, more or less aware of the situation must now guess how deep and how extensive the projected cutbacks in output, orders for inputs, and payrolls will be. Further, all capitalists must estimate the secondary or derived realization problems brought on by reduced expenditures on the part of the initially discontinued firms and unemployed workers’.

11 The key thesis here is suggested, but not developed, by Sardoni (1986, p. 425), who notes that starting from profit squeezes at the level of firms ‘and considering the interdependence among different sectors, Marx’s analysis points to the conclusion that the capitalist economy tends towards a general crisis of overproduction’.

12 The emphasis here on interconnectedness as a fundamental characteristic of modern capitalism helps sharpen some discussions of Marxian crisis theory in the secondary literature. For example, Clarke (1994, p. 143) moves in this direction when he suggests that the counter-tendencies set in motion by supply and demand only work at the individual industry level, but ‘the losses incurred by these capitalists lead them to reduce their purchases in turn, so that overproduction is immediately generalized … The distinction made by classical political economy between particular and general over-production is therefore entirely spurious’.

13 As an introduction to his discussion of Tugan-Baranovsky, Besomi (2006, p. 147) provides a treatment of Marx’s crisis theory that runs along lines similar to the presentation here. While seeing Tugan-Baranovsky’s work as inspired by Marx, he concludes that whereas ‘Marx considers crises as the necessary corrective to the systematic and necessary breaches of equilibrium, Tugan sees equilibrium as the norm and crises a deviation from it, albeit recurring and periodical’.

14 Sweezy ([1942] 1956, p. 161) seems to think that disproportionality arguments cannot be combined with arguments that crises will intensify over time. Indeed, he ascribes the popularity of Tugan-Baranovsky’s disproportionality theory among social democrats to the equilibrating and hence ‘revisionist’ character of his system.

15 Sherman (2001, p. 96) goes on to argue that both Mitchell and Marx envisioned endogenous theories of the business cycle. This is certainly true of Mitchell, but given our discussion of the Marxian view of ‘shocks’ may be less true of Marx than generally thought. Thanks to an anonymous reviewer for suggesting parallels to Mitchell.

16 For discussions of Kalecki’s approach regarding raw material prices, see Lavoie (2014, pp. 544–545) and Martins (2016, pp. 488–490).