Friday, 31 July 2015

Capital III, Chapter 10 - Part 24

“The price of production includes the average profit. We call it price of production. It is really what Adam Smith calls natural price, Ricardo calls price of production, or cost of production, and the physiocrats call prix nécessaire, because in the long run it is a prerequisite of supply, of the reproduction of commodities in every individual sphere.” (p 198)

This is the important point that orthodox economics fails to grasp. Its starting point is the subjective valuation of the individual consumer. It says, the value of any commodity is only what someone is prepared to pay for it. The market value is then the aggregate of these individual valuations. But this is an inversion of reality. The reality is that the value of a commodity is what it costs to produce it including the surplus value, or average profit.

If no one, or not enough people, are prepared to pay this price it does not get produced. It never gets to the stage of being a commodity, because no capitalist will produce such a commodity at a loss, or at least not for long. The only role for the individual, subjective valuation of consumers is then to determine how much they will demand of this commodity at the market value.

It is no different than the situation facing Robinson Crusoe, or a peasant producer. No matter how much they might prefer potatoes to fish, or vice versa, it does not change the price of one measured in terms of how much of the other they have to give up to obtain it. If it takes 10 hours to produce 10 kg. of potatoes, and 20 hours to produce 10 fish, if I want to have 20 kg. of potatoes, I have to pay for it with 10 fish that I cannot produce. That remains true, however much I might prefer potatoes to fish, or vice versa. All my preferences can determine here is what my demand for each will be, how much of my time I devote to one rather than another.

But, the price of production is merely the phenomenal form of this underlying value relation, as it is manifest under capitalist production. As such, it is a superficial reflection of it, which obscures the underlying value relation.

“We can well understand why the same economists who oppose determining the value of commodities by labour-time, i.e., by the quantity of labour contained in them, why they always speak of prices of production as centres around which market-prices fluctuate. They can afford to do it because the price of production is an utterly external and prima facie meaningless form of the value of commodities, a form as it appears in competition, therefore in the mind of the vulgar capitalist, and consequently in that of the vulgar economist.” (p 198) 

The establishment of a general rate of profit across spheres of production, is the result of that competition as capitals continually seek to move out of those spheres where the rate of profit is low, and into those where it is high. Supply falls in the former and rises in the latter, reducing prices and profits. But, because this process also establishes a single market value for the commodities of any particular sphere, this means that within it, the actual profits made by different firms will vary, because each firm has different cost prices. Those firms with lower than average costs will make surplus profits above the average, whilst those with higher than average costs will make below average profits. Whenever there is overproduction or some other crisis, it will be the latter that will be the first to go under, allowing the former to take over their capital and market share, thereby facilitating the process of the concentration and centralisation of capital.

Surplus profits may also arise if a particular sphere can avoid the values of their commodities being converted into prices of production. This is particularly the case in agriculture where the monopoly ownership of land then gives rise to rent, as will be analysed later. But, wherever monopoly exists, this will be the case.

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