Karl Marx and Say's Law Author(s): Bernice Shoul Reviewed work(s): Source: The Quarterly Journal of Economics,

Vol. 71, No. 4 (Nov., 1957), pp. 611-629 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1885713 . Accessed: 06/12/2011 17:46
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KARL MARX AND SAY'S LAW

By BERNICE SHOUL
I. Introduction, 611. - II. The four meanings of Say's Law, 614. - III. Marx on Say's Law as the circular flow, 616. -IV. The equality of aggregate demand and supply and the "money veil"; Marx's answer to Say's Law, 618. V. Marx's view of partial overproduction and the general glut, 623. - VI. Accumulation of capital and economic development; Marx's alternative to Say's Law and the classical system, 625.

I. INTRODUCTION

A. The Need for Systematizing Marx's Position on Say's Law For one hundred and fifty years economic theory has built on the cornerstone of classical economics - Say's Law of Markets.' In one or more of its various meanings and implications this 'law" has been involved in all economic analysis, and has been the source of much needless controversy. This includes the long and inconclusive controversy concerning Karl Marx's position on Say's Law and his related theories of crises and evolution. The reason for the present article on Marx and Say's Law is that it still appears that Marx's position has not been clarified, any more than the meanings and implications of Say's Law have been agreed upon. What follows is an attempt to show that differences of opinion on Marx's position on Say's Law arise both from differences of emphasis on the various meanings and uses of the "law" per se, and from differing views as to which arguments of Marx were directed
1. This "law" bearing Say's name and attributed to him by Ricardo is generally credited to James Mill. Mill expounded the doctrine in his Commerce Defended (1808), which appeared between the first edition of Say's TraitW d'Economie Politique (1803), where the doctrine is barely outlined, and the second edition (1814) where it is more fully developed. For this view as to priority, see the Introduction by Jacob W. Hollander and T. E. Gregory (ed.) to Ricardo's Notes on Malthus (Baltimore, 1928). That Say deserves priority is the view taken by Joseph Spengler in "The Physiocrats and Say's Law of Markets, II," Journal of Political Economy, LIII (Dec. 1945), 341-42. This latter opinion seems reasonable since in Say's first edition it is already stated that when a nation has too many products of one kind the means of selling them is to create another kind (Traite, I, 153-54), that "The demand of products in general is thus equal to the sum of the products" (ibid., II, 176), and that "A nation always has the means of buying all it produces" (ibid., II, 180). It was Mill, however, who developed Say's Law, especially in asserting the possibility of unlimited accumulation and the impossibility of general overproduction. (Commerce Defended, London, 1808, p. 85.) It was Ricardo who fully developed Say's Law and made of it the core of classical economics. His role will be discussed further in this article. 611

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toward these various interpretations of Say's Law. It is hoped that this discussion will show (1) that Marx's position on Say's Law was not a self-contradictory one, as has been alleged; and (2) that although his position was a complicated one, it can be systematized from an examination of his theoretical structures, some of which assume certain aspects of Say's Law and some of which do not.2 Inasmuch as Marx did develop several models of the capitalist system in order to analyze different essential features of this system, and inasmuch as Say's Law has several meanings, it is important to know in which of his models and for what reasons Marx accepted or rejected the different aspects of the law. The Marxian models to be considered are the following: (1) the circular flow model which postulates Say's Law; (2) the model of monetary exchange which denies Say's Law; and (3) the dynamic model which provisionally assumes Say's Law only as a means for demonstrating a tendency to breakdown and the inevitability of crises and cycles in spite of the operation of Say's Law. IDifferences of opinion are found among recent experts on Marx as to the very existence, as well as to the nature, of his theory of crises and cycles. All are agreed that Marx denied the validity of Say's Law; that is, that he argued against its central proposition that there could be no endogenously created crises. But on more than this there is no agreement and the debate continues as to "what Marx really meant." Schumpeter contended that although in Marx's work there are valuable insights into the nature of crises, and that Marx was, in fact, the first economist to see
2. Unfortunately Marx's own economic system was left in such an unfinished state and with so many apparent contradictions that until the last fifteen years or so reconstruction of this system generally has seemed insufficiently rewarding to attract the interest of professional economists. Only the first volume of Capital was prepared for publication by Marx himself, the remaining uncompleted two volumes having been edited by Friedrick Engels. The standard English edition is the Kerr edition (Chicago, 1909). Marx's monumental work on the history of economic thought from Sir William Petty to his own day, originally planned as a fourth volume to Capital, was edited by Karl Kautsky, and published in three volumes as Theorien fiber den Mehrwert (Stuttgart, 1905-10). Two partial English translations of this latter work are available. The first volume has been translated from the French (Molitor) edition by Terence

McCarthy as A Historyof EconomicTheories;FromthePhysiocratsto AdamSmith

(New York, 1952). Selections from the first two volumes have been translated from the original German by G. A. Bonner and Emile Burns as Theories of Surplus Value (London, 1951). Marx's theory of evolution and of cycles, although nowhere stated in full, is developed in part in Volume I, more specifically in Volume III of Capital (especially in chap. 15). His most explicit treatment of Say and the classical economists is in Theorien fiber den Mehrwert, II (2) and III,

