Law of Value- 10. Supply and Demand (draft)

This is a draft of a script from my upcoming video series “Law of Value”.

Supply and Demand

Some people have the mistake impression that the labor theory of value is some sort of substitute for the laws of supply and demand. This is not the case. All of the classical economists from Adam Smith, to David Ricardo to Karl Marx where aware of the forces of supply and demand. Yet they didn’t think supply and demand were sufficient for a theory of value. Instead supply and demand were seen as the mechanism through which value operates.

For Marx, the theory of value is more than just a theory of prices. Price theory might help us make business decisions, but value theory is concerned with deeper social questions like “Why do the products of labor take the form of commodities with prices?” and “What sort of social relations between producers are necessary in order for this to happen?” In the process of answering such questions we can build a theory of the social relations of a capitalist society in all of its antagonism and dynamism.

Bourgeoise economic theory takes the opposite approach. It abstracts away from production relations, treating all economic phenomena as the product of individual psychology. It focusses on prices and not on value. [Insert critique of circularity of marginal utility here?]

There are 3 basic points from other videos in this series that we should summarize before we move on to discussing supply and demand.

1. Value is Socially Necessary Labor Time. Prices fluctuate all the time. I could go on Ebay right now and try to sell my autograph for a million dollars. That would be me setting a price. Anyone can set any price any time. Yet, over time market forces exert pressure on this seemingly lawless process of setting prices. If I actually want to sell the things I produce I will be forced to sell at the market price. This competition at market price will force me to discipline my own labor time so that I am producing as close to the social average as I can. Beneath these fluctuations of price it is this social labor time that is being regulated. This social labor time then should be the focus of economic analysis, not the temporary movements of prices. Price fluctuations are the mechanism by which a socially necessary labor time is established.

2. Money represents labor in the abstract. How do we represent the value of things? With money. More money equals more value. Thus all of the qualitative differences between different labors become merely quantitative expressions of more or less value, more or less labor time. If the price of coffee fluctuates above its value then coffee makers will receive more value in exchange then they actually create with their labor. If the price of coffee fluctuates below its value then coffee makers will be giving up some of the value they create.

3. Price is a special form of value. Value is a social process that involves many stages, production, exchange, consumption. Price is a particular form taken by value. It is an instance of the value of a commodity being measured against the value of money.

Supply and Demand

Now on to supply and demand…

What does it mean to say that supply and demand meet? It means that at a certain price no more or less of a commodity will be produced or demanded. It is a stationary point, often called an equilibrium price. In reality this equilibrium point is never reached. Supply and demand constantly fluctuate. But we’ll critique this notion of equilibrium later. For now it will allow us to make some important observations.

1. If supply and demand are in balance they cease to explain anything. If demand is way above supply then obviously demand is exerting a stronger force on price, pulling prices higher than the equilibrium price. If supply is way higher than demand then this oversupply is exerting a stronger force, depressing prices. But when the two balance out they cease to explain anything. How do we explain why the equilibrium price of coffee is lower than the equilibrium price of cars? We can’t using just supply and demand.

2. Supply and demand also require that we have some theory for the forces behind supply and demand.

What creates demand? As much as bourgeois theory likes to dwell on the psychological basis of demand we never hear it mentioned that psychological desires are conditioned by their social environment. We are taught what to desire and how to desire it. In a capitalist society dominated by marketing we are taught to desire commodities and to attain them through the market.

Even more importantly though, demand isn’t just an abstract notion of what people want. Effective demand is what matters economically. Effective demand is demand backed up by actual purchasing power. I may want a million dollar yacht but since I don’t have a million dollars I don’t have any effective demand for yachts. This means that consumer demand is actually a process whereby people measure their desires against the amount of value they have to spend. What determines the amount of value people have to spend? The amount of money they have been paid for their work! Demand is essentially a process where consumers compare the value of their labor to the value of the labor in the products they want to purchase. Because this value takes the form of money and commodities we don’t have to consciously think that we are comparing labors. Yet we do it anyway because labor is what forms the basis of our income and the products of our desire. [this paragraph could be rephrased more elegantly.]

Demand isn’t just consumer demand. Capitalists also have demand for capital goods, that is goods destined for production. And of course the rich have demand for all sorts of luxury goods that the ordinary consumer could never buy: yachts, jets, mansions, etc. Though mainstream economics makes blanket observations about the rationality of consumer habits empirical evidence shows that demand changes radically with income. Changes in price have very little effect on the purchasing behavior of the filthy rich, while they have drastic changes on the behavior of the poor.  (Actually, more specifically the argument is that changes in income change the proportion at which goods are demanded, the “ordinal ranking”. This shows that consumer utility is not an autonomous psychological state but one conditioned by an already existing distribution of prices and income.)

