On “Market Value” and Competition

F. On “Market Value” and Competition

Our analysis of the Transformation has focussed on the process of “competition” as it operates to reallocate activity between industries (“spheres of production”) with

19 See also Howard and King 1989: 209; Samuelson 1992; Brewer 1995: 126; Blaug 1997: 273. 20 Even so, one passage hints at the operation of the demand-supply mechanism: “owing to the barrier raised by landed property, the market price must rise to a level at which the land can yield an excess over the price of production, i.e., yield a rent. However, since the value of the commodities produced by agricultural capital is higher than their price of production, according to our assumption, this rent . . . forms the excess of value over the price of production,

32 Value and Distribution

differential c /v ratios, on the implicit assumption that within each sphere there is a common c /v ratio. But this is only a first approximation, since in reality “[t]he many individual capitals invested in a particular branch of production, have . . . more or less different compositions. The average of their individual compositions gives us the composition of the total capital in this branch of production” (MECW

35: 608; also MECW 37: 168, 851). Much of what Marx had to say in Capital 3 (Chapter 10: “Equalisation of the General Rate of Profit through Competition”) regarding “market value” – prices proportionate to “socially-necessary” labor – is pertinent to this issue if we suppose that the differential costs between firms there insisted upon reflect differential organic compositions, the more capital-intensive firms producing at relatively low cost. The analysis is riddled with difficulty, but is nonetheless of high importance for its elaboration of the functioning of Marxian “competition.”

The argument commences with an allowance for high- and low-cost firms rela- tive to the “bulk” of firms which produce “under average conditions” (MECW 37: 177). These outlying firms may contribute to the output supplied to the market albeit that market price is (under usual conditions) determined by the costs char- acterizing the average producers, in which event the high-cost firms “are unable to realise a portion of the surplus value contained in them,” while the low-cost firms enjoy an “extra surplus value”:

On the one hand, market value is to be viewed as the average value of commodities produced in a single sphere, and, on the other, as the individual value of the commodities produced under average conditions of their respective sphere and forming the bulk of the products of that sphere. It is only in extraordinary combinations that commodities produced under the worst, or the most favourable, conditions regulate the market value, which, in turn, forms the centre of fluctuation for market prices. The latter, however, are the same for commodities of the same kind. If the ordinary demand is satisfied by the supply of commodities of average value, hence of a value midway between the two extremes, then the commodities whose individual value is below the market value realise an extra surplus value, or surplus profit, while those, whose individual value exceeds the market value, are unable to realise a portion of the surplus value contained in them.

The presumption here is that “the ordinary demand” should be “satisfied by the supply of commodities of average value” or – as I understand Marx – that the quantity demanded at a price reflecting the costs characterizing the common run of firms can (potentially) be satisfied by the output of those firms alone, though in actuality the market will be supplied in part by the exceptional firms. (It is apparently a matter of chance which of these latter – with quantitative limits on their capacity relative to the average firms – will supply the demand.) It also seems to be taken for granted that the high-cost firms might remain in the industry at prices falling short of their “individual value,” for they are not represented as making actual losses but merely as being “unable to realise a portion of the surplus value contained in them.”

F. On “Market Value” and Competition

All this will appear troublesome if we think in terms of an upward-sloping supply curve – more specifically in this case a stepped supply function – and a demand curve sufficiently high to require the output of high-cost firms. Marx himself addresses the issue: “It does no good to say that the sale of commodities produced under the least favourable conditions proves that they are required to satisfy the demand” (177). His argument presumes rather a demand that might

be satisfied by the “bulk” of firms; and “[if ] in the assumed case the price were higher than the average market value, the demand would be smaller” – apparently referring to a backward movement along the demand curve as the price is raised experimentally from the average-cost to the high-cost level.

For all that, Marx does go on to allow that should demand be high enough then the market value will be determined by the high-cost firms: “ . . . if the demand is so great that it does not contract when the price is regulated by the value of commodities produced under the least favourable conditions, then these determine the market value.” But, he adds, “[t]his is not possible unless demand is greater than usual” [or] “if supply drops below the usual level,” a temporary situation only.

