Ricardo, Say and the liberal answer to Sismondi and Malthus
The French economist J.B. Say, who lived between 1767 and 1832, is famous for his “law of markets,” which allegedly proved that a general overproduction of commodities was impossible. Some authorities credit James Mill, the father of John Stuart Mill and a friend of Ricardo, for discovering this so-called law. The law, however, is generally known as “Say’s Law.” So that’s how I will refer to it here.
How did Say “prove” the impossibility of a general overproduction of commodities? He argued that while money makes the exchanges of commodities much easier, it is by no means absolutely necessary for commodity exchange. Commodity exchange can proceed, at least in principle, without money.
Therefore, Say abstracted away money. If money is left out, commodity exchange is the exchange of one commodity for another. The totality of these commodity exchanges makes up the market. Thus, the means of purchasing commodities are commodities themselves.
It is perfectly possible to have an overproduction of one type of commodity relative to another. For example, too many zippers might be produced relative to pants, or the reverse might be true. You could produce too many pants and not enough zippers. But how can you have an overproduction of pants and zippers at the same time? Therefore, according to Say, if the supply of commodities is doubled, the overall demand for commodities will double. As the supporters of Say’s Law put it, supply always creates its own demand.
The quantity theory of money
But what if there was a shortage of money for some reason? (1) Wouldn’t that create a problem in a monetary economy as opposed to an economy of pure barter? According to Ricardo, who supported Say’s Law, this would not be a problem: Suppose the supply of money was inadequate to circulate the total supply of commodities at their current prices. In that case, the nominal prices and wages would fall so that monetarily effective demand would once again exactly equal the supply of commodities on the market at current prices and wages.
According to the Ricardian school of economic liberalism, while an excessive rate of growth in the money supply will be inflationary and therefore undesirable—for example, creditors would be penalized—an insufficient rate of growth of the money supply, or an outright contraction, will lead to lower nominal prices and wages. While this would penalize debtors, it would not mean that there would be any difficulty selling the mass of commodities on the market at current market prices. The quantity theory of money (2) in its pure form, therefore, “demonstrates” that the total monetarily effective demand is always equal to the total supply of commodities on the market.
The theory that changes in the money supply affects only nominal prices and wages but not real incomes is known as the “neutrality of money.” It is one of the pillars of economic liberalism.
But what would happen if the capitalists hoarded their money? Couldn’t that lead to a situation where all commodities—except money (3)—would be overproduced?
Not at all, say the economic liberals. Individual capitalists under the pressure of competition are forced to enrich themselves as much as possible. Capitalists can never be satisfied with their existing level of wealth if they want to remain capitalists. The economic liberals argue that capitalists can get richer only by growing any money that passes through their pockets by investing it anew. Hoarded money, which earns neither interest nor profit, represents an “opportunity cost,” as the modern economists say, in the form of interest or profit that could have been earned by the capitalists but will not be if the money is hoarded. Therefore, the liberal economists argue, it will never be rational for any capitalist to hoard money.
But what about the danger pointed to by the underconsumptionists? If the industrial capitalists keep plowing their profits “back into their businesses” and keep increasing their production, who will provide an adequate demand for their products? Certainly not the workers, who according to Ricardo will as a rule be paid at the bare biological subsistence minimum due to the workings of the Malthusian law of population. (4)
The supporters of underconsumption further argue that the industrial capitalists will not be able to consume enough of the commodities they produce, since they must keep their savings high in order to expand their businesses. Won’t excessive saving by the capitalists combined with the rock-bottom wages (5) of the workers, which keeps their consumption low, lead to a general glut of commodities?
It is true that industrial capitalists and their families (6) must spend part of their profits on consumer goods in order to live. And the industrial capitalists and their families must not only consume necessities. If they want to maintain themselves and their families in way worthy of members of the propertied classes, they must consume luxuries as well. In Ricardo’s day, for example, capitalists would be expected to purchases expensive wines and fine carriages for the enjoyment of themselves and their families. Today, the fine carriages have given way to fleets of cars and a Gulfstream or two or maybe three.
Still, the underconsumptionist argue, given the huge and growing mass of profits appropriated by the industrial and other capitalists, and even if assisted by the unproductive workers, landowners, clergy and the state, how can the capitalist class and its dependents ever consume the ever growing mass of commodities that capitalist industry keeps churning out?
In addition to the unproductive consumption of the capitalists, the industrial capitalists must also engage in what Marx was later to call productive consumption. To fully understand the productive consumption of the industrial capitalists, we should take note of a major error made by the classical economists from Adam Smith on, including both Ricardo and Sismondi.
Adam Smith argued that the capital represented by machines and raw and auxillery materials—what Marx later was to call constant capital (7)—could, if you go back far enough, be reduced in the final analysis to wages, or variable capital to use Marx’s terminology.
