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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".[1] A production price can be thought of as a type of supply price for products;[2] 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,[3] 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") 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 deviations, 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, and therefore could observe the work and its results in daily life.
- ^ “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.
- ^ 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.
- ^ Karl Marx, Capital, Volume III, Penguin 1981, p. 1000.