There is a corresponding allowance for the case where the potential output of average-cost firms exceeds quantity demanded at corresponding prices. Here market value will be determined by the low-cost firms: “Finally, if the mass of the produced commodities exceeds the quantity disposed of [to consumers] at average market values, the commodities produced under the most favourable conditions regulate the market value.” In this case “commodities produced under the least favourable conditions may not even realise their cost price” – and presumably go bankrupt – “while those produced under average conditions realise only a portion of the surplus value contained in them” (178).

But these two allowances represent for Marx unusual cases. For him the norm remains the one from which he set out, each industry comprising a range of firms but the bulk producing subject to “average” cost conditions and some few either below or above “average.” As mentioned above, the source of the differentials is not entered into, but they are possibly identified with differential c /v ratios.

We have shown in this chapter that “competition” is accorded the role of equaliz- ing profit rates across industries by which is intended appropriate industry expan- sions and contractions – that is what the Transformation of Values into Prices is all about. But what is the role of “competition” within each industry? As for the general principle: “What competition, first in a single sphere, achieves is a single market value and market price derived from the various individual values of com- modities. And it is competition of capitals in different spheres, which first brings out the price of production equalising the rates of profit in the different spheres” (179). “The latter process,” Marx adds, “requires a higher development of capitalist production than the previous one.”

Focusing now on the single industry, “the different individual values must be equalized at one social value, the above-mentioned market value” – alluding pre- sumably to the costs of the “bulk” of firms. This is assured by “competition”:

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For the market price [short-run price] of identical commodities, each, however, pro- duced under different individual circumstances, to correspond to the market value [long-run price] and not to deviate from it either by rising above or falling below it, it is necessary that the pressure exerted by different sellers upon one another be sufficient to bring enough commodities to market to fill the social requirements, i.e., a quantity for which society is capable of paying the market value. Should the mass of products exceed this demand, the commodities would have to be sold below their market value; and conversely, above their market value if the mass of products were not large enough to meet the demand, or, what amounts to the same, if the pressure of competition among sellers were not strong enough to bring this mass of commodities to the market.

Marx seems not to have been satisfied with his analysis – or it has been inade- quately recorded by Engels – for he proceeds to what appears to be a reformulation, treating market value as a weighted average of the differential costs of the various firms. Three cases are spelled out. The first again treats above- and below-average cost firms as of quantitatively small significance, which (he adds now) in any event cancel each other out on balance:

Now suppose that the bulk of these commodities is produced under approximately similar normal social conditions, so that this value is at the same time the individual value of the individual commodities which make up this mass. If a relatively small part of these commodities may now have been produced below, and another above, these conditions, so that the individual value of one portion is greater, and that of the other smaller, than the average value of the bulk of the commodities, but in such proportions that these extremes balance on another, so that the average value of the commodities at these extremes is equal to the value of commodities in the centre, then the market value is determined by the value of the commodities produced under average conditions (181). 21

Here, “the market value of the entire mass, regulated as it is by the average values, is . . . equal to the sum of their individual values; although in the case of the com- modities produced at the extremes, this value is represented as an average value which is forced upon them. Those who produce at the worst extreme must then sell their commodities below the individual value; those producing at the best extreme sell them above it” (182).

Thus far, we are on familiar ground. If, however, – assuming the same total demand and supply – “the part of the mass produced under less favourable conditions forms a relatively weighty quantity as compared with the average mass and with the other extreme . . . the mass produced under less favourable conditions regulates the market, or social, value.” This is not to say that the high-cost conditions literally “regulate” market value as in the initial account; for the weighted average obtained, which exceeds “the individual value not only of the commodities belonging to the favourable extreme, but also of those belonging to the average lot . . . would still

be below the individual value of those commodities produced at the unfavourable 21 This is said to settle the problem of the determination of market value set out in A Contribution

to the Critique of Political Economy of 1859 (MECW 29: 302).

