More on Final Demand and Distribution

J. More on Final Demand and Distribution

We now take account of the dependency, upon which Marx strongly insisted, of consumer demand on income distribution for it reinforces the endogeneity property of the rate of surplus value and opens up a mutual relationship such that a change in distribution and consequently in demand patterns, plays back on distribution, should wage goods differ in organic composition compared with goods consumed by other classes. As for the main proposition at hand: “ . . . the ‘social demand,’ i.e., the factor which regulates the principle of demand, is essentially subject to the mutual relationship of the different classes and their respective economic position, notably therefore to, firstly, the ratio of total surplus value to wages, and, secondly, to the relation of the various parts into which surplus value is split up (profit, interest, ground rent, taxes, etc.)” (MECW 37: 180); “supply and demand presuppose the existence of different classes and sections of classes which divide the total revenue of a society and consume it among themselves as revenue, and, therefore, make up the demand created by revenue. While on the other hand it requires an insight into the overall structure of the capitalist production process for an understanding of the supply and demand created among themselves by producers as such” (193–4).

That demand patterns were largely governed by income distribution, Marx con- cluded, meant that “absolutely nothing can be explained by the relation of supply to demand before ascertaining the basis on which this relation rests” (180). In fact, there is considerable flexibility to Marx’s vision in this respect. That quantity demanded varies with price and income changes is clarified in the following passage relating to wage earners: “It would seem, then, that there is on the side of demand

a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social needs are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money wages higher, the labourers would buy more of them, and a greater “social need” would arise for them . . .” (187). (The same applied to capitalists’ “productive” consumption: “if cotton were cheaper, for example, the capitalists’ demand for it would increase, more additional capital would be thrown into the cotton industry.”) Thus not only does the establishment of prices of production entail a process of output variation to assure supplies equal to quantities demanded at cost prices, as we have shown earlier, but these quantities turn on demand patterns themselves governed to a large extent by the pattern of income distribution.

Marx’s 1865 speech contains an account of the short-run effects on the market prices of “necessaries” and “luxuries,” and the long-run effects on quantities produced, gen- erated by changes in the pattern of demand upon an assumed rise in the wage rate. The analysis deserves close attention, first because the pattern of final demand is not a constant – the usual assumption in derivations of the inverse wage-profit

47 relation – but turns on income distribution; and second, because the role of output

J. More on Final Demand and Distribution

variation in profit-rate equalization is fully confirmed. Marx sets out by positing

a change in the rate of wages given technology, and traces out the impact on “the actual proportion between the demand for, and the supply of, these commodities” and thus on prices (MECW 20: 107). First, “[a] general rise in the rate of wages would . . . produce a rise in the demand for, and consequently in the market prices of, necessaries. The capitalists who produce these necessaries would be compensated for the risen wages by the rising market prices of their commodities.” Those capi- talist who do not produce necessaries experience a fall in the rate of profit due to the general wage increase, generating a variety of income effects: “Their income would have decreased, and from this decreased income they would have to pay more for the same amount of higher-priced necessaries. But this would not be all. As their income had diminished they would have less to spend upon luxuries, and therefore their mutual demand for their respective commodities would diminish. Conse- quent upon this diminished demand the prices of their commodities would fall.” As a result, “[i]n these branches of industry . . . the rate of profit would fall, not only in simple proportion to the general rise in the rate of wages, but in the compound ratio of the general rise of wages, the rise in the prices of necessaries, and the fall in the prices of luxuries.” The resultant differentials in rates of return are then corrected by transfer of capital and labor between sectors “until the supply in the one department of industry would have risen proportionately to the increased demand, and would have sunk in the other departments according to the decreased demand. . . . [P]rices would return to their former level and equilibrium” (107–8). In summary: “A greater part of the produce would exist in the shape of necessaries, a lesser part in the shape of luxuries. . . . The general rise in the rate of wages would . . . after a temporary disturbance of market prices, only result in a general fall of the rate of profit without any permanent change in the prices of commodities” (108).

Now in terms of Marx’s own principles the analysis is incomplete. For cost prices to remain unchanged despite variation in industry size upon a wage increase implies constant costs both of a technical order – ruling out land scarcity – and of a pecuniary order – ruling out differential organic compositions, for otherwise the wage increase must increase costs of labor-intensive relative to capital-intensive products. Marx simply neglected to spell out that feature of his analysis elaborated with care in discussing the inverse wage-profit relation whereby (following Ricardo) a wage increase generates an altered structure of cost prices. He falls short of Ricardo who made it explicit that changes in demand composition will play on income distribution by affecting the relative scarcity in the aggregate of labor and capital (above, p. 45). 30

30 Does our perspective conflict logically with Samuelson’s “nonsubstitution theorem” whereby if labor is the only scarce resource, prices are entirely independent of the structure of final

demand (Samuelson 1961)? Such an objection – even if valid it would not necessarily imply the illegitimacy of the interpretation itself – cannot be substantiated. The nonsubstitution

48 Value and Distribution