For example, a machine itself would be produced by a combination of both constant and variable capital. That constant capital, in turn, would itself have been produced by a combination of both constant and variable capital. Therefore, Adam Smith drew the conclusion that all constant capital was reducible ultimately to variable capital! That is, capital consists in the final analysis entirely of the wages paid to the productive workers. A fine theory indeed!
Therefore, Smith and the classical economists who followed him claimed that all commodities are purchased by either profits and rents—surplus value—or wages. In reality, however, only a fraction of the commodities annually produced by capitalist industry is purchased by profits, rents and wages, or incomes that derive from these primary incomes such as tax revenues collected by the state. A part of the total annual commodity production is purchased with the fund that replaces the constant capital used up in the production process. Therefore, commodity production can, and indeed must, exceed the total revenues as defined by the classical economists as the sum total of profits, rents and wages in a given period—that is, the total national income if we look at a “pure” (8) capitalist nation in isolation.
Industrial capitalists, therefore, not only consume their current capital—that is, reproduce it—they also consume the surplus value that falls to them in the form of profit. Some of this is spent on consumer goods, both necessities and luxuries. The rest of the profit—surplus value realized in money form (9)—is transformed into additional capital, both variable and constant. The size of the employed working class expands—and so does the mass of constant capital.
If anything, Marx’s correction of the mistake made by Smith and his successors regarding constant capital tends to further undermine the claim that crises are caused by “underconsumption.” But couldn’t a crisis of overproduction in a key industry, as allowed by Say’s Law, lead to a general crisis? Faced with an overproduction of commodities in their particular line of business, wouldn’t the industrial capitalists hoard their money? Couldn’t this react on other industries and lead to a general economic crisis?
Ricardo and his fellow economic liberals had an answer to that question as well. The industrial capitalists who cannot invest profitably in their own line of business due to a saturation of the market for their particular commodities will put any surplus money capital to work in other lines of production through the credit system. Unable to realize the average rate of profit on all their capital, they will settle for the average rate of interest rather than undergo the “opportunity cost” of letting their capital lie idle and yield nothing at all.
For example, if an industrial capitalist is unable to invest his or her money capital profitably in his or her own line of business, the capitalist might put the surplus money capital into an interest-bearing bank account instead. This is, after all, one of the key functions of the banking system. The bank will then lend the money to an industrial capitalist in a line of business where the rate of profit is above the average due to an underproduction of the commodity produced by that particular industrial business.
Remember, according to Say’s law of markets, any overproduction of a particular type of commodity will always be offset somewhere else in the economy by an underproduction of another type of commodity. Therefore, according to the economic liberals, the credit system will always prevent partial crises of overproduction from turning into a general economic crisis.
Not all capitalists are industrial or commercial capitalists. Some are simply “savers” or “investors,” what Marx and Engels later called “money capitalists.” (10) Won’t the existence of this strata of “thrifty savers” depress the demand for commodities, possibly leading to a general overproducion of commodities?
No, the economic liberals answer. In the case of thrifty money capitalists, the banking and credit system will, just like the case with the surplus money capital of the industrial capitalists, channel their monetary savings into the lines of production where the rate of profit is higher than the average. And remember, according to Say’s Law, which forms one of the pillars of economic liberalism, there will always be sectors of capitalist industry that will be underproducing that must exactly offset those sectors of capitalist industry that are overproducing.
Indirectly, therefore, our thrifty savers are engaging in productive consumption when they save. They are by no means hoarders. Therefore, Ricardo and his supporters argued, there was no danger that “excessive saving” would lead to a general insufficiency of monetarily effective demand relative to the total level of commodity production. Indeed, to the horror of Sismondi, Ricardo held that the more saving the better!
Ricardo wanted production for the sake of production
The Ricardian liberals, unlike the Malthusian reactionaries, wanted to slash to the minimum the expenditures of the “unproductive classes” as well as the working class. The more of the “net revenue”— Ricardo’s term for surplus value—was consumed productively as opposed to unproductively, the faster would be the accumulation of wealth by society as a whole. It was production for the sake of production! Say’s law of markets, according to the Ricardians, would take care of the consumption side of things. As Ricardo saw it, the logic was air tight. There was no “flaw” in the market system. and Sismondi’s fear that production would grow faster than consumption simply had no basis in reality.
Ricardo, the ultimate ‘supply-side’ economist (11)
Essentially, Ricardo was an early example of the so-called “supply-side school” of economics. The aim of the Ricardian “supply-side school” was to remove all obstacles standing in the way of maximizing “net revenue”—the production of surplus value—whether from the resistance of the workers on one side, or the reactionary semi-feudal restrictions, the unproductive consumption of classes such as the landowners, or even individual capitalists whose private interests stood in way—for example, the capitalist farmers in Ricardo’s England.
In Ricardo’s time, the English capitalist farmers, like the landowners, opposed the repeal of the “corn laws,” which protected English agriculture. Ricardo was quite willing to sacrifice the capitalist farmers, just as he was willing to sacrifice the workers or the landowners, for the sake of a faster growth of production.