35 extreme” (183). If, however, “demand is only slightly greater than supply,” then

F. On “Market Value” and Competition

the value will coincide with costs of the least-favored firms: “How close the market value approaches, or finally coincides with, the latter would depend entirely on the volume occupied by commodities produced at the unfavourable extreme of the commodity sphere in question. If demand is only slightly greater than supply, the individual value of the unfavourably produced commodities regulates the market price.”

In the third case when “the mass of commodities produced under better than average conditions considerably exceeds that produced under worse conditions, and is large even compared with that produced under average conditions . . . the part produced under the most favourable conditions determines the market value”

(182). 22 Corresponding to the previous case, the least-cost conditions do not liter- ally “determine” the market value except when “demand [is] weaker than supply” or “supply far exceeds demand”:

Finally, if the lot of commodities produced at the favourable extreme occupies greater place than the other extreme, and also than the average lot . . . then the market value falls below the average value. The average value, computed by adding the sums of values at the two extremes and at the middle, stands here below the value of the middle, which it approaches, or vice versa, depending on the relative place occupied by the favourable extreme. Should demand be weaker than supply, the favourably situated part, whatever its size, makes room for itself forcibly by contracting its price down to its individual value. The market value cannot ever coincide with this individual value of the commodities produced under the most favourable conditions, except when supply far exceeds demand (183).

There follows a confirmation that in the analysis involving the “weighting” of differential-cost segments it was assumed that supply and demand are balanced – that the “mass of commodities does not merely satisfy a need, but satisfies it to its full social extent”:

In the foregoing determinations of market value it was assumed that the mass of the produced commodities is given, i.e., remains the same, and that there is a change only in the proportions of its constituent elements, which are produced under different conditions, and that, hence, the market value of the same mass of commodities is dif- ferently regulated. Suppose, this mass corresponds in size to the usual supply. . . . Should demand for this mass now also remain the same, this commodity will be sold at its mar- ket value, no matter which of the three aforementioned cases regulates this market value. This mass of commodities does not merely satisfy a need, but satisfies it to its full social extent (184; emphasis added).

22 Marx here emphasizes that the concern is long run or cost price: “We ignore here the over- stocked market, in which the part produced under most favourable conditions always regulates

the market price. We are not dealing here with the market price, in so far as it differs from the market value, but with the various determinations of the market value itself” (MECW 37: 182).

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The “demand-supply” configurations when the extreme cost conditions are true determinants are then summarized:

Should their quantity be smaller or greater, however, than the demand for them, there will be deviations of the market price from the market value. And the first deviation is that if the supply is too small, the market value is always regulated by the commodities produced under the least favourable circumstances and, if the supply is too large, always by the commodities produced under the most favourable conditions; that therefore it is one of the extremes which determines the market value, in spite of the fact that in accordance with the mere proportion of the commodity masses produced under different conditions, a different result should obtain.

Once again, there is some intimation that the increase in demand or in supply that dictates one or other of the extreme market values entail temporary disturbances: “ . . . if the demand increases, and consequently the market price rises above the market value, this may . . . [in] some lines of production . . . bring about a rise in the market value itself for a shorter or longer period, with a portion of the desired products having to be produced under worse conditions during this period” (189; emphasis added).

Focusing on normal conditions entailing market value as a weighted average of differential costs Marx reaches a remarkable conclusion: “For a commodity to be sold at its market value, i.e., proportionally to the necessary social labour contained in it, the total quantity of social labour used in producing the total mass of this commodity must correspond to the quantity of the social want for it, i.e., the effective social want” (191); and it is “competition” that assures this outcome: “Competition, the fluctuations of market prices which correspond to the fluctuations in the ratio of demand to supply, tend continually to reduce to this scale the total quantity of labour devoted to each kind of commodity.” Here Marx refers not only to “demand-supply” in the sense of those short-term fluctuations that reduce market prices to market values, but also – and strikingly – to the fact that when market values rule labor is efficiently allocated to satisfy “effective social wants.” Here the potential significance of the pattern of demand emerges with a vengeance to the extent that changes therein affect the “weighting” of cost segments and thus market value itself. How Marx responded to this evident challenge will emerge shortly.