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the cycle as a whole, no single cycle theory can be found in, or reconstructed from, his work without many additional hypotheses.3 Maurice Dobb, on the other hand, argued that, "Undoubtedly, for Marx the most important application of his theory was in the analysis of the character of economic crises,"4 and that Marx's cycle theory was specifically based on the interaction of the falling tendency of the rate of profit and the countertendencies to this law.' Paul Sweezy wrote that in Marx there are elements of two cycle theories; one, somewhat inconclusive and unconvincing, based on the falling tendency of the rate of profit, and the other, more important, but not systematized by Marx himself, based on a disproportion between the growth in output and demand for consumption goods.' Joan Robinson argued that this disproportion between the output of consumption goods and effective demand is the cycle theory that Marx would have developed had he not been taken up by the "false scent" of the falling rate of profit which, she argued, explains nothing at all.7 The conclusions of the present essay on Marx are (1) that he was indeed "opposed" to Say's Law for the reasons (primarily monetary) generally adduced; (2) but that his position was more complicated than that of simple opposition, since some of his models postulate Say's Law; and (3) that the theory of crises and cycles for which there seems the best evidence in Marx is one of inadequate profits, independent of any shortage of demand, a consequence of more fundamental contradictions than those arising from the nonfulfillment of Say's Law. In other words, according to the present writer, Marx rejected Say's Law in so far as it generalized both the essential nature of the capitalist system and the mechanisms of its equilibration, but he accepted Say's Law merely as a formal statement of the logic of the economic circular flow, and also used -it in the initial development of his own theory of "breakdown." Thus, Marx rejected the premises and implications of Say's Law as concealing the essential nature of the capitalist system. Yet, at the same time, he built an economic model himself in which crises and cycles would occur in spite of the operation of Say's Law, in spite of the assumption of equilibrium between supply and demand.
3. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York, 1942), pp. 38-42. 4. Maurice Dobb, Political Economy and Capitalism (New York, 1945), p. 79. 5. Ibid., chap. 4. 6. Paul M. Sweezy, The Theory of Capitalist Development (New York, 1942), chaps. 8-10, esp. pp. 179-84. 7. Joan Robinson, An Essay on Marxian Economics (London, 1947), p. 42.

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B. The "Duality" of Marx's Position on Say's Law The duality of Marx's position on Say's Law has been noted by Joan Robinson as follows:
Marx evidently failed to realize how much the orthodox theory stands or falls with Say's Law and set himself the task of discovering a theory of crises which would apply to a world in which Say's Law was fulfilled, as well as the theory which arises when Say's Law is exploded. This dualism implants confusion in Marx's own argument, and, still more, in the arguments of his successors.8

Could it not be the case that the confusion to which Mrs. Robinson refers arises from a failure to see that for Marx the world dominated by Say's Law and the world in which it is exploded are, in fact, two models of the capitalist system, each constructed for a different purpose? Marx's theoretical world in which Say's Law dominates is an abstract model of pure, competitive capitalism. This ideal capitalism is so purere" in fact, that all but industrial capital is excluded, commodities exchange at their normal labor values without price deviation, there are no problems of lags, frictions, or monetary difficulties. The theoretical world in which Say's Law is exploded is a closer approximation to reality but it is still a theoretical model which assumes away any "faulty distribution of social labor among the individual spheres of production."9 The contradiction in the two models is no accident, although it is unfortunate that Marx did not make his method clear. The purpose of establishing the first model, the world in which Say's Law dominates, was to demonstrate that the "law of motion" of capitalist society produces not only a tendencyto ultimate stagnation, or breakdown, but crises and business cycles as well, evenwhen the equilibrium conditions of Say's Law are fulfilled. The purpose of establishing the second model was to point out the ever-present possibility of crises occasioned by the fact that the capitalist economy is one of monetary exchange, not of barter. In the world dominated by Say's Law, the drive for profits produces cycles endogenously in spite of the fulfillment of the equilibrium conditions postulated by the law. In the world where Say's Law is exploded crises occur because of the very nature of commodityexchange. II. THE FOUR MEANINGS OF SAY'S LAW It is possible that much of the confusion about Marx's position on Say's Law arises from the failure to specify the various meanings and implications of Say's Law, on which Marx did take different but
8. Ibid., p. 51. 9. Theories fiber den Mehrwert, II(2), 301.

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not contradictory positions. It may be useful to recall the four essential meanings of Say's Law, as developed by Say and, more fully, by Mill and Ricardo. These are as follows. (1) Supply creates its own demand; hence, aggregate overproduction or a "general glut" is impossible. (2) Since goods exchange against goods, money is but a "veil" and plays no independent role. (3) In the case of partial overproduction, which necessarily implies a balancing underproduction elsewhere, equilibrium is restored by competition, that is, by the price mechanism and the mobility of capital. (4) Because aggregate demand and supply are necessarily equal, and because of the equilibrating mechanisms, output can be increased indefinitely and the accumulation of capital proceed without limit. It was Ricardo's explicit formulation of Say's Law to which Marx's primary criticism was directed. In Ricardo all four meanings of the law are clearly stated. In regard to the first two meanings of the law, those relating to aggregate demand and the role of money, Ricardo asserted,
Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market as not to repay the capital expended on it; but this cannot be the case with respect to all commodities;'

