Price Theory

B. Price Theory

In the 1844 Manuscripts (MECW 3 : 236), Marx cites, and apparently accepts, Adam Smith’s cost-pricing principles and the mechanism of adjustment or “gravitation” of market to natural price, the latter envisaged as the sum of wage, rent, and profit costs (Smith 1937 [1776]: 55–7). The adjustment is impeded by labor immobility, labor itself treated as a commodity : “The demand for men necessarily governs the

production of men, as of every other commodity” (MECW 3 : 235). 3 But the “gravi- tation” process is not it seems seriously impeded by labor immobility, considering the high degree of capital mobility supposed: “Thus in the gravitation of market price to natural price it is the worker who loses most of all and necessarily. And it is just the capacity of the capitalist to direct his capital into another channel which either renders the worker, who is restricted to some particular branch of labour, destitute, or forces him to submit to every demand of this capitalist” (236). Notwithstand- ing, Smith is subsequently also cited regarding monopoly restrictions on capital mobility (Smith 61; cited 248–9).

3 The notion of labor as commodity is sometimes attributed to Ricardo, for whom “[p]roduction does not simply produce man as a commodity, the human commodity, man in the role of

commodity ; it produces him in keeping with this role as a mentally and physically dehumanised being” (MECW 3 : 284); and sometimes to the Ricardians generally (see below, p. 182).

167 The Smithian proposition (Smith: 86, 98) that increases in the wage and profit

B. Price Theory

rate are passed on to the consumer in higher (cost) prices – subject to productivity improvement – also emerges: “ . . . rising wages and rising interest on capital oper- ate on the price of commodities like simple and compound interest respectively” (MECW 3 : 239). It is found also in modified form later in the manuscript with respect to the landlord’s alleged interest in reducing wages as a means of assuring lower prices (263). Now these citations are from the First Manuscript. In the Second Manuscript, we encounter the inverse wage-profit relation, following immediately upon a citation from Ricardo and James Mill illustrating “a great and consistent advance of modern English political economy” over Smith and Say, that “whilst elevating labour to the position of its sole principle, it should at the same time expound with complete clarity the inverse relation between wages and interest on capital, and the fact that the capitalist could normally only gain by pressing down wages, and vice versa. Not the defrauding of the consumer, but the capitalist and the worker taking advantage of each other, is shown to be the normal relationship” (284–5).

This reading actually over-simplifies Ricardo’s theorem on distribution which concerns the cost of producing the commodity wage and the “proportional” wage both indicated by the money wage (Hollander 2001: 9–10). But shortly thereafter, a somewhat more accurate rendition is given – at least it is consistent with the Ricardo position – in the course of a discussion of landowners’ defense of agricultural protection. Thus, capitalists claim that “the landowner – this idle, parasitic grain- profiteer – raises the price of the people’s basic necessities and so forces the capitalist to raise wages without being able to increase productivity, thus impeding [the growth of] the nation’s annual income, the accumulation of capital, and therefore the possibility of providing work for the people and wealth for the country . . . ” (MECW 3 : 288). On this view, a rise in the corn price generates a compensatory rise in the money wage and (so it is implied) a depression of the profit rate, rather than an increase in prices. In this light, the earlier rejection of the notion of “defrauding the consumer” should be understood as an abandonment of the Smithian notion – expounded in the First Manuscript – that increased wage costs are passed on to consumers in higher prices. For all that, there is still no indication of the proper sense of Ricardian “real wages.”

A positive reference is also made in the Second Manuscript to differential rent, again with the “modern” literature in mind: “It is . . . another great achievement of modern English political economy to have declared rent of land to be the difference in the interest yielded by the worst and the best land under cultivation; to have [exposed] the landowner’s romantic illusions – his alleged social importance and the identity of his interest with the interest of society, a view still maintained by Adam Smith after the Physiocrats” (285). The formulation, which perceives the dif- ferential in interest yielded by the worst and the best land, is not quite how Ricardo expressed the matter. This is no accident, for the context involves prospective change in institutional and social arrangement, the moderns “anticipat[ing] and

Marx’s Economics 1843–1845

prepar[ing] the movement of the real world which will transform the landowner into an ordinary, prosaic capitalist, and thus simplify and sharpen the contradiction [between capital and labour] and hasten its resolution.” Again: “The final conse- quence is . . . the abolition of the distinction between capitalist and landowner, so that there remain altogether only two classes of the population – the working class and the class of capitalists” (266). Here we have a hint of what was to come.

