Chapter 4 : Value and Price

In order to stay in business, every capitalist entrepreneur must strive for the largest possible amount of surplus-labor; for only by achieving this maximum can he maximize the profits he can realize through market prices. This profit maximum is only partly determined by his own exertions in maintaining or raising the rate of exploitation; it is co-determined by similar exertions on the part of all other capitalists. To increase the profitability of any particular capital, the profitability of total social capital must be in creased, for otherwise there would be no way of realizing the increased appropriation of surplus-labor as profits in the market. Since surplus-labor in the form of commodities falls outside the capital-labor relationship, it must be exchanged between capitalists themselves in their efforts to preserve their capital by augmenting it.

The growth of any particular capital depends on the accumulation of total social capital. This fact sets definite limits to the expansion of all separate capitals. The owner of a growing business becomes aware of these limits where diminishing returns make it unprofitable for him to expand it further. However, capital, like labor-power in the abstract, is differentiated only quantitatively. No matter what the type of production, capital will be employed wherever there is a prospect of sufficient yields. If one avenue of expansion closes, others opening up will be invaded. It is the profitability principle which distributes investments over the different spheres and branches of production, thus allocating social labor in accordance with the surplus-value requirements of capital accumulation. And it is this competitive flow of capital which gives rise to a tendency to equalize rates of profit on capital.

Although the capital market does not differentiate between capital and labor investments, this division does affect the economy. The physical nature of the production process defines the relationship between labor and capital, and thus determines the proportion of investment falling to each factor. There is a difference, to speak in Marxian terms, between the “organic compositions” of different capitals in different spheres of production. Some production processes require great investments in means of production and relatively small investments in labor, while others need less capital investments and demand more labor. The first relationship Marx called a “high” and the second a “low” organic composition of capital. Since labor is the only source of surplus-value, or profits, and profits are measured on total investments (i.e. means of production together with labor-power), it should follow from the labor theory of value that capitals of different organic compositions, but with equal rates of surplus-value, should yield different rates of profit. In reality, there prevails a tendency toward their equalization.

Leaving aside such considerations as varying rates of surplus-value in different enterprises, originally diverse rates of profit point to the variety in organic compositions of various capitals. Since the differences in the organic composition of capital which industries possess are determined by their production process, they cannot be eliminated. It may be possible to a degree to average the organic composition of capital within a particular industry; but this cannot be done between totally different spheres of production. Thus the averaging of individual rates of profit must take place in circulation.

In order to understand this mechanism it is necessary to consider the “social” character of capitalist production and the dual nature of the commodity as both a use-value and an exchange-value. There exists a real need to co-ordinate production in terms of use-values. In capitalism the market fulfills this function. It can only exchange what has been produced; but what has been produced reflects the social demand of capitalism at any particular stage of its development. “Social demand” as revealed by the market is not identical with actually existing social needs but only with these needs within the frame of capital production. Still, this capitalistically-determined social demand expresses itself as a demand for use-values. The rising organic composition of capital in a particular industry implies an increasing demand for its commodities. And it is this social demand for commodities produced by industries of a high organic composition which allows them to realize prices that secure their profitability. Since the low organic composition of other industries does not by itself lend their commodities more social use-value than they actually possess, these industries will not be able to realize a greater profit than is compatible with existing social demand as determined by the economic system as a whole.

In the course of capital accumulation almost all industries will increase their investment in capital at a faster rate than their in vestment in labor-power. Capitals of previously low organic composition may turn into capitals of high organic composition and vice versa. Because of the social interdependence of the capitalist mode of production the growth and change of the total capital structure will affect all individual spheres of production and the relations between various industries. A shift from light to heavy industry, for instance, will alter the relations between the extracting and the m industries. So long as the product of any industry is necessary for the functioning of the system as a whole, it will be able to command prices that will make its existence and expansion possible.

Because all capitalists try for the highest profitability in a market where demand is predetermined by the production system as a whole, the distribution of surplus-value is a “social” affair. As such, it excludes individual considerations such as the specific organic compositions of independent capitals. The total social surplus-value comprises a definite quantity of social labor incorporated in commodities. Not only the surplus-labor but the total social product, or the great bulk of it, must go through the circulation process. The impossibility of isolating surplus-value from its commodity embodiment and the need to throw almost the whole of social production on the market divorces the realization and the division of surplus-value from its production.

