Demand, Supply and Prices of Production
Reduced levels of demand for some products also means higher costs, because costs of production are a function of the scale of production. For example, large pieces of fixed capital have to be used to their maximum capacity. If demand is reduced, and so production is curtailed, these economies of scale are lost. This may not mean that market prices of those products rise, in the short-term, because producers, facing reduced demand, have to compete more to sell all of their output. If they can't reduce their output then prices may even fall. But, falling prices, alongside rising costs means falling or disappearing profits. Capital only produces to make a profit so this can't continue; either production is reduced voluntarily or else some firms go bust, and production is forcibly reduced as a result. The result is that the capital is devalued, remaining firms pick up this capital on the cheap, and the process of concentration and centralisation is increased.
So, overall, in the immediate to short-term, we have millions of small businesses that have been forcibly closed by government diktat, or as a result of the moral panic and misinformation it has spread about the nature of the virus, and the actual risks from it. Many of these will go bust, but I will come back to the consequences of that later. Other larger businesses have been closed down for the same reasons, e.g. airlines, airports, car makers. Some of these, with large fixed costs, such as airlines, have also, effectively, gone bust. In many places, governments are having to bail them out, but there is likely to be an accelerated process of concentration and centralisation of capital, in that sector. In car production, firms have had to increase borrowing. The industry is already having to engage in large-scale capital investments and restructuring, to make the switch from petrol to electric motors. Further concentration and centralisation on a global scale is likely, here, too, and, with Brexit, there is an even greater incentive for firms to abandon Britain, and focus production inside the EU, and other large single markets. As airlines stopped flying, and began to go bust, demand for aircraft disappeared, so that plane makers like Boeing and Airbus have seen their profits disappear. Governments are not going to allow large strategic companies like Airbus and Boeing to go bust, and will bail them out. Similar companies in the sphere will go bust, and their capital and markets will be taken over by the bigger companies.
In supermarkets there has been both constraints on supply, as producers, where they were still operating, faced rising costs, at the same time that the lockdown of social activity meant that people needed to hold large stocks of food and other supplies. Constrained supply with rising demand has led to higher prices for a range of products. It has also taken the form of the removal of cheaper products from shelves and their replacement by more expensive, and branded products, as well as the removal of 2 for 1, and other multipack and multibuy offers. The general level of inflation has fallen because these higher prices for food and other essential items has been more than offset by lower prices for petrol etc., as the amount of travel has been slashed. Logically, however, those lower prices are of no benefit, because they are a direct result of consumers not buying or drastically reducing their purchases of those items. The Futures Price for oil, actually turned negative, for a time, because there was so much excess supply that those that held it faced rising costs to simply store it. It was cheaper to pay people to buy it than to pay to store it. A lower price for petrol is of little benefit to me if I can't use my car, and so don't need to buy petrol. A high price for the additional food and supplies I need to buy is, however, a distinct disadvantage. As is often the case with price indices, therefore, its somewhat of a fraud.
High prices often continue for longer than low prices, because existing suppliers can sit on high prices and profits, and it takes longer for new suppliers to enter production, but low prices do not last long, because firms making losses cut back or go bust fairly quickly.
If we consider this in the context of the theory set out at the start, then, what we have, for capital as a whole, is rising costs. In other words, for any commodity more labour is required for its production than was formerly the case. If we take a car, more labour will be required to produce the steel, plastic and so on required for its production, but, also, more labour is required in actually assembling all these components into a finished vehicle. The value of the constant capital, c, will rise, and the value of the new labour will rise (v + s), no matter how divided into variable capital and surplus value. If all commodities sold at their exchange-value, the price of cars would rise, correspondingly. However, under capitalism, commodities do not sell at their exchange-value but their price of production. Assuming that v did not change, i.e. the value of labour-power (wages) the price of production of cars would be c + v + p.
For capital as a whole, c + v + s will have risen, and so, assuming production continues on the same scale, c + v + p will have risen, because for the total capital c + v + s = c + v + p. However, unless c, v and s all rise by the same proportion, p, the average profit will now be different. If c rises proportionally more than v + s, the rate of profit will fall, and vice versa. Whether the price of cars rises or falls then depends on whether this fall in p is more than or less than the rise in c. If its more then car prices will fall, if its less then car prices will rise. If they fall this occurs by more capital being employed in car production, causing supply to rise and prices to fall. If they rise its because capital leaves the sector so that supply falls. In general, it can be seen that what determines this is the organic composition of capital. If car production employs a lot of constant capital relative to labour, a rise in commodity prices means that its increased costs will rise proportionately more than for commodities that use less constant capital relative to labour.
But, the rise in the value of input prices is not the only thing that affects the cost of production. A general rise in prices means that the value of labour-power rises. That means that the rate and mass of surplus value also falls. This causes p to fall again, now for two reasons. Firstly, the mass of p falls because the fall in the rate of surplus value (assuming a constant mass of employed labour) causes the mass of surplus value to fall, but also because the rise in v means that c + v rises, and so s/(c + v) falls. Now, however, whether prices for any particular commodity rises or falls again depends on the organic composition of capital, but in the opposite direction. Now, those commodities with a high organic composition see c + v rise by less than the average so that c + v + p falls, and vice versa.
Overall, the increase in costs means that prices rise, because more labour is required to produce a given quantity of output. Again, Britain fares worse than other countries, because its costs are raised further by Brexit. However, as set out at the start, values are not the only determinants of prices. They depend also on the value of money, or in a system based on fiat currency, the value of the money tokens put into circulation, which is itself a function of the quantity of currency and velocity of circulation. That has been vastly increased devaluing the money tokens at the same time the costs of production of commodities is rising. It means inevitably rising prices.
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