Leap into the void - the critique of Say's law

It is said – I think by John Kenneth Galbraith in his book on money – that Keynes, rejecting Says law, did not know Marx had been there before him, because Keynes found Marx’s writing repellently obscure. Joan Robinson – the Oxford economist [note - Cambridge economist, as Luke gently reminds me in the comments] and Keynesian – wrote: Keynes could never make head or tail of Marx…But starting from Marx would have saved him a lot of trouble.” [Quoted in Claudio Sardoni, Marx and Keynes in Jean Baptise Say: critical assessments of leading economists, vol. 2, 112] Say’s law is usually conveniently abridged as the idea that markets will always clear. Sardoni defines it as “underemployment from insufficient effective demand is impossible.”

Sardoni sums up Keynes position as follows: Keynes held that Say’s Law could apply only in an economy with characteristics far removed from those of a capitalist economy. In order for the law and all its corollaries to apply, the analysis must imply an economy where money is never kept idle, so that all savings are invested. Keynes labeled such a type of economy a ‘non-money economy’. In contradistinction, in a capitalist economy – a ‘monetary economy’ – a demand for idle money can exist, implying that the level of effective demand can be insufficient to ensure full employment.”

In econo-speak, where a thing is, a demand is – hence, if idle money exists, there is a demand for idle money. Such is the way to make the wheel turn round. But let’s disregard this.

Sardoni refers to Marx’s 1862 Theories of Surplus Value:

All the objections which Ricardo and others raise against overproduction etc. rest on the fact that they regard bourgeois production either as a mode of production in which no distinction exists between purchase and sale—direct barter—or as social production, implying that society, as if according to a plan, distributes its means of production and productive forces in the degree and measure which is required for the fulfilment of the various social needs, so that each sphere of production receives the quota of social capital required to satisfy the corresponding need. This fiction arises entirely from the inability to grasp the specific form of bourgeois production and this inability in turn arises from the obsession that bourgeois production is production as such, just like a man who believes in a particular religion and sees it as the religion, and everything outside of it only as false religions.

On the contrary, the question that has to be answered is: since, on the basis of capitalist production, everyone works for himself and a particular labour must at the same time appear as its opposite, as abstract general labour and in this form as social labour—how is it possible to achieve the necessary balance and interdependence of the various spheres of production, their dimensions and the proportions between them, except through the constant neutralisation of a constant disharmony? This is admitted by those who speak of adjustments through competition, for these adjustments always presuppose that there is something to adjust, and therefore that harmony is always only a result of the movement which neutralises the existing disharmony.

When Marx, in Capital, speaks of the double face of the sale-purchase relationship, you can see how thinking in terms of form and content – the emancipating gift given to him by Hegel that helped him understand ‘negative identity”, a barbarism to English ears, a leap out of the circle of common sense (much like that made by Elizabeth Bennet in Pride and Prejudice, when she finally understands Darcy) – helps him to see through Say’s law, and its presumed equilibrium. Common sense is common blindness - it is a tacit compact not to see certain things. What he sees is precisely what Keynes saw – that the presumption, here, fundamentally misunderstands the difference introduced by money, or rather, capital money. Just as the capitalist advances money to realize, at the end of the production process, a profit on selling the commodities that result from that process, so, too, can the capitalist wait with money on hand – ‘idle’ – within the market economy. Both of these are aspects of the degree of freedom the capitalist has captured by his position. There is no invisible hand forcing him to the optimum and socially beneficial effect of keeping his money continually mobilized. But, at the same time, the capitalist always has an interest in expanding the market – finding ever new markets – because of the peril posed by the fact that markets don’t always clear – that is, without destroying the sellers. Thus, crisis is folded into the very core of growth in the capitalist economy.

I should add a historical note here. Mainstream economists in the West still speak, as though zombified, of ‘full employment.” This is their way of reciting the Apostle’s creed. But if you decompose the economy of any Western country – any developed economy – you will find that full employment – if this is meant to refer to the private market – is a thing of the past. In the U.S., the most ‘laissez faire’ of developed economies, government employment – by which I mean all government employment, country, city, state and federal – has consistently accounted for around 15-18 percent of the employed population since the fifties. This bothersome fact is simply bracketed by economists who speak of full employment as though Say were alive and we were ruled by the Indian civil service of 1840. Here we see one of the great effects of what Polanyi called the ‘double movement’ – for not only has the state expanded to supply social welfare goods and services, but, in so expanding, has become the ultimate stopgap for the permanent underemployment created by the capitalist system. Marx, of course, lived in an era where employers having the whiphand could force down pay and increase work hours far beyond the point they are able to in most of the developed world today – and even in places like China, the brief period of Wild West capitalism is certainly coming to an end.