The point, according to Ricardo, was not to increase the gross revenue of the nation—the national income—defined by Ricardo as the sum of wages, profits and rents, but the net revenue, the surplus value squeezed out of the working class. The way to achieve this was to increase to the maximum the share of the surplus value that went to the industrial capitalists in the form of profit as opposed to the working class, the landlords, the clergy and the state. This in a nutshell was the program of Ricardian liberalism.
If the “underconsumptionist Marxists” echo the Sismondi and Malthus-Keynes school, the “insufficient surplus value” school echoes the “supply-side school” of Ricardo and to a certain extent present-day “supply-side” economists. As is the case with “Keynesian Marxists,” who don’t of course share the pro-capitalist and often pro-imperialist politics of bourgeois Keynesians, “supply-side” Marxists don’t share the reactionary pro-capitalist and pro-imperialist politics of the modern supply-side school of bourgeois economists.
However, just as the “Keynesian Marxists” such as Paul Sweezy and Paul Baran and their followers in the Monthly Review school see the realization of surplus value as the biggest problem facing modern capitalism, the “Ricardian Marxists” see the production of surplus value as the biggest problem facing today’s capitalism, much as Ricardo saw it in his day. I will examine the theories of the Ricardian Marxists next.
1 In earlier times, currency consisted largely of coins made of precious metals such as gold and silver, or of banknotes convertible on demand into gold and silver coins. So a shortfall in mine production, caused perhaps by the depletion of existing mines, could in principle cause a shortage of money at the existing level of commodity production, prices and wages. Today, currency consists of so-called “fiat money” issued by the state and the central banks, which function as organs of the state. Nowadays, virtually all economists, both pro-capitalist and Marxist, assume that the state and its “monetary authority” can produce as much money as it wants to up to “full employment,” beyond which the creation of additional “fiat money” will lead to inflation. However, the question of money is not so simple as it seems to modern economists, including most modern Marxists, and I will be exploring this question in later posts.
2 Later, we will see that Ricardo’s theory of “comparative advantage,” which argues that free trade is as much in the interests of the capitalistically backward countries as it is in the interest of capitalistically highly developed countries, is dependent on both Say’s Law and the quantity theory of money. If Say’s Law or the quantity theory of money are invalid, so is the law of comparative advantage in a capitalist economy.
4 According to the law of population of Malthus, which was accepted by Ricardo, any rise in wages much above the bare biological subsistence level will lead to an increase in the working-class population, much as the rise in any commodity’s price above its value will lead to an increase in the supply of that commodity. As the number of workers grows, downward pressure will be exerted on the level of wages until wages fall below the level that can sustain the growth in the working population. This, is turn, will once again reduce the rate of growth in the working-class population. In this way, the size of the working-class population will in the long run, according to Ricardo, adjust itself to the needs of capitalist production. This view implied that no lasting rise in the standard of living of the working class could ever occur, and that trade union organization was futile. It earned political economy the title “dismal science.”
5 Though further development proved in practice that the so-called Malthusian Law of Population was false, in the days of Ricardo and Sismondi, wages in industrial Britain were indeed pretty close to the biological minimum, as they remain today in many “third world” countries.
6 In the time of Ricardo and Sismondi, virtually all active capitalists were men, though women were members of capitalist families who lived off surplus value and were therefore members of the capitalist class. Today, though the active capitalists remain overwhelmingly men, there are now a certain number of women as well, reflecting social progress over the last 200 years.
7 The classical economists distinguished between fixed capital such as machines or factory buildings, which is used up little by little, and circulating capital such as labor (power) and raw materials, which is used up all at once. Unlike Marx, however, they did not distinguish between constant capital, whose value is conserved in the production process, and variable capital, which along with reproducing its own value produces an additional surplus value. In a capitalist economy, surplus value alone is the source of profits including interest and rents and all secondary incomes that derive from them.
8 By a pure capitalist country, I mean a country where all production is carried out by wage workers hired by the industrial capitalists. In the real world, there never has been or ever will be a pure capitalist country. As time goes on, though, countries engaged in capitalist production draw ever closer to this model without ever quite reaching it.
9 This is the definition of profit in the broadest sense. Profit including interest plus rent—surplus value realized in money form—will play a crucial role in my examination of capitalist economic crises as the investigation proceeds.
11 The term “supply-side economics” was coined by a group of neoliberal capitalist economists in the days of the Ronald Reagan and Margret Thatcher administrations. They advocated the end of virtually all concessions the working class had wrested from the ruling capitalist class in the course of centuries of class struggle. They justified their stance by appealing to Say’s Law, claiming that Keynesian concerns about “insufficient demand” were groundless. It would be a mistake, however, to group the great classical economist David Ricardo, who despite his mistakes did much to advance our understanding of the law of labor value and supported capitalism as the only means to achieve the maximum development of the productive forces, which it indeed was in his time, with today’s vulgar “supply-side economists” of capitalist reaction.