(1) “The market price is determined by various circumstances which express themselves in the relation of demand and supply and which, as such, influence “the mind” of the operators on the market. This is a very important discovery!” (p 164)
Who could disagree, for example, that the state of the weather might influence potential buyers of ice-cream? But, who could also disagree that affecting their mind is itself the current price of ice cream? Who could disagree that a major factor determining the price at which capitalists seek to sell their ice-cream is whether that price produces for them, at least, the average rate of profit? And, what is a limiting factor on that other than the cost of production?
(2)“In connection with the conversion of commodity values into cost-prices, “various circumstances” are taken into account which as “reasons for compensation” influence the mind or are reflected in the mind. All these reasons for compensation, however, affect only the mind of the capitalist as capitalist and stem from the nature of capitalist production itself, and not from the subjective notions of buyers and sellers. In their mind they exist rather as self-evident “eternal truths”.” (p 164)
So, a capitalist will seek to, at least, make average profit, and, where possible, to invest their capital where it will produce the highest rate of profit. A capitalist producing ice cream might also have their mind influenced by the fact that, in hot weather, the demand for their ice cream will rise, so that, during such periods, they may be able to raise their price above its “natural price” or “equilibrium price”. And, similarly, capitalists operating in spheres that have higher risks may seek to compensate by requiring a higher than average rate of profit, so that supply in such spheres is restricted, until prices reach the levels required to produce these higher than average profits, or as Marx sets out in Capital III, to cover the higher costs of insurance that capitalists in those spheres must pay, which raises their costs.
But, all of these “effects on the mind” only explain the movements of supply and demand, so as to determine market prices, and their digression from the equilibrium price. By implication, thereby, they rely on the existence of such an equilibrium price, rather than explaining it.
Anyone reading Bohm-Bawerk's later critique of Marx will find there is little in it that goes beyond Bailey's critique of Ricardo's theory of value. But, likewise, there is little in Bailey's critique of Ricardo that had not been raised already by other authors.
(3)“Like his predecessors, Bailey catches hold of Ricardo’s confusion of values and cost-prices in order to prove that value is not determined by labour, because cost-prices are deviations from values. Although this is quite correct in relation to Ricardo’s identification [of values with cost-prices], it is incorrect as far as the question itself is concerned.” (p 164)
Its worth remembering that where Marx speaks of “cost-prices”, here, he means price of production. Bailey's attack on Ricardo, here, is essentially copied by Bohm-Bawerk, in his critique of Marx. The only difference is that Bohm uses Marx's transformation of exchange-values into prices of production to suggest that this represents an overturning, by Marx, of his own theory of value. In fact, as seen earlier, Ricardo, and his followers, did recognise that market prices varied from exchange-values. The problem was not that they did not recognise that problem, but that they were unable to explain the reason for it correctly.
(4)“In this context, Bailey quotes first from Ricardo himself about the change in the relative values of commodities in consequence of a rise in the value of labour. He quotes further the “effect of time” (different times of production though the labour-time remains unchanged), the same case which aroused scruples in Mill. He does not notice the real general contradiction—the very existence of an average rate of profit, despite the different composition of capital [in different industries], its different times of circulation, etc. He simply repeats the particular forms in which the contradiction appears, and which Ricardo himself—and his followers—had already noticed. Here he merely echoes what has been previously said but does not advance criticism a step forward.” (p 164)
It was left to Marx to explain that it was competition which drives towards the creation of an average rate of profit, which plays a crucial role in explaining the divergence of prices of production from exchange-values. The average annual rate of profit is dependent on two factors as mentioned by Marx above. Firstly, those capitals with a low organic composition, i.e. which employ relatively more labour, will produce more surplus value, and a higher rate of profit. Competition to obtain this higher rate of profit will lead to more capital accumulating in that sphere, so that supply rises, and the price of these commodities falls below their exchange-value. The opposite happens in those spheres where the composition of capital is high. But, the second factor that plays a part, in relation to the average annual rate of profit, is the rate of turnover of capital.
A capital that turns over more rapidly will have a higher annual rate of profit than a capital of the same organic composition that turns over more slowly. Because it is the annual rate of profit that capitals seek to maximise, they will accumulate more in those spheres with a higher rate of turnover than those with a lower rate of turnover. Again, therefore, the result will be that this greater accumulation of capital will increase supply of commodities, in those spheres, which will then push down prices of production to below the exchange-values of those commodities.
Bailey himself is forced to accept that cost of production is a major factor in determining the value of commodities. Modern, orthodox economists are also forced to grudgingly accept that production, as well as exchange, plays a part in determining market prices, although they answer this by explaining production costs on the basis of the market price of the factors of production, again determined by demand and supply for these factors.
Bailey, “in the last analysis expresses his agreement with Torrens that value is determined by the capital advanced, which is correct in relation to cost-prices but meaningless if it is not evolved on the basis of value itself, that is, if the value of a commodity is to be derived from a more developed relationship, the value of capital, and not the other way round.” (p 164-5)
That is also the reply to Bohm-Bawerk's criticism of Marx. Marx's development of the concept of price of production does not overturn the theory of value, but raises it to a higher level. The concept of price of production does not overturn the concept of value, because the former is impossible without the latter.
Bailey's final objection to Ricardo is also repeated by Bohm-Bawerk in his critique of Marx.
(5)“The value of commodities cannot be measured by labour-time if the labour-time in one trade is not the same as in the others, so that the commodity in which, for example, 12 hours of an engineer’s labour is embodied has perhaps twice the value of the commodity in which 12 hours of the labour of an agricultural labourer is embodied.” (p 165)
But, again, this criticism has been encountered earlier, and easily dismissed. Just as length is not measured in actual concrete feet, belonging to different human beings, all of which differ, neither is labour-time measured by concrete labour, but by abstract labour.
“What this amounts to is the following: A simple working-day, for example, is not a measure of value if there are other working-days which, compared with days of simple labour, have the effect of composite working-days. Ricardo showed that this fact does not prevent the measurement of commodities by labour-time if the relation between unskilled and skilled labour is given.” (p 165)
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