But to return to our hero.

The deeper meaning of the rejection of Say’s law is not that it mistakes the capitalist economy for a barter economy – but rather that the fundamental variables of classical economics, supply and demand, are not, in fact, fundamental.

Let me get all excited here – and in the next post, I’ll translate a bit from the third chapter. [Note: no - I'll leave the translation at the end of this post.]

Marx’s attack on Say (or similar errors in James Mill and Ricardo) is not just a technical matter, for it is here that the great machinery starts switching to full power. The alienation that is, as we have seen, the socially determined level of the unbearability of social arrangements by those disadvantaged by them of a given historical period – in this case, the proletariat; the increasing pace of the division of labor, which produces both specialization and a generalization of skills that has the effect of de-skilling, with the dynamic always tending to make the workers interchangeable; the secret of the commodity, happening behind the back of both the capitalist and the laborer; and, a constant in Marx, the global scope of capitalism, its outward push for new markets – something to some extent seen in the classical economists in their notion of decreasing returns to scale, but which Marx understood in terms of the complex given by capitalism, distinguishing it from past global enterprises of conquest, those attempted by the Alexander the Greats and Napoleons, because this conquest is driven by traveling salesmen and rentiers invested in railroad stocks and bonds. Where the liberals thought that trade would lead to peace, of course, Marx knew that it was founded on profound violence and would create the conditions for war. Marx’s rooting of the economy in the relations between the capitalists and the workers – defined in terms of the ownership of the means of production – gives him the perspective to see that the the equilibrium models of supply and demand that form the common stock between the classicals and the neo-classicals represent an idealization of a surface phenomenon, putting them at a loss to explain the crises that traverse the system, and forcing them to concoct romantic poems – models – that premise perfect competition and full employment, an entry point that cannot help but distort our understanding of the economic system, and that must buttress itself with a host of other fictions – the perfectly rational economic agent, rationality as a sort of perfect vision of the path to gain in the future, an agreement about gain as the most desireable of economic activities, etc.

So, I will translate the passage here:

Nothing can be more foolish than the dogma that the commodity circulation conditions a necessary equilibrium [Gleichgewicht] of sale and purchase, because every sale is a purchase and vice versa. If we mean by this that the number of really realized sales are equal to the number of their purchases, this is a flat tautology. But what demands proof is that the seller leads his own buyer to market. Sale and purchase are identical acts as the mutual interchange between two polar opposite persons, the commodity possessor and the money possessor. They depct two polar opposite acts as the actions of the same person. The identity of purchase and sale thus encloses the fact that the commodity becomes useless when it is thrown into the alchemical retort of circulation and comes out not as money, not sold by the commodity possessor, and thus bought by the money possessor. This identity further contains the fact that the process, when it succeeds, comes to a resting point, points to a portion of the life of a commodity, that can extend for a longer or shorter period. Since the first metamorphosis of commodities is simultaneously sale and purchase, this partial process is also at the same time an autonomous process. The buyer has the commodity, the seller the mone, which means, a commodity that has preserved the form of being capable of circulation, whether it appears in the market sooner or later. None can sell, without another buying. But nobody needs to buy unconditionally, because he himself has sold. Circulation breaks through the limits of production exchange, be their temporal, local or individual to the point that they divide the immediate present identity here between the exchange of own’s own and the intake of an alien product of labor into the opposition of sale and purchase. For the processes standing independently of one another form an inner unity, meaning that the inner unity moves in external oppositions. If the external becoming independent of the internal dependency of the moments (because they complete each other) continues up to a certain point, the unity makes itself felt through a violent crisis. The immanent opposition of use value and value inhering in the commodities, of private labor, that must present itself as immediately socialized labor, from specific concrete labor, that at the same time must be understood as abstract general labor, of the personification of things and the thingification of persons – this immanent contradiction contains in the oppositions of commodity metamorphosis its developed movement form. These forms thus invoive the possibility, but only the possibility of crises. The final development of this possibility demands for its realization a whole circuit of relationships, that from the standpoint of simple circulation do not yet exist. [My translation]


Luke said…
Keynes' work is surely subject to a greater range of plausible interpretations than even Marx's - it would be fair to say "to each his own Keynes" - it's all good. It is perhaps inevitable that another reader of Keynes' confusing book will dissent from Sardoni's view. Joan Robinson, however, was definitely a Cambridge economist.

roger said…
Hey, you are right about Joan, of course! Why I put Oxford down I don't know.

Keynes work is subject to interpretation, but I thought that Galbraith and Robinson were laying down the conventional wisdom.