Prices of Production

Prices of production is a concept in Karl Marx's critique of political economy. It refers to the price-levels at which goods would have to sell, in order to reach the normal, average profit rate on the capital invested into producing them.

The concept is introduced in the third volume of Das Kapital, although it is already referred to in earlier volumes. In the third volume, Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and capital. The argument is that the sales of newly produced commodities in the capitalist mode of production are regulated by their production prices.

The regulating price of a type of product is a sort of modal average price level, above or below which people would be much less likely to trade the product. This price level is determined by cost-prices, profit margins and sales turnover.

The production price refers basically to a "normal or dominant price level" that prevails during a longer interval of time. It presupposes that both the inputs and the outputs of production are priced goods and services, i.e. that production is fully integrated in fairly sophisticated market relations enabling a sum of capital invested into it to be transformed into a larger sum of capital. In pre-capitalist economies, that was not the case; many inputs and outputs of production were not priced.

Marx's claim is that the production prices of products themselves are fundamentally determined by the comparative labour-values of those products, and therefore are constrained by the law of value. Since however not all goods are produced or reproducible goods, not all goods have production prices. A production price in Marx's sense can exist only in markets developed sufficiently for a "normal" rate of profit on production capital invested to become the ruling average for a group of producers.

Substantively, Marx argues that the prices of new products sold will, assuming free competition for an open market, usually tend to settle at an average level which enables at least a "normal" rate of profit on the capital invested to produce them; and as a corollary, that if such a socially average rate of profit cannot be reached, it is much less likely that the products will be produced (because of comparatively unfavourable profitability conditions).

Thus, investment capital is likely to shift out of production activities where the rate of profit is low, and towards activities where profitability is higher; the "leading" sectors of industry are those where profitability is the highest (in modern times, these are in the production of computer facilities, healthcare, oil products, and finance). The precondition is the free mobility of capital, and thus there is a systemic tendency to remove all obstacles preventing investors from investing where profits are higher. If, for any reason, the free movement of capital is blocked or restricted, then big differences in the profit rates of enterprises are likely to occur.

According to Marx, the movements of different production prices relative to each other importantly affect how the total "cake" of new surplus value produced is shared out as profit by competing capitalist enterprises. They are the basis of the competitive position of the producers, since they fundamentally determine profit yields relative to costs.