Prices of Production - Value and Price

Value and Price

A lot of criticism of Marx's concept originates from the ambiguities referred to earlier. Consequently, many of the criticisms can, according to some Marxists, be dispelled simply by a more exact definition of the cost, product and revenue aggregates used, and of the timing of transactions (see e.g. Temporal Single System Interpretation).

In doing so, it must be admitted though that Marx's draft manuscript often shows sloppy use of terminology and concepts, and that Marx's purpose was often not fully explicit. At a high level of abstraction, he moves very easily and cavalierly from values to prices and back again, and restricts his discussion of "capital invested" to intermediate goods, fixed capital and labour power only.

In Marx's view, a capitalist production process was a valorisation process in which new value was formed. The theoretical problem was, that this value-forming process - the process vital for capital accumulation - took place mainly external to the market, being bracketed by the transactions M-C (purchase of inputs, C, using money, M) and C'-M' (sales of new output, C', for more money, M'). Between the successive exchanges, however, economic value was conserved, transferred and added to. Management then tried to estimate the cost and profit implications of different tasks and activities in production for the growth of capital.

But in that case, the domains of product-values and product-prices, and consequently the domains of value relations and price relations, were separate but co-existing and overlapping domains (unless one is willing to argue that goods have an economic value only at the point where they are being sold for a price). "Price management" was not really possible insofar as prices were determined by markets which individual producers could not control, but value-based management was possible.

• Goods could sell below or above their real or socially average value, and that was precisely the critical problem for capitalists, because it affected their gross income and profit margins. The wealth of capitalist society might present itself as "a mass of commodities" (as Marx himself put it), but before and after the commodities were sold, they existed outside the market as use values. At that point, they had only a value and a use-value, but not an actual market price (though obviously one could estimate an hypothetical selling price - see also real prices and ideal prices).

• Thus, at the point of production, the "factors of production" themselves had no actual market price either, only a value, because they were being used to create new products, rather than being offered for sale (indeed, what a particular business enterprise was currently "worth" in total, as a going concern, might be very difficult to say; it would depend on how much profit income it was expected to yield in the future compared to the capital assets invested in it, but even if a total price could be estimated, its individual assets might change in value continuously).

• A quantity of value was produced by enterprises, but how much of that value would actually be realised by an enterprise as income from sales, or how gross revenues would be distributed among producers, could not be established with certainty in advance. Yet, the value of the total masses of output-values actually produced by all enterprises affected the market prices that could be obtained by each in distribution; it affected how the market would reward each of the producers, and there was a real, systematic relationship between total value produced and total sales revenue (even although these might not be equal).

• More importantly, producers were constantly adjusting their commercial behaviour to the emerging economic reality (the "state of the market"), as far as they could. And that adjustment followed a specific pattern; Marx argued it created a specific trajectory for capitalist development, guided by the quest for realizing extra surplus value. There is, he argues, a permanent imperative to increase productivity, and producers aim to utilize every possibility for gaining competitive advantage (which includes blocking competition from others in some way).

How could this business reality best be modelled? In contemporary "value-based management" by corporations, we can witness a continual cross-reference between past prices, current prices and future prices occurring, because there is practically no other way to do it for business purposes. In the words of group controller Gerard Ruizendaal of Royal Philips Electronics,

"The main idea is to improve our economic value-added (EVA) every year so our return of capital is more than our cost of capital." (cited in "The value creation equation", Corporate Finance Magazine, March 2004).

A partner of McKinsey & Company comments:

"The guiding principle of value creation is that companies create value by using capital they raise from investors to generate future cash flows at rates of return exceeding the cost of capital (the rate investors require as payment). The faster companies can increase their revenues and deploy more capital at attractive rates of return, the more value they create. The combination of growth and return on invested capital (ROIC) relative to its cost is what drives value." - Timothy M. Koller, "Why value value? Defending against crises", McKinsey Quarterly, April 2010, excerpted from Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies (fifth edition, Hoboken, NJ: John Wiley & Sons, August 2010).

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In that case, it is impossible for the sum of input values to be exactly equal to the sum of output values. Indeed, that is exactly what, according to Marx, capitalists are in business for: to invest a sum of capital in production in order to get a larger sum of capital out of it. In bourgeois theories, value appears spontaneously out of trading activity in the sphere of circulation. Marx however regarded the prices of production as the "outward expression" of the results of a valorisation process in production, and in order to be able to talk about price aggregates at all, he thought reference to value relations was completely unavoidable.

Not only was a value-theoretic principle required simply to group prices, relate them and aggregate them (meaning principles of value equivalence, comparable value, value transfer, value conservation, value creation and value used up or destroyed), but most of the stock of labour-products in an economy at any time had no actual price, simply because they weren't being traded. To what extent their value could be realised through exchange in the future could be known definitely only "after the fact", i.e. after they were actually sold and paid for. In the meantime, one could only hypothesize about their price, working from previous data. But in the final analysis, the attribution of value to products implied a social relation, without which value relations could not be understood. A community of independent private producers expressed their co-existence and mutual adjustment through the trading prices of their products; how they were socially related was expressed through the forms of value.