Prices of production (or "production prices"; in German Produktionspreise) is a concept in Karl Marx's critique of political economy, defined as "cost-price + average profit".“The rates of profit prevailing in the different branches of production are… originally very different. These different rates of profit are balanced out by competition to give a general rate of profit which is the average of all these different rates. The profit that falls to a capital of given size according to this general rate of profit, whatever its organic composition might be, we call the average profit. That price of a commodity which is equal to its cost price, plus the part of the annual average profit on the capital applied in its production (not simply the capital consumed in its production) that falls to its share according to its conditions of turnover, is its price of production.” – Karl Marx, Capital, Volume III, Penguin 1981, pp. 257-258. A production price can be thought of as a type of supply price for products;Ronald L. Meek, Studies in the Labour Theory of Value. New York: Monthly Review Press, 1975, 2nd. edition, pp. 199-200. "We call it the price of production because in the long term it is the condition of supply, the condition for the reproduction of commodities, in each particular sphere of production." - Karl Marx, Capital, Volume III, Penguin 1981, p. 300. it refers to the price levels at which newly produced goods and services would have to be sold by the producers, in order to reach a normal, average profit rate on the capital invested to produce the products (not the same as the profit on the turnover).
The importance of these price levels is, that a lot of other prices are based on them, or derived from them: in Marx's theory, they determine the cost structure of capitalist production. The market prices of products normally oscillate around their production prices,Karl Marx, Capital, Volume III, Penguin 1981, p. 1000. while production prices themselves oscillate around product-values (the average current replacement cost in labour-time required to make each type of product).
This understanding already existed in classical political economy (the idea of market prices which gravitate to "natural prices" or "natural price levels")In 1730, Richard Cantillon already recorded a distinction between natural price (the price of "intrinsic value") and market price, in the manuscript for his Essai sur la nature du commerce en général [Essay on the nature of commerce in general], first published in 1755. but, according to Marx, the political economists could not really explain adequately how production prices were formed, or how they could regulate the trade in commodities. In addition, the political economists could not theoretically reconcile their labour theory of value with value/price differentials, unequal profit/wage ratios and unequal capital compositions. Consequently, the labour theory of value of the political economists before Marx was more in the nature of a metaphysical belief, than a scientifically demonstrated proposition. If the belief persisted, that was because it made good sense of business practice - in an era where the owners of most enterprises also personally managed them (or were their directors), and therefore could observe the work and its results in daily life.Sidney Pollard, The genesis of modern management: a study of the industrial revolution in Great Britain. London: Edward Arnold Ltd, 1965.
Sources and context
The concept of production prices is introduced and elaborated systematically in chapter 9 et seq. of the third volume of Das Kapital, although it is already referred to in earlier texts by Marx. The first significant discussion occurs in the Grundrisse (1857–1858), followed by numerous references in Theories of Surplus Value (1862–1863),In Theories of Surplus Value Marx often used the term "cost-prices" to refer to what he later - following David Ricardo - called "prices of production" or production prices (inter alia because the cost-price component of making a new product output (C+V) differs from the cost-price of buying a product as input (C+V+S), and because the production price is an average supply price). See M.C. Howard & J. E. King, The political economy of Marx. Harlow: Longman Group Ltd, 1975, p. 233 note 39. However, see also Theories of Surplus Value, Vol. 3 (Moscow: Progress Publishers edition 1978), p. 513, where Marx explicitly distinguishes between cost-price, production price and value. letters by Marx to Engels of 2 August 1862 and 30 April 1868 outlining his theory, the Resultate manuscript (1863–1866), Capital, Volume I (1867) and Capital, Volume II (1865–1877).Karl Marx, Grundrisse. Penguin edition, 1973, p. 313-318, 761; Karl Marx, Theories of Surplus Value (3 Vols., see subject index). Moscow: Progress Publishers, 1978 (alternatively, Marx Engels Collected Works, Vols. 30, 31, 32, 33); Karl Marx, Capital, Volume I, Penguin 1976, p. 269 and p. 963 (the Resultate manuscript included as appendix in the Penguin edition, written somewhere between 1863 and 1866 - see also Marx Engels Collected Works Vol. 34); Karl Marx & Friedrich Engels, Letters on Capital. London: New Park, 1983, pp. 74-78 and 134-138.; Karl Marx, Capital, Volume II, Penguin 1978, p. 294, 413.