Of the third meaning of the law, relating to partial overproduction, he wrote,

Mistakes may be made, and commodities not suited to the demand may be produced - of these there may be a glut; they may not sell at their usual price; but then this is owing to the mistake and not to the want of demand for production.2

Ricardo's view on the fourth meaning of the law regarding accumulation was that,
There cannot, then, be accumulated in a country any amount of capital which cannot be employed productively until wages rise so high in consequence of the rise of necessaries, and so little consequently remains for the profits of stock, that the motive for accumulation ceases.3

Ricardo's explicit limit to capital accumulation, the adequacy of profits, is not a contradiction of Say's Law, in so far as the law concerns the adequacy of demand at any level of output and assumes an adequate motive for continued supply. The tendency to stagnation
1. David Ricardo, Principles of Political Economy and Taxation (Everyman ed., New York, 1943), p. 194. 2. Ricardo, Notes on Malthus (Baltimore, 1928), p. 160. 3. Ricardo, Principles, p. 193.

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which Ricardo indicated is theoretically possible even while Say's Law in its other aspects is fulfilled. This tendency to stagnation was deduced by appealing to additional postulates, those relating to population growth and the physical productivity of land. Say's Law in itself implies the possibility of equilibrium at all levels of output and the unlimited development of an inherently adaptive economy.4 Marx's position, as distinct from that of Ricardo, essentially was that (1) general overproduction becomes possible precisely because (2) money, while a "veil" only in the sense that it is a medium of exchange, is also a store of value in commodity exchange, and that this exchange is a dual one whose parts may be separated in time and place. As a consequence, (3) partial overproduction is almost inevitable and easily can produce a cumulative downward spiral. And, most important, (4) even if Say's Law were fulfilled, unlimited accumulation is impossible because of (for reasons other than those advanced by Ricardo) the fall in the rate of profit. III. MARXON SAY'SLAW AS THE CIRCULARFLOW Marx's reproduction models5 postulate the operation of Say's Law. What is involved is his explicit recognition of the economic circular flow. In these models, aggregate output is divided into two departments, Department I representing producers' goods and Department II representing consumers' goods. The output of each department equals the inputs of "constant" capital (machinery and raw materials) and "variable" capital (wages) plus the "surplus value" (profit) created. The equilibrium conditions for "simple reproduction" and for accumulation are that in each case the constant capital of the second (consumers' goods) department is equal to the variable capital plus the surplus value of the first department (producers' goods). Marx's reproduction models express the same tautologies as are contained in Say's Law, that aggregate demand is elicited by and is identically equal to aggregate supply, that consumption equals production, and that revenues equal sales. The equilibrium conditions are met via the exchanges within and between the two departments. So far Marx used a familiar tool, although his was the first (and more elaborate) exposition of the circular flow since Quesnay.
4. In the final formulation of Say's Law by John Stuart Mill, there was considerable modification, since, according to Mill, "This argument is evidently founded on the supposition of a state of barter; . . . If, however, we suppose that money is used, these propositions cease to be exactly true." (Essays on Some Unsettled Questions of Political Economy, 2d ed., London, 1874, p. 69.) 5. Capital, II, chaps. 20, 21.

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In setting up his formal reproduction schemes and their conditions of equilibrium, Marx thus followed in the classical tradition. His criticism of classical economists, particularly of Say, is entirely different from that of the classical critics of Say's Law - Malthus especially - and some of Marx's own successors, notably Rosa Luxembourg, who tried to negate Say's Law by proving an error in the logic of Marx's own reproduction models. It might seem unnecessary to deal with the economic logic behind both Say's Law as a model of the circular flow and Marx's own reproduction schemes, in view of the fact that Schumpeter's analyses of the circular flow and Leontief's input-output analyses have once more made the "tableau economique" a basic instrument of economic reasoning. However, it was the central issue in the old classical controversy on Say's Law, notably in the debates between Malthus and Ricardo, and in the controversies among Marx's followers. Malthus believed he negated Say's Law and proved the possibility (and likelihood) of general gluts with his arguments concerning (1) the exchange of commodities against money and labor, as different from exchange against other commodities,6 and (2) the limits to accumulation arising from the falling rate of profit.7 However, the inadequacy of effective demand which, in Malthus' view, made for the general glut, was fundamentally an inadequacy built into his own theoretical system. This is because of his very definition of value, which he measured by the labor which commodities could command, not as with Ricardo, by the labor which commodities embodied. According to Malthus' definition, aggregate demand (subsistence wages, or labor "commanded") is defined in terms of the labor contained in commodities, and aggregate supply in terms of this quantity plus the surplus, or profit, created in production. Thus, given Malthus' particular theory of value, Say's Law could not hold, and,
6. T. R. Malthus, Principles of Political Economy (London, 1819), pp. 35354. Say removed part of this objection by admitting that labor is a commodity. Malthus' argument (J. B. Say, Letters to Malthus, London, 1821, pp. 22-23.) against the idea of money as a veil was not answered, and he is rightly regarded as a contributor to monetary analysis and the theory of liquidity preference. 7. Malthus, op. cit., pp. 9, 370. Malthus developed a concept of an optimum rate of accumulation defined by the acceptable rate of profit. It should be pointed out that this argument about the rate of profit concerns lack of profitability due to a shortage of demand. Ricardo admitted a falling rate of profit could lead to eventual stagnation, but with him the only reason for a falling rate of profit was the increase in wages occasioned by the increased costs of producing subsistence goods. Marx, like Malthus, stressed the fall in the rate of profit, but for entirely different reasons than those adduced by Malthus and Ricardo. For Marx's critique of Malthus, see Theorien fiber den Mehrwert, III, 9-10; 43-49.

