Notes on Marx, Say's Law and the Interconnectedness of the Capitalist Economy
Notes on Marx, Say’s Law and
the Interconnectedness of the
Department of Economics, University of Illinois at Chicago
Chicago Political Economy Group
• Say’s Law: Supply Creates its Own Demand or Commodities are Bought
• Keynes phrased much of his theory of depression in terms of an attack on
• Marx’s attack on Say’s Law, almost dismissive, impressionistic and
• The question of Say’s Law closely tied to Marxian Crisis Theory
• Since Sweezy Marxian crisis theory divided into those approaches that
preserve Say’s Law and those that attack it
• The argument made here suggests this distinction is largely beside the
point and an integration of the various strands of Marxian crisis theory can
be based on Marx’s understanding of the interconnectedness of the
capitalist economy as suggested in his Theories of Surplus Value
• Crises Starting with Rising Input Prices and Falling Profits
• Wage squeeze
• Rising organic composition
• Can add to these: raw material shortages
• Crises of Realization
• Lack of Investment or capitalist consumption
Raw Material Shortages
• Much overlooked, the prototype of crises caused by rising prices is the raw
• The scenario begins with an unanticipated rise in price for raw materials in a key
sector (e.g. cotton as input to calico production)
• With little chance of substitution, calico producers must cut back production and
employment as they put more into cotton purchases and less cotton is available.
• But this shock to one sector spreads out through the economy as the calico
producers reduce their purchases of all inputs and their work force reduces its
• From there crisis spreads as other workers are laid off up and down the supply
• The crisis is further deepens through the financial system as individual capitalists
can’t pay their debts and are forced into bankruptcy
• In the raw materials crisis, “the rate of profit falls because the value of
constant capital has risen as against that of variable capital and less
variable capital is employed.”
• The scenario is Ricardian in spirit, even as it parallels Marx’s more
general discussion of rising organic composition
• Marx sees much the same pattern when capitalists in a particular
branch of industry “over-produce” fixed capital and find there is
insufficient raw material to feed the expanded industry, again driving
up raw material prices.
• Or the simplest source, the situation when expansion in leading
industries runs ahead of the labor supply and the reserve army
Is Say’s Law Operative in these Scenarios?
• For example, Sweezy suggests the case of rising wages “assumes
throughout that, until the crisis actually breaks out, all commodities can be
sold at their full values…[I]t assumes that the crisis is not the result but
rather the cause of a shortage of effective demand,” (Sweezy 155).
• But, what does it mean for the crisis to be a “cause” of a shortage of
effective demand? In each case capitalists in one or another sector have
pushed their production to a scale that for whatever reason they cannot
maintain at expected profit rates. Their response is to reduce production
and this reduction in production spreads through the system. The firms
involved must certainly feel that at least for the present they have over-
• And given the tendency of contractions to spread through the economy,
the result is a general glut. For the large majority of producers, whatever
the original stimulus, it will be experienced as a general glut.
Crises of Realization
• Marx does on occasion suggest that crises can have their origin in
insufficient demand, even though he doesn’t consistently hold to this
• For example there is the famous quote: “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,” (V.3, Ch. 30, 1).
• Again Marx’s examples are likely to start with one or several major
• Again profits fall; this time not because of rising input costs, but
because of falling product prices.
• Similarly in discussing overcapitalization, firms in key industries may
be too optimistic in gaging the market.
• All these cases are characterized by the crunch in leading sectors
being extended to a range of industries through the
interconnectedness of the economy.
• And here too the financial sector will spread the crisis.
Marx and Say’s Law
• Marx shocked at Ricardo’s support for Say’s Laws
• The argument that production only undertaken with intention to
purchase, Marx finds patently “apologetic.”
• “In order to prove that capitalist production cannot lead to general
crises, all its conditions and distinct forms, all its principles and
specific features—in short capitalist production itself—are denied. In
fact it is demonstrated that if the capitalist mode of production had
not developed in a specific way and become a unique form of social
production, but were a mode of production dating back to the most
rudimentary stages, then its peculiar contradictions and conflicts
hence also their eruption in crises would not exist.” (TSV, 709).
The Question of Possibility
• Marx accuses Say and Ricardo of doing away with crises by “forgetting
or denying the first elements of capitalist production.”
• The capitalist economy separates sale and purchase. The capitalist
can horde money rather than buy other commodities. In the
capitalist mode these fundamental conditions make a general glut
• Marx acknowledges that J.S. Mill had recognized the possibility of a
general glut, gluts—But Mill’s view is “insipid” and leaves the
occurrence of crises as “merely a matter of chance” (TSV, 715)
• The point is that crises are not just a matter of possibility but of
Sources of Inevitability
• Several reading of Marx on Say (Sweezy, Shoul, Foley) reach this point and
then leave the matter largely as a contest to pick among the possible
sources or causes of crises
• The suggestion here is that such a search misses the central point. There is
a fundamental pattern that characterizes all the scenarios touched on by
• In each case there is a squeeze on profits in a leading sector or several
closely related sectors. This squeeze might start on the cost side or on the
demand side. Which is largely irrelevant. What is inevitable under
capitalism is that capitalist calculations must often go awry.
• Just as inevitably, if the initial sectors are central enough, the effects of the
initial miscalculations will spread from the leading sectors back along
supply chains and forward in reduced consumption spending.
Interconnections and Say’s Law
• Because of these interconnections, the classical statement of Say’s
Law “must always be taken cum grano salis,” because “in times of
general over-production, the over-production in some spheres is
always only the result, the consequence, of over-production in the
leading articles of commerce; [it is] always only relative, i.e., over-
production because over-production exists in other spheres,” (ch.
XVII, section 14).
• One can call this a disproportionality crisis, but once initiated, it has
all the characteristics of a general crisis of over-production. As Marx
puts it, “For a crisis (and therefore also for over-production) to be
general, it suffices for it to affect the principal commercial goods,”
(TSV, ch. XVII, section 8).
• From this perspective it is easier to understand Marx’s dismissal of the
classical denial of a general glut. Their apologetics turn overproduction into
“its very opposite,”(14). The followers of Say’s Law had insisted that in
universal overproduction “all spheres of production would retain the same
relation to one another; therefore universal overproduction is proportional
production which excludes over-production.”(14)
• And in a rather rhetorical flourish, Marx concludes, “[I]t is alleged that
actual over-production, which is precisely not this non-existent, self-
abrogating overproduction, does not exist—although it only exists because
it is not this,” (14)
• While the presence of money makes a general glut possible and while
credit must intensify the pressures put on any capitalist by a fall in
profitability, it is the intense inconnectedness of the capitalist economy
that guarantees disruptions in leading sectors will be spread and amplified.