Prices of Production: Unveiling the Secrets of Economic Forces, a Journey into Prices of Production

By Fouad Sabry

What is Prices of Production

Karl Marx's critique of political economy includes a term known as "prices of production," which can be defined as "cost-price plus average profit." A production price is a form of supply price for products; it refers to the price levels at which freshly produced goods and services would have to be sold by the producers in order to obtain a typical, average profit rate on the capital spent to make the items. A production price may be thought of as a type of supply price for products.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Prices of production

Chapter 2: Labor theory of value

Chapter 3: Transformation problem

Chapter 4: Organic composition of capital

Chapter 5: Use value

Chapter 6: Exchange value

Chapter 7: Labour power

Chapter 8: Reproduction (economics)

Chapter 9: Valorisation

Chapter 10: Surplus labour

Chapter 11: Value product

Chapter 12: Law of value

Chapter 13: Productive and unproductive labour

Chapter 14: Tendency of the rate of profit to fall

Chapter 15: Okishio's theorem

Chapter 16: Commodity (Marxism)

Chapter 17: Capitalist mode of production (Marxist theory)

Chapter 18: Socially necessary labour time

Chapter 19: Surplus value

Chapter 20: Das Kapital

Chapter 21: Marxian economics

(II) Answering the public top questions about prices of production.

(III) Real world examples for the usage of prices of production in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Prices of Production.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Feb 4, 2024

Book preview

Chapter 1: Prices of production

Prices of production (or production prices; in German Produktionspreise) is a concept in Karl Marx's critique of political economy that is defined as cost price plus average profit. It refers to the price levels at which producers would have to sell newly produced goods and services in order to achieve a normal, average profit rate on the capital invested to produce the goods (not the same as the profit on the turnover).

The significance of these price levels stems from the fact that a large number of other prices are derived from or based on them: according to Marx's theory, they determine the cost structure of capitalist production. The market prices of goods typically fluctuate around their production costs, whereas production costs fluctuate around product values (the average current replacement cost in labour-time required to make each type of product).

This understanding existed in classical political economy (the concept of market prices that gravitate toward natural prices or natural price levels), but according to Marx, political economists were unable to adequately explain how production prices were formed or how they could regulate the trade of commodities. In addition, political economists were unable to reconcile their labor theory of value with value/price deviations, unequal profit-to-wages ratios, and unequal capital compositions. Therefore, the labour theory of value of political economists prior to Marx was more of a metaphysical belief than a scientific assertion.

The concept of production prices is introduced and elaborated systematically in chapter 9 et seq. of the third volume of Das Kapital, despite Marx's references to it in earlier works. The first significant discussion is found in the Grundrisse (1857-1858), followed by numerous references in Theories of Surplus Value (1862-1863). The products must be sold at a profit and bought at a competitive price through market trade and the circulation of capital.

Marx intended to publish additional volumes but was unable to do so. Volume III of Capital argues that the capitalist mode of production regulates the sales of newly produced commodities through their production prices. The selling price of a product is determined by the cost of production plus a markup that ensures a normal average return on capital for the producing enterprise. For efficient producers, there will typically be a larger margin between their costs and sales-revenue (more profit), whereas for less efficient producers, this margin will be smaller (less profit) (less profit). Marx's controversial claim is that the magnitude of production prices for goods is ultimately determined by their current replacement costs in average labour time, i.e., by their value.

Marx never finalized the text of the third volume of Capital for publication, although he drafted it before publishing the first volume. This is likely the cause of much of the academic debate surrounding Marx's concept of production prices. Nonetheless, Marx's concept is frequently confused with concepts from other economic theories. According to the majority of economists, production prices roughly correspond to Adam Smith's concept of natural prices and the modern neoclassical concept of long-term competitive equilibrium prices subject to constant returns on scale. Marx's theory differs from both classical political economy and neoclassical economics with regard to the function of prices of production.

Marx believed that a production price for outputs always consists of two primary components: the cost-price of producing the outputs (including the costs of materials, equipment, operating expenses, and wages), and a gross profit margin (the additional value realized in excess of the cost-price, when goods are sold, which Marx calls surplus value).

