Friday, 1 March 2013

Market Price

The market price of a commodity is the price it has in a particular market. In fact, for this reason, the same commodity at the same time can have several market prices, depending upon which market it is being sold in. A commodity might, for example, sell at £10 in Birmingham, and £12 in Manchester, reflecting the fact that the specific conditions of supply and demand are different at that time in the two cities. Competition should equalise these market prices, because merchants will buy the commodity at £10 in Birmingham, and sell it at £12 in Manchester.

This process is called arbitrage, and happens all the time on money markets, for example, where traders take advantage of variations between different currency pairs. If, £1 = $2, and $1 = 10 Baht, then £1 should equal 20 Baht. But, if in fact, it doesn't, there is an opportunity for arbitrage. Suppose, traders spot that £1 is trading at 20.001 Baht. £1 billion will buy, 20.001 billion Baht. But, if $1 = 10 Baht, these 20.001 Billion Baht will buy $2.0001 billion. The trade will have netted a gain of $.0001 billion or $100,000. Given that such trades are usually conducted not on billions of pounds, but tens of billions, it can be seen how vast amounts can be made from small variations.

Some gambling syndicates also use this principle to take advantage of small variations in odds offered by different bookmakers. If a large enough number of people can be brought together, its then possible to lay bets on a range of options with these different bookmakers so that a guaranteed profit is made.

This illustrates why even in sophisticated and developed markets a range of market prices can exist simultaneously, because a series of frictions exist that prevent competition from equalising prices. That can simply be because supply cannot rise fast enough to meet a surge in demand, to the absence of perfect knowledge amongst market participants. The existence of these different market prices does not at all undermine the Labour Theory Of Value, precisely because it is a theory of Value not of market prices. On the contrary, unless you understand the nature of Value, it is impossible to understand market prices, because the latter are ultimately determined by the former.

Market prices have to be distinguished, therefore, from Exchange Value, as well as from Price Of Production, and from Price.

Commodity production arose long before Capitalism. As Marx points out, its origin arises with the sporadic trade between different tribes and communities. This trade develops, as a result of the Division of Labour, into the exchange of commodities between individual producers within communities. This production, and exchange of commodities was developed enough even 2,400 years ago, at the time of Plato, for him and other Philosophers to concern themselves with trying to fathom the nature of Value, and to recognise the division within the commodity between Exchange Value and Use Value.

But, under slave societies like those of Rome and Greece, theorised by Plato, and under feudal societies, the commodity production that takes place is only on a small scale. Its purpose is only to enable the peasant producers within these societies, to obtain those commodities they cannot produce for themselves, by exchanging their own surplus production for them. There is then no dynamic forcing these peasant producers, who make up the vast bulk of these societies, to expand their production of commodities beyond these limits. They therefore, engage in only Simple Commodity Production i.e. they only put back into the production of these commodities what they have previously consumed for their production.

The exchange of these commodities under simple commodity production, initially takes the form of barter, and direct labour service. For example it was common for a peasant to work on the land of a blacksmith, for the same time that the blacksmith was taking to shoe the peasant's horse. This underlines the true nature of Value as being an amount of labour-time rather than some inherent property of a commodity. Over time, however, the development of trade, and money to facilitate that trade, results in these commodities being exchanged for some money commodity. So, at this point under simple commodity production, commodities are produced and exchanged at their Exchange Value against other commodities, and then against Money, which operates as the Universal Equivalent Form Of Value. This Exchange Value measured against the money commodity is its price.

But, for the reasons set out above, these commodities will in reality also sell at market prices that will differ from the Exchange Value, and Price. In fact, it is precisely for that reason that a class of merchants arises who make profits from the process of arbitrage described above. At the same time, it is precisely because of the actions of these merchants, and the development of larger markets that more detailed knowledge of relative costs and prices is developed, and Exchange Value takes on a more developed form. Merchants can only make profits if they have more accurate knowledge of real production costs, who the most efficient producers are etc., and where the best prices can be had. Producers can only ensure they are not being completely ripped off, if they know what prices their commodities are selling for in different markets, and if they know how their own costs compare with those of other producers.

As Marx states once commodity production and exchange develops on this basis, Capitalism becomes inevitable. Once money starts to be exchanged for these commodities, it can be used to buy and pay for everything. The ruling classes demand payment of taxes in money rather than in kind, which in turn provides an added incentive for peasant producers to turn their attention to producing commodities. The same process is seen today in developing economies where peasant producers are led into the production of cash crops, usually for export, for the same reasons. But, once peasant producers begin to exchange their surplus production for money, that money itself can be hoarded, as opposed to the situation under barter, where the commodities obtained in exchange are acquired for the purpose of consumption. Hoarded money provides the basis for the development of Capital itself.

The more efficient peasant producers of different types of commodities are led, therefore, to maximise their money income by specialising in the production of those commodities in which they have a comparative advantage. As Lenin sets out in The Development Of Capitalism In Russia this provides the basis for the differentiation of the peasantry. The more efficient peasant producers, accumulate money, which they use to buy or rent additional land, to buy means of production such as horses, and to hire wage labourers. The less efficient peasant producers become increasingly unable to compete, and forced to sell their labour-power to the more efficient peasants. The latter become transformed into bourgeois, and the former into proletarians.

On this basis commodity production and exchange is necessarily extended, so that it becomes generalised commodity production. But, this is not yet Capitalism. As Marx describes, Capitalism only begins from the point at which the production process itself is conducted on a capitalist basis. That only develops in stages. For the reasons set out elsewhere, Industrial Capital inserts itself in the production process in those industries where the Organic Composition Of Capital is lowest, because it is in these industries that the Rate of Profit is highest.  For example, Marx notes that machine production, which he equates with Capitalist production proper, is only applied to the manufacture of machines themselves, at a very late stage.  It continues until then to be dominated by handicraft production and manufacture.  It requires a lot of Constant Capital relative to the Labour-Power employed.

Capital inserted itself first into those industries where
 the Organic Composition Of Capital was lowest, and
 Rate of Profit was highest.  That was things like agriculture,
spinning and weaving.   For a long time, by contrast, in those
areas like iron production, where the Organic Composition
of Capital was high, and the Rate of Profit low, Capital was
late to enter.  Production remained for a long time on a
pre-capitalist basis, dominated by the iron masters like
Abraham Darby.
As Marx describes, at this stage, the Rate of Profit in different industries differs widely. The tendency towards an average rate of profit only develops as Capitalist production itself spreads across the economy, and competition leads to Capital flooding into those areas where the rate of profit is highest, thereby reducing prices below Exchange Value. As this process proceeds, Capital is led to insert itself into one area of production after another, and these now transformed output prices become the input prices of all other producers. Rather than commodities exchanging at Exchange Values, (the money equivalent of which is their price) they now Exchange at these transformed Prices of Production.

But, just as commodities sold in different markets at a range of market prices rather than at their exchange value or their price prior to Capitalism, so under Capitalism they sell at a range of market prices rather than at their price of production. So, for example, a car might sell at one price in one car dealership, and at another in their competitor's. The price of an aeroplane ticket is higher at peak times than off peak times, and so on. But, all of these are ultimately variations around a central point. Prior to Capitalism that central point was the commodity's Exchange Value. Under Capitalism, that central point is its Price of Production.

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