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as Ricardo finally pointed out, Malthus' debates with Ricardo could lead nowhere because they started from different premises.8 In the case of Rosa Luxembourg who believed Marx should have been completely opposed to Say's Law, the argument (although based on the labor-embodied theory of value) also concerns difficulties in the "realization" of aggregate output, not in the case of simple reproduction, but only of expanded reproduction, or accumulation.9 However, in Marx, accumulation itself furnishes the demand for these additional commodities although Luxembourg did not see this. Hence her own logically impossible solution - the noncapitalist market which somehow buys without ever selling anything. Thus Luxembourg's "correction" of Marx's reproduction model, which itself formally expresses one aspect of Say's Law, rests on misunderstanding,1rather than on a logically alternative economic model. On the level of abstract economic logic, both Say's Law and Marx's reproduction models are but tautological expressions of the necessary equality of aggregate supply and demand. On this level a logically alternative model is not possible. It is in this sense that, as a first approximation, Marx constructed a theoretical world where Say's Law dominates.
DEMAND AND SUPPLY AND THE IV. THE EQUALITYOF AGGREGATE "MONEY VEIL"; MARX's ANSWER TO SAY'S LAW

In a different model from that discussed above, however, Marx argued that Say's Law could not operate. This is precisely because, while in the circular flow model it appears that commodities do exchange against commodities, in a model concentrating on the monetary exchange of commodities, it becomes clear that commodities must first exchange against money before they can exchange against
8. "Allowing you your premises, I see very few instances in which I can quarrel with your conclusions. I agree with all you say concerning the glut of commodities; allow to you your measure, and it is impossible to differ in the result." (Letters of David Ricardo to Thomas Robert Malthus, ed. James Bonar, Oxford, 1887, p. 216.) 9. Rosa Luxembourg, Die Akumulation des Kapitals (Leipzig, 1921), pp. 6075. Luxembourg objected in addition that the reproduction schemes do not correspond to reality, where proportional accumulation does not prevail, and further objected to Marx's giving the impetus to accumulation to Department I (means of production) to whose scale of accumulation Department II adapts. (Ibid., pp. 102-3.) Her fundamental objection to Marx's model of expanded reproduction is that a necessary shortage of demand would make accumulation impossible. 1. Luxembourg's misunderstanding of the whole concept of the circular flow is illustrated by her criticism of Marx's model of expanded reproduction of which she wrote, "Obviously, we turn in a circle." (Ibid., p. 104.)

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each other. Marx's contention was that it is this dual exchange that gives the ever-present possibility of crises. The fundamental theorem of Say's Law that, because commodities really exchange against each other, money is merely an instrument of exchange, represented for Marx a complete misapprehension of the fundamental nature of the capitalist economy. He believed that it is the specific peculiarity of the capitalist system that commodity exchange is a dual one, an exchange of qualitatively different use values which are at the same time quantitatively equal exchange values. It is this duality, he argued, that gives rise to problems unknown in a barter economy, where use values are exchanged directly without being transformed and circulated as exchange values via the instrument of money. It is this du#1 nature of the commodity (as use value and as exchange value), which -he called the key to the capitalist system the "pivot on which a clear comprehension of political economy turns."2 According to Marx it was because the classical economists worked only within a model suitable for a barter economy that they failed to see this duality and thus failed to see the possibilities of endogenous crises. Marx's critique of the classical model, contained in his analysis of Ricardo, is as follows:
In order to prove that capitalist production cannot lead to general crises, all conditionsand determiningforms, all principlesand differentiae in specificae, short, capitalist production itself, is denied. In fact, it is proven that if the capitalist form of production, instead of a specifically developed, particular form of social production, were rather a form of production more elementary than its earliest beginnings, then its particular opposition and contradictions, and, therefore, their eruption in crisis, would not exist. Accordingto Ricardo,followingSay, productsare always bought by products or services;money is only the mediumthroughwhich the exchangeis accomplished. Thus, in the first place, the commodity, in which there is an opposition between use value and exchange value, is transformedinto a mere product'(iso value), therefore, the exchange of commodities into mere exchange of products, that is, mere use values. That means not only going back to a stage beforecapital l ist production,but even before the mere productionof commodities;and it means assuming away the most complicatedphenomenonof capitalist production- the world market crisis - by denying the first condition of capitalist production, namely, that the product must be a commodity, must therefore appear in'the form of money, and must go through the process of metamorphosis. Instead of speaking of wage-labor, he speaks of "services," a word in which the' specific characteristicsof wage-labor,and its use - namely, to increase the value of the commodities against which it is exchanged and thus to generate surplus valueis again omitted, and thereby, also, the specific relationshipthrough which money
and commodity are transformed into capital.... Money ... is considered only

as a means of exchange, not as an essential and necessary form of existence of the