Marx argues that price levels for products are determined by input cost-prices, turnovers, and average profit rates on output, which in turn are primarily determined by aggregate labour-costs, the rate of surplus value, and the growth rate of final demand. These price levels determine how much of the new output value created in excess of its cost price can be realized as gross profit by businesses.

It is hypothesized that, as a result of business competition, differences among the majority of producers regarding their profit rates on capital invested will tend to even out, and a general norm for the profitability of industries will emerge.

In capitalist production, a profit levy is the standard prerequisite for the provision of goods and services. When competition for product markets intensifies, the producers' true income, which is the difference between cost prices and selling prices, decreases. In this case, producers can only maintain their profits by reducing their costs and increasing their productivity, or by increasing their market share and selling more product in less time, or by doing both (the only other option they can try is product differentiation). In an established product market, however, supply and demand fluctuations are typically not extreme.

Long before the beginning of the modern era in the 15th century, this basic market logic was well understood by medieval merchant capitalists.

A product's regulating price is a sort of modal average price level, above or below which people are much less likely to trade the product. If the price is too high, buyers will either be unable to afford it or seek cheaper alternatives. If the price is too low, sellers are unable to cover their expenses and generate a profit. Therefore, there is typically a price range within which the product can be traded, with upper and lower limits.

The production price is essentially the normal or dominant price level for a product type that prevails over an extended period of time. It assumes that both the inputs and outputs of production are priced goods and services, i.e., that production is fully integrated in relatively sophisticated market relations, allowing a sum of capital invested in it to be converted into a greater sum of capital. This was not the case in pre-capitalist economies; many inputs and outputs of production were not priced.

Marx argues that the production prices of goods are fundamentally determined by the comparative labor requirements of those goods, and are thus constrained by the law of value.

Marx argues that the prices of new products sold will, assuming free competition for an open market, tend to settle at an average level that enables at least a normal rate of profit on the capital invested to produce them, and that if such a socially average rate of profit cannot be reached, it is highly unlikely that the products will be produced at all (because of comparatively unfavourable profitability conditions). Marx defines the general rate of profit as the (weighted) average of all the average profit rates in various production branches; it is the grand average profit rate on production capital. The most straightforward indicator of this rate is the ratio of total surplus value to total production capital employed.

According to Marx's theory, investment capital is likely to move away from production activities with a low profit rate and toward those with a higher profit rate; According to Marx, the relative movements of different production prices have a significant impact on how the total cake of newly produced surplus value is distributed as profit among competing capitalist enterprises. They are the foundation of the producers' competitive position because they determine profit yields relative to costs.

Some authors contend that Marx's production price is comparable to, or serves the same theoretical function as, the natural prices of classical political economy, which can be found in the works of Adam Smith and David Ricardo, among others (though the concept of natural prices is much older). This is the orthodox Marxist viewpoint, based on quotations from Marx in which he compares his concept of production prices to the classical notion of natural prices. Marx rejects the notion of a natural interest rate in Volume III of Capital, arguing that this term refers to the interest rate that results from free competition. According to this argument, there is nothing natural about purportedly natural prices; rather, they are the socially determined results of capitalist production and trade. Moreover, the existence of production prices does not logically rely on or assume a state of equilibrium.

If classical economists discussed the naturalness of price levels, this was ultimately a theoretical apologism; they were unable to reconcile their labor theory of value with the theory of capital distribution. They assumed market equilibrium without demonstrating how it could exist.

The general theory underlying the concept of natural prices was that the free play of markets, through successive adjustments in the trading process, would naturally converge on price levels at which sellers could cover their costs and make a normal profit, while buyers could afford to purchase products; with the result that relative labor requirements would be proportional to relative prices. However, classical political economy did not provide a plausible explanation for how this process could actually occur. Since it confused and conflated the value of labour power with the price of labour, commodity values with their production prices, and surplus value with profit, i.e., it conflated values and prices, it could only explain the normal price levels of commodities as natural phenomena in the