Post Covid Prices and Revenues - The Theory Bit

The Theory Bit 

Many pundits are predicting that, because government imposed lockdowns on social activity have created the worst economic slowdown in 300 years, the period head will be characterised by disinflation or deflation, along with lower, even negative, interest rates for longer. Here is why they are wrong. 

Bourgeois economic theory believes that market prices and values are the same thing. It believes that values are purely subjective, depending on the immediate preferences of buyers and sellers that determine how they rank any particular commodity relative to another. But, this is clearly wrong, because it takes no account of the cost of production. If commodity A costs £10 to produce, and the average rate of profit is 20%, then capitalists will not produce this commodity if buyers are not prepared to pay at least £12 for it. Its true that demand, therefore plays a part. No commodity is a commodity unless it is also a use value, i.e. that someone demands it, but more than that, as Marx describes, they must demand it at its market value. But, the starting point, here, is the value. It is the value, the labour-time required for production that is the first consideration. From that is determined its market value, the average value for this commodity, across all producers, and only when that is determined can the question even be asked as to whether it constitutes a use value, i.e. whether there is demand for it, at this market value. The demand, i.e. the subjective preferences of consumers, as to whether for them this commodity, is a use value or not, and, if it is, how much they want to buy, can only determine the level of demand at the market value. It cannot determine the value of the commodity itself, which is already objectively determined. 

If buyers are not prepared to pay £12 for the commodity, any capitalist producing it would not make the average profit of 20%, and so, even looked at in terms of subjective preferences, for a capitalist to still then produce this commodity would require that they have a preference for the £12 – x they can get for producing commodity A, as against the £12 + x they could get from producing some other other commodity, which sells at or above its market value. That would be irrational, because one thing we know about the money commodity is that it is homogeneous, i.e. one £1 is the same as another £1, in terms of use value. To arrive at such a position is what is called in formal logic a reductio ad absurdum.  If buyers are prepared to pay £15 for commodity A, on the other hand, that would bring its producers a 50% profit, way above the average. Existing producers would produce more, additional producers would start producing it, and the supply would rise until its market price falls to the £12 at which only the average profit is being produced. 

This £12 price is what Marx calls the price of production. It is the cost price plus the average profit. Where, under precapitalist modes of production, the market price of commodities revolves around their market value, under capitalism, market prices revolve around this price of production. If market prices fall below this price of production for any sustained period, producers will cut back supply, or leave the industry to use their capital elsewhere, and as capital in general accumulates, less of it would accumulate in these lower profit areas. That causes supply to contract so that prices rise, and vice versa. 

What determines the price of production is two things – the cost of production and the average profit – but both these things are determined by values, at least that is the case if all production is considered in total. The cost of production is determined by the value of the constant capital consumed in production plus the value of labour-power consumed (wages). The average profit is also determined by values, because the total surplus value produced is equal to the total of new value created (total hours worked) minus the total value of labour-power (wages). The average profit is this total surplus value divided by the total capital advanced. 

So, prices are not subjectively determined on the basis of relative preferences, but objectively determined by values, and the average profit, which itself is objectively determined by values. The other element of price is its unit of measurement. All exchange values are an expression of price, because, as Marx explains all commodities are money. I can express the price of wine, for example, as a cotton price, it being the quantity of cotton that is equal to the value of, say, a litre of wine. But, because a particular commodity, such as gold, gets singled out as the money commodity, the general commodity or universal equivalent form of value, when we talk about prices what is generally understood is the exchange value of a commodity expressed as a quantity of gold. However, gold itself is quickly represented by tokens. These tokens may be gold coins, other coins, or paper notes promising to pay the bearer a given amount of gold. Each of these is given a name that historically related to the quantity of precious metal it represented, such as the £. 

Prices therefore, depend not just on the values of commodities, or their price of production, but also on the value of the money commodity. If the value of gold falls, the prices of all other commodities rise in proportion, i.e. their exchange-value against gold rises. However, as Marx describes in “A Contribution to the Critique of Political Economy” because currency takes the form of money tokens and credit money, put into circulation as representatives of gold, if more of these tokens are put into circulation than the amount of gold required as the equivalent of the value of all these commodities, then the value of the tokens themselves falls and that is true whether these tokens are gold coins, paper notes, or electronic money that circulates digitally.

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