In Capital, Volume III, Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money, and capital.Karl Marx, Capital, Volume III, Penguin 1981, chapter 1, p. 117. Capitalist production cannot exist without market sales, and therefore it is a type of production that fully depends on market trade. If there are no market sales, then value and surplus value cannot be realized as private profit. For the purpose of the analysis of the immediate process of capitalist production, which is the main subject of Capital, Volume I, successful market transactions are assumed and market fluctuations are initially mostly disregarded - but that gives only one half of the story.Karl Marx, Capital, Volume III, Penguin edition 1981, p. 117. The products have to be sold at a profit, and purchased at a competitive price, through market trade and the circulation of capital. Otherwise the owners of capital do not make money.
The argument in Capital, Volume III (Marx intended to publish still more volumes, but did not manage to do so) is that the sales of newly produced commodities in the capitalist mode of production are regulated by their production prices.Howard Nicholas, Marx's theory of price and its modern rivals. London: Palgrave Macmillan, 2011. What products will sell for, has to do with what it normally costs to make them, plus the profit mark-up that will secure a normal average return on capital for the producing enterprise. For efficient producers, there will normally be a larger margin between their costs and their sales-revenue (more profit), and for less efficient producers, there will be a smaller margin between their costs and revenue (less profit). Marx's controversial claim is that the magnitude of the production prices for products is determined ultimately by their current replacement costs in average labour time, i.e. by the value of products."...the value of a commodity is determined not by the quantity of labour actually objectified in it, but by the quantity of living labour necessary to produce it." - Karl Marx, Capital, Volume I, Penguin 1976, p. 676-677; "...the value of commodities is determined not by the labour-time originally taken by their production, but rather by the labour-time that their reproduction takes, and this steadily decreases as the social productivity of labour develops." - Marx, Capital, Volume III, Penguin 1981, p. 522.
A lot of the academic debate about Marx's concept of production prices is probably caused by the fact that Marx never finalized the text of the third volume of Capital for publication, although he drafted it before publishing the first and second volumes.Allen Oakley, The making of Marx's critical theory; a bibliographical analysis. London: Routledge & Kegan Paul, 1983, chapter 5 and 6. The third volume, like the second one, was edited together posthumously by Friedrich Engels. Engels tried to make a polished story out of a mass of draft manuscripts Marx left behind.The original manuscript for Capital Vol. 3 is now available in English: Fred Moseley, Marx’s Economic Manuscript of 1864–1865 (transl. Ben Fowkes). Leiden: Brill Publishers, 2016. Overall, the differences between the original text and Engels's version are not very great, because, by his own admission, Engels aimed to provide a fairly literal rendering of the manuscript - with a few exceptions, Engels did not attempt to alter the text, solve problems of content, or introduce new content. The theoretical problems or unclarities remaining in Marx's draft were therefore not removed by Engels' editing, but reproduced fairly literally. Marx sketched complicated issues in a shorthand way which is sometimes ambiguous and incomplete, and does not make all the implications explicit. According to the German Marxian scholar Michael Heinrich, "Marx was nowhere near solving all of the conceptual problems".Michael Heinrich, "Engels’ Edition of the Third Volume of Capital and Marx’s Original Manuscript". Science & Society, Vol. 60. No. 4, Winter 1996-1997, pp. 452-466. However, Marx's concept of production prices is also frequently confused with similar concepts in other economic theories. For most 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.For an historical discussion, see Ronald L. Meek, Studies in the labour theory of value. New York: Monthly Review Press, 1975. Nevertheless, the function of prices of production within Marx's theory differs from both classical political economy and neoclassical economics.
Basic explanation
A production price for outputs in Marx's sense always has two main components: the cost-price of producing the outputs (including the costs of materials and equipment used, 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's argument is that price-levels for products are determined by input cost-prices, turnovers and average profit rates on output, which are in turn determined principally by aggregate labour-costs, the rate of surplus value and the growth rate of final demand. and Willi Semmler, "The dynamic equalization of profit rates for input-output models with fixed capital", in: Willi Semmler (ed.), Competition, stability and non-linear cycles. Berlin: Springer Verlag, 1986, pp. 1-34. These price levels determine how much of the new output value that is created in excess of its cost price can actually be realized by enterprises as their gross profit.
The suggestion is, that the differences among most producers with regard to their profit rates on capital invested will tend to "level out" as a result of business competition, so that a general norm emerges for the profitability of industries.
Profit impost