Theories of Surplus Value, Part II, Chapter 10 - Part 29

[c) Ricardo’s Two Different Definitions of “Natural Price”. Changes in Cost-Price Caused by Changes in the Productivity of Labour]

At the start of Chapter IV, Ricardo defines natural price as the value of the commodity. What he means by this is its exchange-value. In this context, he also means what for Marx is its market value, i.e. the social value around which its actual market price fluctuates. It is the equivalent of the equilibrium price in orthodox economics. However, Marx says, throughout the chapter, Ricardo actually means something completely different, when he refers to natural price. What he actually means is the price of production, and this is different to the exchange-value.

“Thus, instead of showing how competition transforms values into cost-prices, i.e., creates permanent deviations from values, he shows, following Adam Smith, how competition reduces the market-prices in different trades to cost-prices.” (p 211)

But, of course, these cost-prices, prices of production, should have been the starting point for analysing the variation of market price, not vice versa. Both Smith and Ricardo assume that commodities exchange at their values, and that this value is the natural price, but that, in practice, market prices diverge from it, but only temporarily, as a result of demand and supply.

““In making labour the foundation of the value of commodities, and the comparative quantity of labour which is necessary to their production, the rule which determines the respective quantities of goods which shall be given in exchange for each other, we must not be supposed to deny the accidental and temporary deviations of the actual or market price of commodities from this, their primary and natural price” (l.c., p. 80).” (p 211) 

But, later, Ricardo says,

““Let us suppose that all commodities are at their natural price, and consequently that the profits of capital in all employments are exactly at the same rate, or differ only so much as, in the estimation of the parties, is equivalent to any real or fancied advantage which they possess or forego” (l.c., p. 83).” (p 211) 

But, if each capital obtains the average profit, the prices of commodities cannot be equal to their exchange-values. Conversely, the natural price or equilibrium price, that Ricardo is using here cannot be the commodity value. It must be the case that capitals of equal size will produce different quantities of surplus value, dependent upon the organic composition of those capitals, and their rate of turnover, if commodities are sold at their value. It is only possible for these capitals to produce the same amount and rate of profit if the commodities are sold at prices of production, not at their values.

“By equalisation through competition, Ricardo therefore understands only the rotation of the actual prices or actual market-prices around the cost-prices or the natural price as distinct from the value, the levelling out of the market-price in different branches of production to general cost-prices, i.e., precisely to prices which are different from the real values in different trades.” (p 212) 

Ricardo actually describes the situation correctly in relation to the role of competition in creating a general rate of profit, but the reallocation of the total surplus value that results from this does not result in prices being equalised to values, but to prices of production.

““It is then the desire, which every capitalist has, of diverting his funds from a less to a more profitable employment, that prevents the market-price of commodities from continuing for any length of time either much above, or much below their natural price, It is this competition which so adjusts the changeable value of commodities,” “that after paying the wages for the labour necessary to their production, and all other expenses required to put the capital employed in its original state of efficiency, the remaining value or overplus will in each trade be in proportion to the value of the capital employed” (l.c., p. 84).” (p 212) 

The surplus value is reallocated by this very process. In those spheres where the surplus value is high, because the organic composition of capital is low, and the rate of turnover is high, the surplus value is reduced, because capital enters this sphere, and the increased supply of commodities pushes prices down below their exchange-value. The opposite occurs where the organic composition of capital is high, and the rate of turnover is low.

“To bring this adjustment about the price of one commodity must be raised above, and that of the other must be depressed below their respective real values, It is not the value of the commodities but their cost-price, i.e., the expenses they contain plus the general rate of profit, around which competition forces the market-prices in the different trades to rotate.” (p 212)

At the end of the chapter, therefore, Ricardo says that, in his further analysis, he will ignore these deviations of market prices above and below the prices of production. That is, of course, quite valid and Marx does the same thing. But, as Marx says, Ricardo has thereby failed to analyse the constant divergence of the prices of production from values.

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