If there were a value-for-value exchange, enterprises with a high organic composition of capital could not expand for lack of profitability, while those of a low organic composition could not expand for lack of additional markets. Private capital accumulation, however, implies competitive market relations which “transform” values into prices of production. Of course, the “transformation” is only a way of saying that although everything in the exchange process occurs in terms of prices, the latter are nevertheless determined by value relations of which the producers are not aware. This determination of price by value cannot be established empirically; it can only be deduced from the fact that all commodities are products of labor, of different quantities of labor, and from the necessarily proportional distribution of the whole of social labor. There is no direct way of discovering a commodity’s price in its “value,” or, by a reverse procedure, of discovering its “value” in its price. There is no observable “transformation” of values into prices; and the value concept has meaning only with regard to total social capital.

The “transformation” is brought about by way of competition, by the search for profits and extra-profits which constitutes the capitalist contribution and reaction to the increasing productivity of labor. As pointed out above, capital competes for the more profitable lines of business and, where possible, shifts from one type of economic activity to another. It tries to escape from spheres of low profitability and to enter those of high profitability. Under conditions of competitive marketing and investment, any particular capital will realize an approximately average rate of profit. Actually, of course, “the rates of profit differ from business to business and from year to year according to the different circumstances, and the general rate exists only as an average of many businesses and a number of years... [It is] the nature of the rate of profit and of economic laws in general, [that] none of them has any reality except as approximation, tendency, average, and not as immediate reality.” ^[1]

Subjected to the “equalization” of profit rates in this sense, an enterprise’s share of the total social profit will depend on the size of its capital. This is a further inducement for a rapid capital accumulation. The interdependence of capitalist production, that is, the dependence of each producer on the existence of all other producers, as well as their common need to go through the market in order to turn surplus-labor into profits, produces a kind of “capitalistic communism.”^[2]

According to Marx, originally different rates of profit are equalized by means of competition into a general rate of profit, which is the average of the special rates of profit. The equalization of profits “transforms” values into prices of production and divides social surplus-value equally among the individual capitals in pro portion to their sizes. This world of prices is the only world for the capitalists. For them, that part of the value of the commodity which they have to pay for constitutes its cost-price, which excludes unpaid labor. Profits appear to them as the excess of the selling-price over the cost-price. Commodities can thus be sold below their value so long as they are sold above their cost-price. It is around the cost-price, or price of production, that market prices oscillate.

Cost-prices are specific but the profit added to them is not. According to Marx, while “one commodity receives too little of the surplus-value another receives too much, so that the deviations from value shown by the prices of production mutually compensate one another. In short, under capitalist production, the general law of value enforces itself merely as the prevailing tendency, in a very complicated and approximate manner, as a never ascertainable average of ceaseless fluctuations.”^[3] Marx thought that commodities would exchange on the basis of labor-time values only by accident. That labor time determines the production process of commodities is obvious. But this cannot find consideration in the exchange process. Already in the first volume of Capital, Marx, still restricted to value analysis, pointed out that a “quantitative incongruity between price and magnitude of value, or the deviation of the former from the latter, is inherent in the price-form itself. This is no defect, but, on the contrary, admirably adopts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another.” Moreover, “the price-form is not only compatible with the possibility of a quantitative incongruity between magnitude of value and price, ... but it may also conceal a qualitative inconsistency, so much so, that although money is nothing but the value form of commodities, prices cease altogether to express values. Objects that in themselves are not commodities, such as conscience, honor, etc., are capable of being offered for sale by their holders, and thus acquiring, through their prices, the form of commodities. Hence an object may have a price without having a value.”^[4]

According to Marx, then, commodities are not and cannot be exchanged in accordance with the socially-necessary labor time incorporated in them. Yet Marx insists that “no matter what may be the way in which prices are regulated ... the law of value dominates the movements of prices, since a reduction or increase of the labor-time required for production causes prices of production to fall or to rise.”^[5] And since “the total value of the commodities regulates the total surplus-value, and this the level of the average rate of profit ... it follows that the law of value regulates the prices of production,”^[6] even though individual commodity prices do not correspond to labor-time values. Actually, of course, prices exist only individually, and their “regulation” by the law of value can only be deduced from the fact that, although there is no way of dealing with total social production in capitalism, it is nonetheless a reality which overrides all individual exchange relations.