2. Capital, I, 48.

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commodity, which must present itself as exchangevalue, namely as general social labor. By striking out the essence of exchange value through transformingthe commodityinto a mere use value (product)one can easily deny, and, in fact, must deny, an essential, independent form which also has an independent existence, as against the original form of the commodity, in the process of the metamorphosis. Here the crises are reasonedaway by forgetting or denying the first prerequisites of capitalist production,the existence of the product as a commodity, the duplication of the commodity in commodity and money, the resulting separation in the exchangeof commodities,and, finally, the relationshipof money or the commodity to wage labor.3

Instead of the classical picture Marx's second model is of a world in which crises are always possible precisely because of the dual nature of the commodity and the "metamorphosis" of its exchange value from commodity to money and back again to commodity. Marx claimed that it is this necessary transformation of value which gives rise to what he called the two abstractforms of crises. Underlying the metamorphosis of the commodity there was, for Marx (and in his view not understood by the classical economists), the metamorphosis of "social labor." This is the abstract, undifferentiated labor whose quantitative equality in the exchange process is what transforms qualitatively different use values, produced by labor of specific skills, into quantitativelyequivalentexchange values. Thus, the dual nature of the commodity was traced to the dual nature of labor in capitalist society, and, consequently, the dual nature of exchange to the dual nature of the commodity form itself. Marx explained this theoretical foundation of his system in great detail in the first two chapters of Capital, I. It is the very basis of his critique of Say's Law and classical economics in Theorien uiberden Mehrwert. This foundation deserves emphasis lest it be concluded that Marx's opposition to Say's Law was a purely monetary one, and that he considered the structure and disruptions of the monetary system, or the "behavior of money" to be an independent cause of crises. Marx's criticism of Say's Law may be called "monetary criticism" only to the extent that it stresses the difficulties inherent in monetary exchange. But it must be made clear that this "monetary criticism" refers not simply to "unneutral money" (as opposed to the classical ''money veil") but arises from Marx's theory of the dual nature of labor and of the commodity in the capitalist economy. In his most succinct analysis of the possibilities of crises, Marx did not give details but presented rather a purely formal case. The analysis specifies the two essential features of the exchange of commodities that make crises Dossible. These are (1) the separation of
3. Theorien fiber den Mehrwert, II (2), 275-76 (my translation).

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purchase and sale, and (2) the fact that money is used as a means of payment to bridge this separation. It is a specification of the "formal possibilities" of crises rather than a theory of the causes of crises, as sometimes has been inferred. Marx's argument is as follows.
The most abstract form of the crisis, and, therefore, the formal possibility of crisis, is, thus, the metamorphosisof the commodity itself, which ... contains the contradictionsbetween use value and exchange value included in the unity of the commodity, and between money and commodity ...4 The crisis in its second form arises from the function of money as a means of payment, whereby money figuresin two differentmoments separatedin time, and in two differentfunctions.... Both of these forms are entirely abstract although the second is more concretethan the first.5

(1) The Separation of Purchase and Sale. The metamorphosis of commodities, the transformation of exchange value from commodity to money to commodity, means that sale and purchase are distinct in both time and place. Commodity exchange, unlike barter, the direct exchange of use values, presents the ever-present possibility that the commodity which exists actually as a use value, and only ideally as an exchange value may not be realized as an exchange value. "No one can sell unless some one else purchases. But no one is forthwith bound to purchase because he has just sold."6 The metamorphosis of commodity-capital, C-M-C, presupposes the inverse metamorphosis of money-capital, M-C-M. A disturbance of the latter metamorphosis thus means a disturbance of the former.
If the interval in time between the two complementaryphases of the complete metamorphosis of a commodity becomes too great, if the split between the sale and the purchasebecomestoo pronounced,the intimate connectionbetween them, their oneness, asserts itself by producing- a crisis.7

And, according to Marx, the crisis is nothing more than the process by which the unity of production and circulation, of purchase and sale, is forcibly restored.8 (2) Money as Means of Payment. The fact that money serves not only as the means of circulation, but also as a means of payment (since it is a store of value), gives rise to the second possibility of crises. Thus if any commodity cannot be sold in a given period of time, whether because of changes in tastes or savings habits, money can no longer fulfill its function as a means of payment. A single
4. 5. 6. 7. 8. Ibid., II (2), 282. Ibid., II (2), 283. Capital, I, 127. Ibid., I, 128. Theorien fiber den Mehrwert, II (2), 282.

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producer cannot pay his debts or realize the value of his commodities. This means that the whole network of mutual debts and obligations is disturbed. According to Marx, this second possibility of crises is always accompanied by the first, the separation of purchase and sale. But the first possibility may exist without the second, that is, independently of the fact that money serves as a means of payment and independently of the use of credit. This second possibility of crises is realized not because commodities are unsaleable as such, but because they are unsaleable within a given period. Marx asserted that all monetary crises are, in fact, the realization of this second abstract form of crisis.9 Marx's summary discussion of the possibilities of crises is useful not simply as a summary, but also because it contains a warning against confusing the formal possibilities of crises with their cause.
The generalpossibility of crisesis the formalmetamorphosisof capital itself, the separationof purchaseand sale in time and space. But this is not the cause of crises. It is nothing more than the most general form of crises, thus of the crisis in its most general expression. One cannot say that the most abstract form of the crisis is the cause of crises. If one seeks the cause, it is precisely to understand why the form of its possibility becomes a reality. from the generalcondiThe generalconditionsof crisis ... must be developed tions of capitalistproduction.'