There is a complexity of high historiographical interest in the First Manuscript, that the concept of rent-free land is illustrated from the Wealth of Nations rather than Ricardo’s Principles (MECW 3 : 261). Thus Smith is paraphrased: “Rent cannot

be paid on all commodities. For instance, in many districts no rent is paid for stones” (see Smith 1937 [1776]: 163); and he is cited explicitly to the effect that “rent enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it” (Smith: 146). Similarly, the highest conceivable profit rate is said by Smith to be that rate “which in the price of the greater part of commodities eats up the whole of the rent of land . . . rent can disappear entirely” (Smith: 97, cited 248). 4

We turn to the Notebooks. Here Marx commends Proudhon’s use of cost-price formulations attributed to Ricardo and to Say to arrive in effect at the, or rather

a, notion of surplus value in a private-property system : “Ricardo demonstrates that labor accounts for the entire price since capital too is labor; Say shows [Say 1819,

1 : 28–9n] that he has forgotten the return to capital and to land, since these are not provided free. Proudhon rightly concludes from this that, where private property exists, a commodity costs more than it is worth; it is precisely this tribute that is paid to the owner of private property” (Marx 1968: 8–9; emphasis added). 5 This commendation of Proudhon is repeated in a passage excluding both rent and profits from “necessary” costs other than in a qualified sense: “The need for land and capital in production cannot be counted within costs except insofar as labor etc. is required for the maintenance of capital and land. . . . But it is solely the surplus, the excess over these costs, that constitute interest and profit, and rent [le fermage et la rente]. Consequently, the prices of all commodities are too high, as Proudhon has already proven” (Marx 1968: 9–10; emphasis added).

Now Proudhon’s reading of Ricardo, based in part on Say, in the first of the foregoing passages, was accepted by Marx too hastily. Ricardo himself went out of his way to reject that sort of representation of his position (Ricardo 1951–73, 1 : 46– 7). Proudhon’s discernment of the source of surplus value in an excess of price over value is thus based on a common misunderstanding of Ricardo which neglects

4 Say too had insisted on Smith’s priority (e.g., Say 1843 [1828–9]: 103). For a modern claim along these lines, see Samuelson 1978.

5 The allusion is to Proudhon’s Qu’est-ce que la propri´et´e? (1840), chapter IV: “La propri´et´e est impossible, parce que l`a o `u elle est admise, la production co ˆute plus qu’elle ne vaut” (Rubel

169 the simple proposition that relative price is proportional to relative labor input

B. Price Theory

(setting aside, of course, various well-known “modifications”). Reading Ricardo in absolute terms with value reflecting labor alone, the trap was set – since price includes profits, it necessarily exceeds “value:” “a commodity costs more than it is worth,” which excess constitutes “the tribute” paid to property owners. This perspective is far from Marx’s ultimate solution – namely that though there should

be no such deviation of absolute price from labor value, all products selling at their values, a surplus nonetheless exists due to the fact that the “product” labor also sells at its value, essentially that only part of each workday is devoted to the production of wage goods. 6

In what follows, Marx refers to the “natural rates” of wages, profit, and rent; and this perhaps implies the meaningfulness of cost price. On the other hand, there is considerable doubt whether Marx stood by this position. In the first place, he asserts that “the natural rate of wages, rent and profit depends entirely on custom and monopoly, and in the final resort on competition; it does not derive from the nature of the land, of capital and of labor. Costs of production are themselves

determined by competition and not by production” (Marx 1968: 10). 7 And in what follows, he attacks Ricardo for treating market-price deviations from “natural price” as “momentary or accidental,” whereas – following Say – it is natural price itself that is “chim´erique” since there are only highly variable current market prices in economics:

Ricardo says that when he talks of “exchangeable value” he always intends “natural price,” setting aside the accidents of competition that he calls a “temporary or accidental cause” [Ricardo 1819: 125]. To give more substance and precision to its laws, political economy is obliged to represent reality as accidental and abstraction as real. Say remarks in this regard that “natural price . . . appears to be chimerical. There are only current prices in political economy” [Say 1819, 1 : 126]. This he demonstrates by saying that the prices of labor, capital and land, are not determined according to some fixed rate, but according to the relation between quantity supplied and quantity demanded. 8

6 Rubel, however, asserts of Proudhon 1840 that he was familiar with “la conception de la plus- valeur qui devait alors germer dans l’esprit de Marx” (Rubel 1968: 1601), thereby implying

that Proudhon was Marx’s source for his ultimate solution. Mandel recognizes that “Marx approves of Proudhon’s remark that rent and profit are ‘super-added’ and thus are a factor in bringing about increases in price” (Mandel 1971: 41), but quite rightly does not see this as

a contribution to a “genuine” theory of surplus value by which is intended the final Marxian resolution. 7 Rent is not here treated as a differential transfer from profit as it is in the Second Manuscript (see above, p. 167), raising the possibility that the latter superseded the Notebooks in this particular respect.

8 A sharp distinction is drawn between Ricardo’s “definition” of value as entirely cost ori- ented and Say as focussing on “competition” (which strangely is here identified by Marx with

“utility”): “With Say, competition replaces production costs. Utility, that is to say competition, therefore depends, according to Say himself, solely on fashion, caprice, etc” (Marx 1968: 8). Yet, paradoxically, Marx proceeds to point out that it is Say (Say 1819, 1 : 14n) – not Ricardo – who insisted on the constant value of corn (on grounds of the interdependence of supply and

Marx’s Economics 1843–1845

In this objection to Ricardo we have a denial of what was later to be an essential tenet – the “essence” of value relationships disguised by the surface manifestation of the market. More immediately, we have here an actual rejection of the very mean-

ingfulness of the cost-price concept. 9 A further passage commends Smith’s “natural price” – but only when “abstraction [is] made from private property”; as for “politi- cal economy” whose sphere is limited to the private-property institution – “all that is involved is current price” or “sordid trading” (“trafic sordide”) and not “costs of production.”