Marx’s adherence to the labor theory of value, coupled with his demonstration that commodities cannot be exchanged in accordance pith their value, caused both friends and foes to accuse him of self-contradiction. To quote one of the latter, Böhmm-Bawerk wrote that “either products do actually exchange in the long run in proportion to the labor attaching to them – in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital – in which case it is impossible that products should continue “to exchange in proportion to the labor attaching to them ... The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value.”^[7]

Marx never claimed, however, that “in the long run” products exchange in accordance with their labor-time. He held that the law of value “regulates” the prices of production and the average rate of profit by determining whether their levels are high or low with respect to total value and surplus-value. The law of value dominates the movements of prices by virtue of the varying productivity of labor. There is no need for a “reconciliation” of the law of value with the prices of production and the average rate of profit. Value does not dominate the actual quantitative exchange ratios of the commodity market. But the overall fall or rise of the prices of production and the average rate of profit is caused by the changing value relations and the changing value content of commodities in the course of the changing productivity of labor and the structural changes in the organic composition of total capital.

Because “the rational and naturally necessary asserts itself only as a blindly working average,” Marx wrote to Kugelmann, “the vulgar economist thinks he has made a great discovery when, as against the revelation of the inner interconnection, he proudly claims that in appearance things look different. In fact, he is boasting that he holds fast to appearance and takes it for the last word. Why, then, have any science at all?”^[8] For Marx, the value concept was the “science,” or tool, with which he could penetrate and understand the nature and history of capitalism. But though a “concept has the essential nature of that concept and cannot prima facie coincide with reality, from which it must first be abstracted,”^[9] Marx’s “abstractions only reflect, in the form of thought, the content already reposing in the relation.”^[10] Even if there were no chapter on value in Capital, Marx wrote, “the analysis of the real relationships which I gave would contain the proof and demonstration of the real value relations. All that palaver about the necessity of proving the concept of value comes from complete ignorance both of the subject dealt with and of scientific method.”^[11]

In order to understand the capitalist system and its dynamic it was necessary to lay bare its real social production relations and to analyze its development in its fetishistic determination, i.e. as a value-expansion process. This analysis does not require proof that the actually-given price relations between specific commodities are traceable to labor-time. It merely requires recognition of the obvious fact that, just as in any other economic system, so also in capitalism, social existence and development are unalterably bound up with labor-time relations in the production process. No matter how prices may deviate from values, they must find their explanation as well as their boundaries in labor-time relations and thus, in capitalistic terms, in the law of value.

Marx took pains to demonstrate the validity of the law of value for a system which precludes a value exchange. These efforts do not betray any desire on his part to make the law of value “operational”: he did not expect the law to verify actual exchange relations in terms of prices. Rather, his efforts relate to the theoretical need to test the validity of the law in confrontation with a reality which seemed to contradict it. Finding out whether or not value relations do, in fact, underlay market and price relations required a theory of prices consistent with the theory of value. The “transformation” of values into prices of production satisfies this theoretical need. The problem of individual price determination was of no real interest to Marx; only value relations mattered, plus the assurance that the difference between value and price as encountered in reality would neither logically, nor actually, invalidate the value concept as the key to the “essential fundamental laws” of capital production.

Convinced that the deviation of price from value does not eliminate the derivation of price from value, even though this derivation can only be established deductively, Marx was not surprised that the established bourgeoisie should find the value theory irrelevant to their own practical problems. Whereas the very existence of an average rate of profit, as brought about by way of competition, turned the question of its formation and its quantitative changes into a problem transcending the market reality and thus the horizon of bourgeois economic interest, it served Marx as a verification of the labor theory of value. He saw very well, of course, that “by the transformation of value into prices of production, the basis of the determination of value is itself removed from direct observation,” and he found it only “natural that the capitalist should lose the meaning of the term of value at this juncture.”^[12] For, with regard to the average rate of profit, “the individual capitalists ... justly believe that their profits are not derived solely from the labor employed in their individual spheres”; and since they saw further “that a reduction in the quantity of labor required for production ... exerts no injurious influence on profits, ... how, then, could living labor be the exclusive source of profit.”^[13]

While competition averages the various rates of profit, it does not determine the magnitude of the average rate of profit at any given time, nor does it cause the changes which occur in this rate. Competition, according to Marx, “can influence the rate of profit only to the extent that it affects the prices of commodities. It can merely make the producers within the same sphere of production sell their commodities at the same price, and make them sell their commodities in different spheres of production at prices which will give them the same profit. In order to balance unequal rates of profit, the profit as an element in the price of commodities must already exist, and competition does not create it.”^[14] Rather, competition is itself conditioned upon the existence of profit, and the explanation of the average rate of profit presupposes the recognition of its source, which then leads back to value and surplus-value. The average rate of profit indicates that prices are determined by the system as a whole. The system as a whole is susceptible to value analysis.