We should also raise the objection that mainstream economics likes to conflate the motives of producers and consumers. This is most blatantly seen in the fact that the supply and demand curves are drawn to look like mirror images of each other. Bourgeois economists claim that just as producers seek to sell at price which maximizes their profits consumers buy at a price that maximizes their utility, giving them a “consumer surplus”. Yet unlike capitalist profit, a real objective magnitude measured in money, this consumer surplus can’t be found anywhere in the real world. It exists only in the minds of economists. Money is a clearly objective phenomenon. Psychological satisfaction is not an objective thing, it can’t be measured in any numerical amounts, and there clearly can be no such thing as a surplus of subjective satisfaction over an objective amount of money spent. Such logical mistakes abound in marginal utility, reducing its theories to circularity and meaninglessness.

What creates Supply?

Obviously supplies of commodities must be created by labor. Labor is not the only “factor of production”, yet it is the only one that we have control over as a society, and thus the one that is important in economic analysis. The sun, water and land are crucial for agricultural production. Yet these factors are pre-existing gifts of nature. If we are to try to exert control over them so that we can ration them differently through irrigation, improvements in fertility, or greenhouses, these improvements will require labor.

Sometimes people argue that the rareness of commodities are what give them value. But the high price of a diamond or a pearl reflects the great amount of labor that must go into locating, and extracting such a resource. A diamond buried deep beneath the ground has no value at all until someone takes the time to find it, dig it up and transport it to market.  The true scarcity is human labor time. We only have so much of it at any given moment to devote to the production of different things.

Changes in productivity have an effect on the amount of labor that is required to create a commodity. New machines and new production techniques all make it possible to produce more commodities more cheaply. These machines and techniques all represent past labor. Marx was very interested in theorizing these changes in productivity and their effect on values and social relations over time.

We might criticize some of the assumptions behind the neoclassical supply curve as well. For one it makes the ridiculous assumption that production will continue at super low or super high price. In reality, if prices are really low cadillac manufactures won’t just produce one car a year. They’ll just go out of business. And if prices are really high this will attract more investors into the market which will eat into profits and bring prices back down.

[The supply curve also assumes the same level of productivity across industries. In contrast Marx has a marginal concept of productivity which accounts for the effect on prices when producers produce at different levels of productivity. Specifically this relates to his theory of rent in agriculture. But this is really complex and I don't know how to summarize it in this video.]

Time

We often heard it said that value is subjective implying that consumer demand is the determining influence on price. [Since for Marx price is only a momentary form of value, the critique is a bit complex. Where to start first? With idea that demand determines price? Or that value is subjective? I think that it's important to show that these are two separate yet related questions]  The only way that demand can determine price is if we hold supply as frozen. If all labor stopped today then demand would be the only changing factor. A rise in demand would raise prices. Such a perspective corresponds well to the needs of bourgeois ideology which likes to both abstract away from all production relations, and paint the present social order as an eternal, timeless unchanging order.

But when we realize that the entire point of demand and supply is that they adjust to each other then we must realize that a rise in demand will have a corresponding effect on supply. More of a good will be produced, more labor will go into it. And once supply and demand balance again they don’t help us explain the long term price of a commodity.

The long term price of a commodity corresponds to its value. Temporary fluctuations may cause the price to rise above or below its value. But these fluctuations can’t change the amount of labor that actually goes into the production of the commodity. The only thing that changes this is changes in productivity.

Equilibrium doesn’t exist

Though talking about the balance of supply and demand helps us make some observations about the relation of value and price, it must be realized that supply and demand rarely ever meet. The market is a place of constant fluctuations, constant guessing. The approach of mainstream economics is to ignore these fluctuations and to build models which just assume that an economy is always in equilibrium.

Marx has a more subtle approach, one that embraces these fluctuations. Firstly, since for Marx price and value diverge all of the time, his theory isn’t disturbed by these fluctuations. In fact the fluctuation of price above and below value is the mechanism by which the law of value works. When prices rise above values this attracts investment, reapportioning labor to new sectors. When price falls below value labor must be withdrawn from that sector. But unlike bourgeois theory which treats changes in demand as the dominant force in these fluctuations, Marx stresses changes in technology caused by competition to produce under the socially necessary labor time.

At one level we can say that these fluctuations are just disturbances that oscillate around values. Thus we can abstract away from supply and demand to study the underlying movement of value, of labor time. This approach is taken by Marx at times and by many contemporary Marxists.

At another level though we can show that it is hard to even talk of an equilibrium price at any level of relevance. Critics of equilibrium like to show that there is no justification for assuming that once a price is not at equilibrium that it will ever converge to equilibrium. Prices will only converge upon equilibrium under certain conditions.

Conclusions
Marx’s treatment of the law of value gives us a much more nuanced and profound understanding of the forces and dynamics behind supply and demand than either the classical economists before him or the neoclassical school of thought that followed him.

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One Response to Law of Value- 10. Supply and Demand (draft)

  1. Pingback: Law of Value- drafts for the upcoming video series « Kapitalism101

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