A complex picture has emerged regarding Marx’s adherence to cost pricing. The complexity reflects a particular methodological stance as is made particularly clear in the Notebook comments on James Mill. Here Marx charges Mill and the entire Ricardo school firstly for expounding an abstract law of value or price (the two are here identified) in terms of cost, whereas in reality cost prices pertain only “momentarily” and “accidentally” when supply and demand happen to be equal; and secondly, for neglecting that equally “constant” law according to which there is no “necessary relation” between value and costs considering the continual fluctuations of supply, fluctuations which – pace Ricardo – he designates “real movements” rather than merely “accidental” and “inessential” (MECW 3 : 211; also Marx 1968: 16).

Marx’s raises the question why the Ricardian economists should take their faulty position: “Why? Because in the acute and precise formulas to which they reduce political economy, the basic formula, if they wished to express that movement abstractly, would have to be: In political economy, law is determined by its oppo- site, absence of law. The true law of political economy is chance, from whose move- ment we, the scientific men, isolate certain factors arbitrarily in the form of laws.” According to this critique Marx represents cost price as no more than a chance phenomenon that has “arbitrarily” been accorded law-like quality by economists. As mentioned, Marx is here taking a standpoint which he attributed to Say. 10

It is important to recognize Marx’s allowance that Ricardo and his followers do admit a tendency of market to cost prices which turns on the mechanism of demand and supply, thereby implying that the emergence of cost prices is not for them an “accidental” matter; it is only that Marx himself rejected that process. That this is indeed so emerges clearly in the Notebook comments on McCulloch. The context relates to the praise accorded the Ricardians by McCulloch’s translator Pr´evost for working with averages : “Pr´evost lauds the Ricardians, those profound economists, for having simplified the science to a high degree, by taking averages for its base, and by setting aside all accidental circumstances (just as the great Ricardo, for example, dismisses the number of inhabitants of a country) that might hinder

9 For a discussion of Say on value determination, focusing on the apparent rejection of cost-price analysis, see Hollander 2005: 30, 42–6. Say is there shown to have in fact retained cost-price

analysis – except in the case of corn – emphasizing, however, that price fluctuations around cost are the greater the less broadly based the demand. 10 Also to be noted is Say’s use of the term “abstract” in a perjorative sense in his Notes on

C. Wage-Rate and Profit-Rate Trends 171 them in their generalizations” (Marx 1968: 35). Marx responded that their focus

on “averages” was no credit to the Ricardians since it abstracted from “la vie r´eelle”: “What do these averages prove? That one abstracts more and more from mankind, that one dismisses more and more real life, and that one considers only the abstract movement of material and inhuman property. Averages are real offences inflicted upon real individuals.”

Secondly, Pr´evost had praised Ricardo for divorcing costs from demand and supply: “Pr´evost praises Ricardo for having discovered that price represents costs of production independently of supply and demand.” Again Marx insists that this approach abstracted from reality: “the courageous man forgets that the Ricardians only prove this principle with the help of a calculus based on averages, that is by abstracing from reality.” But he objected further, on grounds of positive theory, that Pr´evost’s reading implied that goods might be produced without demand – which Marx found inconceivable: “according to his thesis, it suffices to put a product on the market, though there are no buyers, in order to determine price by production costs. . . . ” Moreover, “these gentlemen allow that accidental causes may generate price oscillations above and below production costs, and that competition causes price to rise or fall to the level of production costs. But what is competition if not the relation of supply and demand? Thus the supply-demand relation is allowed in under the guise of competition” (emphasis added).

Now, if Marx accepted all this, he would have undermined his own insistence that actual prices reflect cost only “accidentally” – that “there is only a momentary equilibrium of demand and supply. . . . ” But he did not accept it, once more reject- ing the entire Ricardian argument on the grounds that price is a matter of chance : “What then do [the Ricardians] wish to prove? That assuming free competition the price of commodities is on a par with production costs. We have spoken elsewhere of the effect of free competition as a means of determining prices. To express this abstractly: price is determined by competition – price is a matter of chance (le prix est affaire de hasard).” He allows that “if these gentlemen say that nobody wants to sell below production costs, they are right. But mere wanting is not enough” (36).

Marx’s apparent rejection of cost pricing turns partly on an insistence that gen- uine analysis focused upon “la vie r´eelle” of actual markets, so very different from the later Marx. But how such rejection fits in with his commendation at the same early period of Proudhon’s position that the excess of actual cost price over value constituted surplus – the tribute “paid to the owner of private property” (above p. 168) – is a mystery. The approach to value reflects serious ambiguity regarding the market as regulative or chaotic, that was never to be properly corrected (see the concluding chapter).