Competition leads to the division and accumulative application of surplus-value. And this competition implies a deviation of prices from values just because it takes place in a value and surplus-value producing society wherein “the distribution of social labor and the mutual supplementing and circulation of matter in the products, the subordination under the social activity and the entrance into it, are left to the accidental and mutually nullifying initiative of the individual capitalists.”^[15] Within the market mechanism, the actual division of the products which comprise the aggregate value of the necessary labor time, as well as the actual division of surplus-value among the capitalists and nonproductive layers of society, is determined by the real activities of men in the competitive pursuit of their interests within the frame of their socially-determined, but changing possibilities. And here there is nothing but the struggle of all against all, self-interest against self-interest, a general and impenetrable scramble for the amassing of wealth, or for mere existence. Market and extra-market activities intertwine and there is no room for the clear-cut exchange relations of either value on price theory. But even from a purely economic point of view, the variety of degrees of exploitation, differences in the turn-over of various capitals, differences between the spheres of production, the existence of monopolies, the effects of rent and interest upon the rate of profit, and so forth, exclude the possibility of recognizing the value base of the commodity price. This base “remains visible only in the influence of the fluctuating productivity of labor upon the rise and fall of the prices of production.”^[16]

Marx never intended “to descend from the general idea of value ... by means of ever closer determinants to a direct determination. the prices of commodities.”^[17] What he tried to show with respect to the value-price problem is that the absence of value considerations in the market does not invalidate an analysis of capital in value terms. Beyond the statement that price relations presuppose value relations and that in this sense the latter determine and limit the former, no need exists for a “Marxian theory of prices.” Marx’s goal – the formulation of a theory of capital development necessitated analyzing capital in terms of labor and surplus-labor, value and surplus-value. The value-price transformation does not stand in opposition to the abstract value scheme; it merely points to its limitations. Marx saw no other way – and no other way has yet been found – to penetrate the bewildering capitalist reality and the ceaseless flux of its development except with the value concept.

The controversy around the value-price transformation problem has meanwhile abated. It is no longer doubted that it is “possible to construct an economic model in which the labor theory of value is set forth as a system of distribution but in which commodities do not exchange in proportion to the amount of labor used in their respective production.”^[18] However, bourgeois economy is not interested in the origin but only in the making of profit. It is interested in the market, not in what sustains and determines its mechanism and changing structure. The deviation of price from value could not do away with the derivation of price from value simply because social production is time spent in the laboring process, and the quantity of products it comprises can never exceed that number which an equivalent quantity of labor time can produce. However, the deviation of price from value, due to the market relations which reflect social necessities within the system of capital production, is not such that value is discernible in price.

Aside from being a practical impossibility, it would be a superfluous undertaking, for only in its price form, not in its value form, does the evaluation of commodities in the exchange process reflect the capitalistically-modified social needs which determine the capitalist production and expansion process. The disregard of the hidden value content of commodities through the deviation of price from value indicates the extent of “socialization” possible within the otherwise asocial capitalist society. So long as the deviation of price from value secures, in one fashion or another, the necessary and capitalistically-determined proportioning of social labor via the competitive market relations, price and market relations are the sole concern of bourgeois theory and practice. Without either ideological or practical applicability in capitalist society, the labor theory of value could survive only in the Marxist critique of bourgeois economy.

1. Engels to C. Schmidt, Marx-Engels, Selected Correspondence, p. 563.

2. Marx to Engels, Selected Correspondence, p. 248.

3. Capital, Vol. III, p. 190.

4. Capital, Vol. I, p. 115.

5. Capital, Vol. III, p. 211.

6. ibid., p. 212.

7. E. V. Bohm-Bawerk, Karl Marx and the Close of his System, New York, 1949, pp. 28-30.

8. Marx-Engels, Selected Works, Vol. II, p. 462.

9. Engels to C. Schmidt, Selected Correspondence, P. 563

10. Engels to Kautsky Selected Correspondence, p. 454.

11. Marx-Engels, Selected Works, Vol. II, p. 461.

12. Capital, Vol. Ill, p. 198.

13. Ibid., p. 201.

14. Ibid., p. 1007.

15. Ibid., p. 1020.

16. ibid., p. 965.

17. K. Korsch, Karl Marx, London, 1939, p. 153.

18. J. P. Henderson, “Marx, Classical Economics, and the Labor Theory of Value,” The Centennial Review of Arts and Science, Vol. III, 1959, p. 448