In his specific discussion of Say's Law and of the formal possibilities and realization of crises, Marx did not develop the cycle theory that would indicate the fundamental "cause" of crises. This can be found in Capital, III, although it requires considerable reconstruction to make Marx's meaning clear. Marx held that in the crises of reality the "formal possibilities of crises" become realized in a variety of ways. As a consequence, the precipitating factor which actually sets off any given crisis thus appears to be causal. But, according to Marx, such a precipitating factor is more superficial and should not be confused with the more fundamental "cause" of crises, the "general conditions of capitalist production." He gave numerous examples of such disturbances of equilibrium. For instance, the crisis can be set off by a monetary stringency. Or it might be precipitated by an inequality of deprecia9. Ibid., II (2), 288. 1. Ibid., II (2), 289 (my emphasis). This passage is of key importance. Study of the chapter on crises in the Theorien uiberden Mehrwert, and especially of this passage avoids misunderstanding of Marx's cycle theory. The popular theories of crises and cycles attributed to Marx, which are based on "disproportions" or "realization" difficulties, rest on the very confusion Marx warned against, the confusion between the abstract form, and the cause, of crises.

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tion reserves and the replacement needs of fixed capital. Or changes in the period of capital turnover, or of consumers' tastes, or of savings habits - all these can precipitate a crisis, make a formal. possibility a reality, and by so doing give the crisis its unique historical features. Marx did not develop his argument to deal with the details of the concrete and varying disturbances of equilibrium. This is because he was more concerned with showing that, contrary to Say's Law, the very nature of the system makes crises always possible. However, Marx noted that the real crisis, when it did appear, whatever its precipitating factors, always seems to be due to partial overproduction somewhere in the system which is not corrected according to Say's Law, but spreads and cumulates into general overproduction. V. MARX'SVIEWOF PARTIAL OVERPRODUCTION
AND THE GENERALGLUT

The theorem that partial gluts cannot lead to a general glut is central to Say's Law. The general acceptance of this theorem among nineteenth century economists, despite its blatant contradiction by reality, can be explained only by the facts that at the time when classical economics was in full flower the business cycle was in its infancy and that early crises were, in fact, associated with monetary and trade difficulties, which, it could be argued, arose from exogenous sources, from wars, politics, and errors in banking and trade policy.2 In logic the theorem follows directly from the postulate that aggregate supply and demand are equal and from the theorems of competitive price adaptations and of factor mobility. Thus in theory no endogenously created crises are possible. The inadequacy of the explanation brought forth criticism at the time, long before that of Marx. One of the chief critics was Malthus. Another was Sismondi, who, writing at the same time (1819) as Malthus, denied the self-regulating feature of the classical model. His arguments are based on various grounds, including the inadequacy of mass purchasing power and, more specifically, on the time lag between production and consumption and on frictions which prevent the equalization of supply and demand for specific commodities.3
2. From the French Revolution until the 1820's the English economy was disturbed by wars, blockade, and consequent inflation. These events could rightly be regarded as exogenous as could the monetary crises of later years be considered a consequence of currency mismanagement. It should be recalled that Ricardo, the abstract theorist, was also deeply concerned with practical matters, as in The High Price of Bullion (1810). Ricardo's theories of money and of international trade ultimately became the basis for Bank of England policy. 3. Jean Charles Leonard Simonde de Sismondi, Nouveaux principes de l'Vconomie politique, I (Paris, 1819), esp. 303-11, 374-81. It should be recalled

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Marx's view of the general glut differs from that of Sismondi in so far as he considered the "contradictions" of capitalism to be more fundamental than those of lags and frictions, and further disagreed with the assumption, implicit in Sismondi, more explicit in Rodbertus,4that crises could be avoided by a different distribution of purchasing power within the capitalist economy. Because his interest in capitalism was in its fundamental tendencies, Marx had little to say about the failure of the competitive mechanism to adjust the malallocation of resources responsible for partial overproduction. What he did say was that, by its very nature, an unplanned economy would produce too much or too little of specific commodities, and that price adjustments and factor mobility were inadequate to prevent such errors from leading to a general glut. Moreover, Marx argued that not only was there continual price deviation from value, but there was also an additional difficulty in the fact that changes in productivity continually alter values themselves.5 In any case, if overproduction appears in a sector of some importance and it becomes necessary to sell commodities at prices which do not cover costs, the difficulty multiplies and the result is - the general glut. Marx's description of what happens is classic:
But under all circumstancesthe equilibriumis restored by making more or less capital unproductiveor destroying it. This would affect to some extent the material substance of capital, that is, a part of the means of production,fixed and circulating capital, would not perform any service as capital; a portion of the running establishments would then close down. Of course, time would corrode and depreciate all means of production (except land), but this particular stagnation would cause a far more seriousdestructionof means of production. However, the main effect in this case would be to suspend the functions of some means of production and prevent them for a shorter or longer time from serving as means of production. The principal work of destruction would show its most dire effects in a slaughteringof the valuesof capitals. That portion of the value of capital which exists only in the form of claims on future shares of surplus-valueor profit, which
that Sismondi was primarily an historian rather than an economist. As such his contribution to economics was not one of logical analysis, but rather of a broad historico-economic vision which led him to see the capitalist economy as but one of several historical stages of economic progress and to be highly critical of capitalism. 4. Karl Rodbertus, Overproduction and Crises (New York, 1898), pp. 123-32. The first German edition with which Marx was familiar appeared in 1850-51. Marx countered Rodbertus' underconsumption idea by pointing out that the working class enjoys its greatest prosperity just before the outbreak of the crisis and that "advocates of the theory of crises of Rodbertus are requested to make a note of this." (Capital, II, 476n.) II(2), 300-14. 5. Theorienfiberden Mehrwert,

