[b) Ricardo Confuses the Process of the Formation of Market-Value and the Formation of Cost-Prices]
“For the establishment of his theory of rent, Ricardo needs two propositions which express not only different but contradictory effects of competition. According to the first, the products of the same sphere sell at one and the same market-value, competition therefore enforces different rates of profit, i.e., deviations from the general rate of profit. According to the second, the rate of profit must be the same for each capital investment, that is competition brings about a general rate of profit. The first law applies to the various independent capitals invested in the same sphere of production. The second applies to capitals in so far as they are invested in different spheres of production.” (p 206-7)
But, Ricardo confuses these two processes, and thereby the creation of market values, and prices of production. Ricardo fails to deal with the first, the formation of market value, and instead examines the formation of prices of production as market prices, on the basis of a predetermined general rate of profit.
“... in Chapter IV “On Natural Price and Market-Price”, he does not deal with market-price or market-value at all, although in the above-quoted passage he uses it as a basis to explain differential rent, the excess profit crystallised in the form of rent. But he deals here merely with the reduction of the prices in the different spheres of production to cost-prices or average prices, i.e., with the relationship between the market-values of the different spheres of production and not with the establishment of the market-value in each particular sphere, and unless this is established market-values do not exist at all.” (p 207)
But, as Marx has set out, capitals of the same size, employed in different spheres will produce very different amounts of profit and rates of profit, if they sell their output at prices that are equal to their exchange values. That is because the organic composition of capital, and rate of turnover of capital, is different in each sphere. It is only possible to posit a general rate of profit on the basis that prices diverge from values accordingly.
So, it is competition, in both cases, which is the means of resolving the contradiction, but in opposing ways. Competition between suppliers, between suppliers and consumers, and between consumers acts, within a particular sphere, to reduce all of the individual values down to one single market value, but competition between spheres acts to create a single, general rate of profit.
“Competition in this second instance by no means tends to assimilate the prices of the commodities to their values, but on the contrary, to reduce their values to cost-prices that differ from these values, to abolish the differences between their values and cost-prices.” (p 208)
But, oddly, as Marx points out, Ricardo considers this second process as the reduction of prices to values. Ricardo's error stems from the fact that he starts by equating value with the price of production, and this error is facilitated by his assumption of a general rate of profit. In other words, he begins from a presumption that a general rate of profit exists, without first identifying what profit is and what surplus value is. So, he simply assumes the existence of this profit. The question of the maintenance of this average then becomes a matter of movement of demand and supply. If you assume that values and prices of production are identical, and that capitals of equal size obtain the average profit, then, if prices in one sphere rise above this level, and so cause profits to rise above the average, the cause must be an excess of demand over supply, which requires additional capital to be invested in that sphere. Marx refers later to Ricardo's correct description of the role played by credit in bringing about this reallocation of capital.
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