Prices of Production - Simple Definition

Simple Definition

For most political economists, the concept of production prices corresponds roughly to Adam Smith's concept of "natural prices" and the modern neoclassical concept of long-term competitive equilibrium prices under constant returns to scale. However, the function of prices of production within Marxian theory is different from that of these other concepts in their own theories.

Simply put, Marx's "price of production" (P) is a price which applies to sales of new outputs produced, and it equals cost price (cp) + average profit of capital invested in production (ap). The cost price could be computed as the unit-cost of a product, the profit component being the normal mark-up. The production price is the price at which goods would have to sell in order to reach the average profit rate on capital invested into producing them. The amount ap is often assumed to have the same magnitude relative to the amount of capital invested in all sectors, seemingly representing an equilibrium of flows of capital between different parts of a capitalist economy that results in a "general rate of profit".

Thus,

P = cp + ap

The cost-price equals labour-costs incurred (or variable capital measured in price terms) in producing output, plus the monetary cost of constant capital inputs used up.

In the sphere of capitalist production, Marx argues, commodity values are expressed in the form of prices of production, established jointly by average input costs and by the ruling profit margins applying to outputs sold. It is a result of the establishment of regular, developed market trade; the production price averages reflect the fact that production has become totally integrated into the circuits of commodity trade, in which capital accumulation has become the dominant motive. But what prices of production simultaneously hide, he argues, is the social nature of the valorisation process, i.e. how exactly an increase in capital-value has occurred through production. The direct connection between labour-time and value, still visible in simple commodity production, is largely effaced; only cost-prices and sale-prices remain, and it seems that any of the factors of production (which Marx calls the "Holy Trinity" of capitalism) can contribute new value to output, paving the way for the concept of the production function.

In his manuscript, Marx frequently defines a newly produced output of commodities as being equal to a newly formed "commodity capital K" where

K = c + v + s

where c = constant capital (the element of conserved value), v = variable capital, and s = surplus value (the two elements of newly created value). (Marx's standard assumption in his models is that the rate of surplus-value (s/v) is the same in all sectors. But this is just an ideal average, in reality s/v will differ in different sectors and regions; Marx seems to have thought though that assuming a uniform rate was justified, because an open market in labour and capital would tend to make working conditions increasingly similar for a whole population).

One question is then how exactly the value of K is distributed as gross revenues among producing enterprises, what determines this distribution, and what factors affect it. In the Marxian view, answers given to this question have important implications for explaining and predicting the pattern and direction of capitalist economic growth (this is the subject of Marx's theory of economic reproduction and the mobilisation of capitals).