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consists in fact of creditor's notes on production in its various forms, would be immediatelydepreciatedby the reduction of the receipts on which it is calculated. One portion of the gold and silver money is renderedunproductive, cannot serve as capital. One portion of the commoditieson the market can completeits process of circulation and reproductiononly by means of an immense contraction of its prices, which means a depreciationof the capital representedby it. In the same way the elements of fixed capital are more or less depreciated. Then there is the added complication that the process of reproductionis based on definite assumptions as to prices, so that a general fall in prices checks and disturbs the process of reproduction. This interference and stagnation paralyses the function of money as a medium of payment, which is conditioned on the development of capital and the resulting price relations. The chain of payments due at certain times is brokenin a hundredplaces, and the disaster is intensified by the collapse of the credit-system. Thus violent and acute crises are brought about, sudden and forcible depreciations, and actual stagnation and collapse of the process of
reproduction, and finally a real falling off in reproductions

Marx followed this description of the crisis and downswing phases of the cycle with an equally vivid description of the recovery and upswing phases. He referred to the work of "other agencies," to wage, cost, and price reductions, to the "new combinations" which raise productivity, restore profitability, and pave the way for a new cycle under "expanded conditions of production in an expanded market, and with increased productive forces."7 Obviously, Marx saw that crises appeared as a state of general overproduction, the very state which Say's Law denied to be a consequence of endogenous economic forces. What caused the periodic appearance of this state of general overproduction is another question which can be dealt with only in considering Marx's theory of capital accumulation and capitalist evolution.
VI. ACCUMULATION OF CAPITAL AND ECONOMIC DEVELOPMENT; MARX'S ALTERNATIVE TO SAY'S LAW AND THE CLASSICAL SYSTEM

Marx's theory of economic development is the core of his work, and in that theory capital accumulation plays the central role. This theory is a large subject, beyond the scope of the present article. What is of interest here, however, is the fact that this theory is developed initially within a model which postulates Say's Law. In the previously discussed model emphasizing monetary exchange Marx argued that, contrary to Say's Law, endogenous crises are always possible. In the model emphasizing capital accumulation Marx argued that even if Say's Law could operate, crises and ultimate breakdown would be inevitable.
6. Capital, III, 297-98. 7. Ibid., III, 299.

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There are three points to be emphasized concerning the relation between Marx's theory of economic development and Say's Law. (1) Marx's model does not contradict the "law" in any of its meanings in so far as it postulates Say's Law in assuming that demand and supply are everywhere equal and that equilibrium prevails in the value system. (2) Marx's theory of evolution, while an alternative to the Ricardian theory of stagnation (itself no contradiction to Say's Law), is also an alternative to the stagnation theory adumbrated by such critics of Ricardo and Say as Malthus and Sismondi. (3) The limit to capital accumulation deduced in Marx's model, like that indicated by Ricardo, is no contradiction to Say's Law, in so far as this limit in each case arises from the side of capital supply, whereas Say's Law asserts the existence of adequate demand at any level of output. Marx's dynamic model postulates Say's Law for an obvious methodological reason - to examine the fundamental tendencies of the system underlying the disturbances of the market. It is as if Marx were determined to show, by ruling out of the model the difficulties which he elsewhere acknowledged to be inherent in exchange, that his basic disagreement was on a much deeper level. Thus, with the assumptions of Say's Law, Marx deduced what he considered the inevitability of capitalist breakdown.8 In so far as Marx's dynamic model starts with the assumptions of Say's Law and ends with a theory of cycles and stagnation, it is entirely distinct from the models of other critics of the classical system. In Malthus (if we ignore the fact that disequilibrium is almost built into the system because of his definition of value), the general glut emerges because of oversaving. In Sismondi, the general glut is
8. Marx's model does not specify the exact conditions or timing of capitalist breakdown. It deduces only a tendency to breakdown, expressed in periodic crises, due to the increasing contradictions of the economic system. Apparently, Marx expected crises to become more severe. However, crises alone would not bring the end of capitalist production. The transformation from capitalism to socialism, like that from feudalism to capitalism, was expected to be a prolonged social transformation made necessary by the inability of capitalism to continue to develop the "productive forces," and made possible by the action of the working class. Although Marx did not work out his theory of specifically economic breakdown, except in the most general terms, such a theory can be reconstructed from his work. Most of the controversy on Marxian economics from the end of the nineteenth century on was concerned with just this problem. Unfortunately for economic analysis, however, most of the discussions confused theoretically deduced tendencies with historical prediction. Moreover, in much of the literature "breakdown" seems to suggest some very specific moment of economic chaos and the crumbling of bank walls. A more reasonable interpretation would be that the breakdown of the system would mean stagnation, since a stagnant capitalist system is a contradiction in terms.

