Inflation and Prices of Production
Under capitalism, commodities do not exchange at their exchange-value, but at prices of production – cost of production plus average profit. However, as Marx points out, in explaining the determination of prices of production, and the transformation of exchange-values, in terms of total values and prices, the identity remains, and so in terms of aggregate supply, and the general price level, no change in the basic principles set out arises. The only difference is within the realm of distribution, and competition, and the manifestation in terms of higher prices of production for some commodities, and with corresponding lower prices of production for others.
Marx explains this in Capital III, Chapters 11 and 12. In Chapter 11, he sets out the effects of a general rise in wages, and in Chapter 12 of a change in the value of commodities bringing about a change in prices of production. A general rise in wages causes a fall in the average rate of profit, and, thereby of the average profit added to costs of production. If, in the case of any type of commodity, the fall in the amount of average profit added to costs of production (k + p) is less than the rise in its costs of production, due to higher wages, then the price of production of such commodities would rise, and vice versa.
In this case, it is those commodities with a low organic composition of capital, where prices would rise, and vice versa. The means of effecting this is that capital moves out of the former areas and into the latter. Only for commodities of average composition would prices remain unchanged.
In the case of an increase in costs of production due to a rise in the value of constant capital, the total amount of surplus value produced remains unchanged, but the rate of profit falls, as a result of the rise in the value of constant capital, and so of the capital advanced. Here, it is those capitals that have higher organic composition of capital that experience a proportionally greater increase in their costs of production, which if they are to continue to obtain the average rate of profit, must see their share of total profits increase, and so must see their price of production rise, whilst those with lower than average organic compositions will appropriate a smaller proportion of total profits, and see their prices of production fall. That requires that capital leaves the higher organic composition spheres, and moves to the lower organic composition spheres, so reducing aggregate supply in the former, and increasing it in the latter, with a consequent effect on market prices.
In the case of higher wages, reducing the amount and rate of profit, this has no effect on total value of output or total prices, because total value remains c + v + s, and c has remained constant, as has v + s, with merely a different distribution of v in respect of s. For total prices to rise, it requires that the value of money, as the measure of prices falls. That is what happens as central banks increase liquidity in an attempt to enable firms to compensate for rising wages, to avoid squeezing profits. In the case of a rise in c, this does increase not only c + v, but also c + v + s, with v + s now remaining constant. Consequently, total value and so total prices of production would rise, even though the rate of profit falls. It would require an increase in the money equivalent, so that commodities could continue to circulate, or else all money prices would be deflated in aggregate.
However, as stated earlier, in general, total social productivity rises in aggregate, though more quickly in some periods than in others. Whilst a rise in the value of some types of constant capital might rise as a result of natural disasters and so on, in general it falls along with rising productivity, and so rises in value of some forms of constant capital is more than offset by falls in the value of other types of constant capital. The most obvious examples are with manufactured materials and fixed capital. Moreover, whilst the value of c in c + v + s may rise, rises in social productivity also bring about falls in v + s, which may well outweigh any overall increase in the value of c, and so would result in c + v + s, being reduced overall, which would require a reduction in the money equivalent for constant prices to be maintained.
In short, the general principle still applies that price is the exchange-value of commodities expressed in terms of money or money tokens, and changes in those prices are a consequence of differential changes in the value of the money commodity or money tokens compared to that of commodities. Inflation, in short, is a monetary phenomenon.
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