The argument that inflation – a rise in the general level of prices – is a result of aggregate demand exceeding aggregate supply, or what is the same thing, a result of cost-push, or demand-pull, is false, because the rise in the price of some commodities means a corresponding fall in the price of other commodities, relative to it. There can only be a rise in the price of all commodities if it is relative to the one commodity – the money commodity – which acts as the indirect measure of their value.
In other words, the value of money must fall, for there to be inflation. As I have set out, elsewhere, in the era of fiat currencies that act as the standard of price, the basis of this devaluation of the currency/standard of price, is it being thrown into circulation in excess quantities, as seen with QE, helicopter money during lockdowns, and liquidity injections over the last 40 years.
So, if supply is a function of value, and the price of the commodity is its cost of production plus profit, what, then, determines the amount of this profit? The answer lies in two definitions of cost of production, as Marx sets out in Theories of Surplus Value. Basically, there is cost of production for society, and cost of production for the capitalist. These two costs of production can be measured in labour-time.
This was described earlier. If we take the production of yarn, it comprises the value of cotton, the wear and tear of machinery and so on. All of this value is equal to a given amount of labour-time, required for the production of these inputs. Let us say it is equal to 100 hours of labour. But, then, to produce 100 kilos of yarn, workers must set in motion the machines, and process the cotton. Let us say that this requires a further 100 hours of labour. So, now, the cost of production, to society, of 100 kilos of yarn, is, in total, 200 hours of labour. The unit value of a kilo of yarn is 2 hours of labour. This determines its exchange-value/price, relative to other commodities.
However, what is the cost of production to the capitalist? They have advanced the equivalent of 100 hours of labour for the purchase of cotton, and to cover the wear and tear of machinery, buildings etc., but they do not advance the equivalent of 100 hours of labour as wages. They only advance, as wages, an amount equal to the value of labour-power, i.e. sufficient to reproduce that labour-power. This is, again, a function of value, because the workers require a given physical quantity of use values – food, clothing, shelter, education and so on – to reproduce their labour-power, and all of these commodities have their own value.
What the capitalist pays for, then, is 100 hours for constant capital (cotton, wear and tear) plus, say, 50 hours for wages, the equivalent of the value of labour-power, consumed. This is their cost of production, which is 50 hours less than the cost of production to society, and the value at which they sell the yarn. The difference of 50 hours labour constitutes, for them, but not society, a surplus value, a something for nothing, which makes up their profit. Of course, the capitalists and their economists see, also, this profit as a cost of production, a cost that must be covered to get the capitalist to advance their capital.
So, the cost of production of a commodity, to society, i.e. the total labour-time required to produce it, determines its value, whilst the difference between that and the cost of production to the capitalist determines the amount of profit. Where commodities sell at prices equal to their values, this profit will be equal to the surplus value produced, i.e. the difference between the new value created by labour, in the production of the commodity, and the value of the labour-power/wages consumed in that production. Taking all commodities in total, it will also equal the surplus value.
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