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a consequence of lags and frictions. In Marx, it follows from the conditions of accumulation even when there are no disturbances in the savings-investment process and no other lags or frictions. Marx's own analyses of the systems of Malthus and of Sismondi9 make it clear that while he too shared their disapproval of the classical refusal to see the effects of capitalist income distribution, of monetary disturbances, of lags and frictions, his explanation of crises and ultimate breakdown is based on entirely different considerations. It is important to recognize this, since two of the three leading interpretations of Marx's theory of economic development see in it as basic the very factors stressed by earlier critics of the classical system - "disproportionality" and underconsumption,' recognized by Marx, but not considered causal. In Marx, as in Ricardo, the fundamental causal element in economic development is the rate of profit, whose long-run tendency is to fall. However, the falling tendency of the rate of profit was attributed by Marx not to the decline in the fertility of land and consequent rise in rents and wages but instead to technological improvement of the labor-saving kind. The motivation for such improvement is the drive for profit, but its consequence defeats the profit motive through the reduction, within the total means of production, of the proportion of labor - the only value and surplus value, or profit, creating element. The increasing ratio of nonwage or constant capital (machinery and raw materials) to variable capital (wages), or the increase in the "organic composition of capital," was, according to Marx, the inevitable consequence of the drive for profit, but also the reason for the fall in the rate of profit.2 Marx considered his development of the law of the falling tendency of the rate of profit to be of paramount importance and his special contribution to political economy. He wrote:
Simple as this law appears . . . all of political economy has so far tried in vain to discover it.... Since this law is of great importance for capitalist production, it may be said to be that mystery whose solution has been the goal of the entire political economy since Adam Smith. The differencebetween the various schools since Adam Smith consists in their differentattempts to solve this riddle.'

The riddle to which Marx referred is that the law of the falling tendency of the rate of profit is a "two-faced law" which explains both the fall in the rate of profit and the rise in the mass of profit.
9. Theorien fiber den Mehrwert, III, 43-55. 1. An excellent survey of the crisis and breakdown theories ascribed to Marx appears in Sweezy, op. cit., chaps. 9-11. 2. Capital, III, 247-49. 3. Ibid., III, 249-50.

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The falling rate of profit is a long-run tendencyin Marx's view, a tendency which the accumulation process restrains with various "counteracting causes."4 Their effect is chiefly to cheapen the elements of capital, that is, to reduce the costs both of subsistence goods and material means of production, whether through increasing productivity at home or the advantages of foreign trade. However, the long-run tendency of the rate of profit to fall was seen by Marx as a fundamental law, the source of periodic crises, themselves overcome by the effects of the counteracting causes, and hence of cyclical development.5 Moreover, although Marx did not develop this analysis very far, the implication is clear that the falling rate of profit is inexorable, because the accumulation process develops on the basis of an ever increasing proportion of nonwage (and nonvalue creating) capital, and because the countertendencies to the falling rate of profit become less effective.6 Thus the logical development of the Marxian model would be that the capitalist system is one of cycles induced by this tendency of the rate of profit to fall and of ultimate stagnation as the tendency of the falling rate of profit becomes stronger and the countertendencies weaker.7 The Marxian model of evolution is thus quite different from that of Ricardo. Like the latter it postulates Say's Law and deduces a tendency to stagnation due to the falling rate of profit. Unlike Ricardo's model, however, it deduces the falling rate of profit directly from the labor theory of value alone, with no additional postulates but that capitalists seek to maximize their profits. Also, unlike Ricardo's model, Marx's model offers an explanation of crises and cycles as well as a theory of secular trend. From this discussion of Marx's different models it thus appears
4. These are discussed in Capital, III, chap. 14. 5. Marx referred to a "decennial cycle (interrupted by smaller oscillations)." (Ibid., I, 694.) His view was that the system automatically responds to crises in a cyclical pattern. "Effects, in their turn, become causes, and the varying accidents of the whole process, which always reproduces its own conditions, take on the form of periodicity." (Ibid., I, 695.) 6. As examples, cost minimization has limits, particularly in the case of wages. Similar limits prevail in the possible gains from foreign trade, particularly as several countries compete for gains in trade with, or capital export to, backward areas, and as these areas are themselves industrialized. Marx did not develop this argument but it is implied. On the other hand, he did not consider the effects of other countertendencies which had not made their appearance historically and would not fit into his abstract model of pure, competitive capitalism, such as the effects of trade unions, monopolies, and government stimulation and support of the economy. 7. An elaborate reconstruction of the Marxian model along similar lines appears in Henryk Grossman, Das Akkumulations- und Zusammenbruchs-gesetz des Kapitalistischen Systems (Leipzig, 1929).

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that his position on Say's Law was indeed complicated. In some models he used Say's Law for specific analytic reasons. In another model he directly opposed it. The difference between the models arises from the intention to isolate and emphasize specific features of the economy. Hence the complicated "position" on Say's Law is not one of inconsistency but the consequence of deliberate methodology. SHOUL. BERNICE
BARD COLLEGE ANNANDALE-ON-HUDSON NEw YORK