Sismondi’s position during the general glut controversy

From Nouveauxprincipes onwards, discussions on macroeconomic equilibrium are central for Sismondi and are the consequences of the serious doubts he entertained on the coordinating abilities of the price system.

In this debate, Sismondi argues fundamentally that an increase in the volume of production does not necessarily guarantee an increase in income.

Among the new principles of political economy, I have thought to establish [that] there is one that offends more than the others conventional wisdom, which nevertheless appears to me more important than any other to acknowl­edge, because it explained the violent crises that have without end plagued industry for ten years, and which would make a start in preventing their return. I have endeavoured to prove that increases in the production of all objects of our needs and desires are a blessing only when they are followed by an equivalent consumption; that similarly savings in all factors of pro­duction are a social benefit only if everyone who contributes to production continues to obtain from it an income equal to what he received before such savings had been introduced; this can only be done by selling more products. I have therefore concluded that increases in production, in a given nation, could be a benefit or an evil, depending on circumstances, whereas all other writers on political economy [in particular Say and Ricardo] have regarded them invariably as a benefit.

(1827, 497; 1991, 595)

The fact that aggregate supply tends to be greater than aggregate demand is directly associated with distributional issues.

Stemming from the mathematical sequential model of Richesse commerciale (1803, 80-2), the central idea that production at the source of income might not be demanded in the form of consumption (or investment) is at the origin of his under- consumptionist theory of crises: “If [the] annual products brought to the market for which they were intended did not find any consumers there, the nation would ruin itself” he wrote already in 1817 (1816-17, 50). The Smithian^[209] macroeconomic bal­ance between production, income, consumption, saving and investment is in doubt: supply does not create its own demand.

Starting from a hypothetical family economy, in which the paternal author­ity adjusts expenses (and in particular the volume of its capital) to the size of its income, Sismondi explains that when wages and capital are introduced into agri­cultural and manufacturing productions, this proportionality is made practically impossible. In an industrial society, rich and poor have widely different (and irrec­oncilable) consumption programmes. To avoid insolvency and bankruptcy, the rich must sell. To sell he must lower prices. It does this only by reducing wages and resorting to technical progress. Both solutions decrease the purchasing power of the wage labour force; moreover, the second increases unemployment. The machine replacing man, the population in industrial countries is too large. If technical pro­gress and investment are to continue, the size of the working population has to be reduced. The population being too important, reducing it by increased misery and famine, however, is hardly a civilised solution. Yet this is the wrong path on which chrematistic political economy leads the society.

Unlike Smith, for whom savings essentially feed the wage fund, Sismondi, like Ricardo, comes up clearly against the “problem of machines” and industrialisa­tion: mechanisation induces a substitution of labour by capital; the accumulation no longer induces an increase in the demand for labour. In addition, a slowdown in the rate of increase in the capital stock (as in the aftermath of the Napoleonic wars) causes a contraction in the demand for labour. These two phenomena separately, or cumulatively, cause a fall in the wage rate, a fall in overall demand and unem­ployment. Just like Ricardo in his revised chapter on machines in the third, 1821, edition of his Principles, Sismondi argues much earlier in his explanation that by introducing a machine which reduces gross product (and the number of employ­ees), the employer increases the net product (and consequently his rate of profit). The development of machinery thus causes a decrease in employment not off­set by the decrease in prices enjoyed by consumers. Whereas Ricardo sees in it a self-correcting phenomenon of short period, Sismondi considers it as a crippling tendency of the capitalist system. The division of labour combined with technical progress therefore introduces a new instability in the Smithian model.

Due to the imperfect mobility of factors, an increase in fixed capital,

in giving movement to new labour, though it does not destroy the balance between production and consumption, renders it much more complex. The new produce thus obtained must, at last, find a consumer; and though it may be generally affirmed, that to increase the labour is to increase the wealth, and with it in a similar proportion the revenue and the consumption; still it is anything but proved, that by too rapid an increase of its labour a nation may not altogether deviate from the proper rate of consumption, and thus ruin itself by economy as well as prodigality.

(1816-17, 56)

In other words, the acceleration of the level of production resulting from the increase in the rate of accumulation of fixed capital does not necessarily create the income necessary for its consumption. By investing, the rich “replace” more capi­tal and less labour than the poor do: a wealthy manufacturer or farmer invests an ever-larger amount of his income in fixed capital to the detriment of the wage fund. The problem is, in Sismondi’s opinion, that a raising number of workers cannot permanently be employed in the production of capital goods.^[211] Only the production of commodities of everyday use could bring about full employment.

Despite frequent allusions to what was later to be called Keynesian shortages of effective demand, Sismondi never suggested against Ricardo and Say the pos­sibility of economic policies aimed at closing the gap between aggregate supply and aggregate demand: “one always sees that a consumption increase may alone determine an increase in reproduction, and that on its part consumption can only be determined by the income of the consumers” (1827, 94; 1991, 107). The diagnostic is crystal-clear, even if alternatives to a redistribution of income are sorely lacking.

As a matter of fact, for Sismondi, shortfalls in aggregate demand can only be tackled by changing the distribution of income, which itself works through of a more equitable distribution of property, the only way to guarantee, in his opin­ion, a stable and predictable income.

And for him, everything is played out on the labour market populated by employ­ees who are the sole owners of their labour power. In this market, the employee is dependent on the production decisions of the rich. The asymmetry of the forces involved forced him to adapt to the fall in wages and/or the increase in working hours dictated by competition. The rapid increase in production, far from being advantageous to the working classes, implies a sacrifice of its free time, its material well-being and, ultimately, of its happiness. However, and once again, Sismondi’s position rests on the questionable assumption that the lower prices made possible by technical progress do not lead to an expansion of the labourers’ consumption. Even if the rich increase their capital by diminishing their consumption, the labour­ers might not benefit, because it is not certain that there is a demand for the new production. Finding its paroxysm in overproduction crises, unlimited competition threatens society in its foundations.

Sismondi thus places at the centre of his reflection the problem of the distribu­tion of the increase in production linked to division of labour and technical pro­gress between the different social classes. The income inequalities characterising capitalism do not reduce the bundle of goods consumed by a community, but, in determining its composition, are a major contributing factor to unemployment and depression. He saw with great acuity the need to support aggregate demand through a re-distribution of income: “It is the diffusion of wealth, not its accu­mulation, that increases consumption”. In addition, this distribution responds to a principle of justice because only is admissible “an increase in wealth which is accompanied by the increase in wealth of the most numerous class”; because “human society... is shaken in its foundations whenever one of its members is crushed” (1816-17, 56, 84).

In short, the deficiency of aggregate demand which is at the origin of the crises can only be prevented by a modification of the distribution of income, itself a func­tion of a new distribution of property, the only source in Sismondi’s eyes of a stable and predictable income.

5.