A more general feature of the competitive process may be noted here. Marx adopts what in effect is the old Smithian notion of a race to obtain goods in excess demand or to dispose of goods in excess supply: “If the demand for [a] particular kind of commodity is greater than the supply, one buyer outbids another – within certain limits – and so raises the price of the commodity for all of them above the market value. . . . If, conversely, the supply exceeds the demand, one begins to dispose of his goods at a cheaper rate and the others must follow . . . ” (192–3). By implication, an equilibrium situation entails the absence of “competitive” activity, which incidentally has much in common with the position of the early Austrian

37 economists (see Endres 1997: 139). It also seems to follow from Marx’s account

F. On “Market Value” and Competition

that in equilibrium the two sides – buyers as a group and sellers as a group – are in balance, having in mind that each side “acts always more or less as a united whole against its antagonist . . . unity of action ceas[ing] the moment one or the other side becomes the weaker, when each [individual buyer or seller] tries to extricate himself on his own as advantageously as he possibly can.”

Marx’s analysis encompasses industries composed of firms producing at differential cost levels, some firms earning “surplus profit”: “Our analysis has revealed how the market value . . . embraces a surplus profit for those who produce in any particular sphere of production under the most favourable conditions” (MECW 37: 197). The further consequences of this situation are not elaborated; and nothing is said of those firms producing under the least favorable conditions.

It is striking that intra-industry competition is said to play on values, considering that capitalists operate only on the surface, i.e., at the prices-of-production level of conception. However, the foregoing ellipses cover the supplementary assertion that “everything said concerning [market value] applies with appropriate modifications to the price of production,” though the discussion is regrettably brought to a precipitous halt at this point. For elaboration we refer to the analysis of rent later in Capital 3 which takes for granted the price-of-production rather than the value scheme. Surplus profit of low-cost firms “can only arise from the difference between the general and the individual price of production and consequently from the difference between the general and the individual rate of profit” (636). And it is the average industry cost that determines the market price-of-production: “ . . . the general price of production . . . regulates the market prices of the commodities produced by the capital in this sphere of production in general . . . .”

Now to the extent that the advantage enjoyed by low-cost firms are attributable to some power source such as a waterfall, or a “monopolisable force of Nature . . . which is only at the command of those who have at their disposable particular por- tions of the earth and its appurtenances” (638), the “surplus profit is transformed into ground rent” – a form of differential rent (639). But a cost deviation from the average may be due to scale economies, “the fact that capital is used in greater than average quantities, so that the faux frais of production are reduced, while the general causes increasing the productive power of labour (co-operation, division of labour, etc.) can become effective to a higher degree . . .”; or they may reflect the applica- tion of “better methods of labour, new inventions, improved machinery, chemical manufacturing secrets, etc., in short, new and improved, better than average means of production and methods of production are used” (637–8). These advantages are represented as necessarily temporary, any scale advantage being “cancelled out as soon as equal magnitudes of capital are used on the average” (638), and any techno- logical advantage “disappear[ing] as soon as the exceptional method of production becomes general or is surpassed by a still more developed one.” Indeed, “there is

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no particular reason why all capital in the same production sphere should not be invested in the same manner. On the contrary, the competition between capitals tends to cancel these differences more and more. The determination of value by the socially necessary labour time asserts itself through the cheapening of commodities and the compulsion to produce commodities under the same favourable condi- tions.” It is thus by recourse to the dynamics of competition, that Marx avoids the dire threat noted above whereby a change in demand patterns might itself dictate industry cost – and industry value. And though he does not spell out explicitly that relatively inefficient firms producing at above average costs which fail to modern- ize must (given demand conditions at least) fall by the wayside, this is implicit in

what has been said in the above account. 23 All in all, though Marx wrote reams on the matter of intra-industry differential costs, he realized how much of his scheme depended on a clear-cut notion of “socially-necessary labour” which he did not manage properly to justify.