Capital III, Chapter 12 - Part 4

When capital does begin to establish itself in production, however, then, as Marx and Engels describe, it does so by establishing prices of production alongside the continuation of prices based on exchange values, in large parts of the economy. But, the very existence of prices of production undermines and modifies exchange values in the way Marx sets out. On the one hand, non-capitalist producers of a particular commodity are forced to accept the market price of that commodity, as determined by capitalist producers, on the basis of price of production. On the other, non-capitalist producers increasingly buy their inputs from capitalist producers on the basis of prices determined on the basis of prices of production, and so the exchange value of their own commodities is necessarily modified.

Even today this situation exists. When I bought my first house, many years ago, I needed some plastering doing, which was done by a friend of my parents. I paid him for the value of the plastering work he did, plus the cost of materials. Whilst the payment for the product of his labour was, therefore, based on value, the payment for the materials used was based on their price of production, because they were bought in the capitalist market place. It is the fact of these numerous variations that prevent even developed capitalism forming prices purely on the basis of the price of production that Marx turns to next.

3) The Capitalists Grounds For Compensating 

An abstract model has been set out whereby competition establishes a general rate of profit, because each capital tends to obtain a share of the total surplus value proportionate to the size of the capital.

“This occurs through the continual transfer of capital from one sphere to another, in which, for the moment, the profit happens to lie above average.” (p 208)

because each capital now obtains this proportionate share of the total surplus value, rather than the surplus value it created itself, instead of its commodities selling at their values, they now sell at their prices of production. That is, they sell at their cost price (which itself now is based on the price of production rather than the value of inputs) plus the average profit. 

“This movement of capitals is primarily caused by the level of market-prices, which lift profits above the general average in one place and depress them below it in another.” (p 208)

In other words, the capital in each sphere cannot simply change its prices to be the cost price plus this average profit. As Marx says previously, and as can be readily observed, market prices can only rise permanently if the rise is matched by a proportionate fall in supply, and vice versa. If capital in one sphere were to simply raise its prices, so that they were equal to the price of production, then demand for these commodities would fall. How much it would fall depends on the price elasticity of demand for that commodity. But, as demand fell, supply would exceed demand and market prices would fall back, unless supply was reduced to the level of demand.

So, market prices can only rise to equal the price of production where supply is appropriately reduced, i.e. where capital is withdrawn. Similarly, market prices can only fall to equal the price of production where capital is increased. In short, where market prices are below prices of production, the rate of profit will be below average. Capital will tend to leave this sphere to be invested elsewhere, where the highest rate of profit can be obtained. As capital is withdrawn, supply falls relative to demand, prices and profits rise towards the average.

Similarly, where market prices are higher than the price of production, profits will be higher than the average. Capital leaving the below average spheres, and new capital, will move into the highest profit spheres. Supply will rise relative to demand. Prices and profits will fall towards the average.

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