Jess Fournier
Department of Feminist Studies, University of California, Santa Cruz
Price is an expression of the socially agreed-upon exchange value of a commodity, typically expressed as a quantity of money or gold (Marx 1995). The price system describes an economy formed around exchanging commodities based on their prices (Baumol & Stigler, et al. 2011). Analyzing the formation and fluctuation of prices offers insight into debates within different theories of political economy and forms of economic organization. When considering the price system, two questions arise: First, how are prices formed? Second, what purpose do prices serve in the economy?
While at the most basic level price is an expression of value, the relationship between price and value is more complex than it initially appears. Adam Smith defines a commodity’s “natural price” as the price that it costs its creator to produce it, while its “actual price” is the price at which it is commonly sold—which can be lower, higher, or equal to the natural price due to supply and demand fluctuations in particular industries (Smith 1937, Chapter VII). Even natural price is not necessarily a faithful expression of the cost of its production—rather, the natural price is the lowest amount that is sufficient for the producer to continue producing and selling the commodity. This makes natural price an “enabling condition,” that ensures ongoing production and supply (Andrews 2015, 275).
Karl Marx notes that these “quantitative and qualitative incongruities” between price and value are necessary for the capitalist market economy to function (Marx 1995, Chapter 3). Marx defines price as the expression of a commodity’s value (itself an expression of the amount of labor-time expended to produce a commodity) in the form of money. Price is a “purely social form” of value. In other words, value must be expressed as a price in order to provide a basis for exchange. However, once a commodity is assigned a price, that price can express the value of the commodity or deviate from it in order to describe the amount of money the commodity can be sold for in different circumstances (Marx 1995, Chapter 3). Marx also describes “imaginary prices,” prices that are applied to things that are not produced by human labor but which become commodities when sold for a price, including uncultivated land, honor or conscience (Marx 1995, Chapter 3). David Harvey notes that price can also represent “reputational value,” which is also not directly derived from labor, but could include the reputation or status of a particular brand like Apple (Harvey 2019). Imaginary prices make clear that prices are not always or exclusively an expression of labor-time or of the cost to produce a particular commodity. In fact, Harvey notes that the equilibrium of supply and demand necessary in a capitalist market economy can only work if prices positively or negatively deviate from the labor-time value of a commodity depending on supply and demand conditions (Harvey 2019). The “equilibrium price” of a commodity is the closest approximation of its value (Harvey 2018, 63).
This brings us to the question of the purpose of price. In a free market economy, the price system is a means to regulate supply and demand and seek an equilibrium (Harvey 2019). Like the “invisible hand” of the market, Smith’s definition of natural price reflects an understanding of the price system as the mechanism that allows supply and demand forces to self-regulate and to allow producers to continue producing and selling commodities.
Friedrich Hayek describes the price system of a capitalist free-market economy as a method for communicating economic knowledge efficiently among diffuse actors who do not have perfect or complete knowledge. Prices act as “price signals” to coordinate the actions of different people in networks of commodity production to increase or decrease production of a particular commodity without direct instruction or control from any individual or group of people (Hayek 1945). Because the price for any one commodity is related to that of every other commodity, people only need information directly relevant to them in order to make the most rational decision about what to produce and how to price their products. While not a product of direct human intervention, the free market price system “consists in inducing the individual, while seeking his own interest, to do what is in the general interest” (Hayek 1945).
Hayek’s text is part of the socialist calculation debate between classical, neoclassical, and Marxian economists. The debate focused on whether socialist societies could use central planning to replicate or improve upon a capitalist market economy, including the question of how a collectivist state would set and use prices (Levy & Peart 2018, 12672). As a classical economist, Hayek’s notion of price signaling is a critique of centrally-planned socialist economies and economists who endorse them, such as Oskar Lange. Hayek argued that planned price formation is impossible. Due to the vastness and constantly changing conditions of the economic system, no central group of planners could set prices efficiently or rationally (Shapiro 1989, 139). However, some proponents of socialist planned or market economies argue that price has a different purpose in a planned economy than in a market economy. Czerwinski argues that the purpose of price theory is a mechanism to explain fluctuations that are not part of a socialist price system. Because prices are set by a central authority in a planned socialist economy, there is no need for a price theory to explain price changes, while in a market economy the price theory “can be used by economic policy-makers for controlling the economy in so far as the capitalist mode of production allows for intervention” (Czerwinski 1978 , 373). Because a central authority directly controls a planned economy, the system must construct a “rational price system” to indicate how prices should be set to achieve particular goals. Hayek characterizes the market economy as rational because it coordinates the effective utilization of resources when complete knowledge is impossible and the end results for each individual producer or consumer are unknown. In contrast, Czerwinski notes that a price system can only be understood as rational or irrational because of its consequences: “the particular acts of production and exchange which it induces producers and consumers to perform” relative to stated goals – such as increased food production, intensive industrialization, etc. (Czerwinski 1978 , 375-6).
That the price system serves particular goals is evident in theories of socialist planned economy, but is also a reality in capitalist ones even if not directly stated. The existence of monopsonies and government-set prices are further evidence that prices in a capitalist economy are not exclusively determined by market forces.
Price can also serve as a means to extract surplus value for companies or private actors. In Mariana Mazzucato’s critique of value extraction practices in the financial, tech and pharmaceutical sectors, among others, she notes that high drug prices have little to do with their efficacy in treating disease or their cost to produce, but that these prices generate value that the pharmaceutical company then extracts (Mazzucato 2018, 8). Similarly, Harvey argues that investors fix prices for items that are not produced by labor– such as art, currency, and carbon futures– as a means to generate surplus value. This surplus value does not continue to circulate in commodity production (Harvey 2019, 94). These examples reflect Marx’s discussion of imaginary prices, where price comes to represent something besides an exchange value or the labor that produced an object. These prices do not form an enabling condition of commodity production or lead to the kind of rational decision-making that Hayek predicts will follow from supply and demand adjustments. Instead, high prices that generate surplus value in speculative markets ensure that “the rational capitalist behaves irrationally from the standpoint of the reproduction process of capital as an evolving totality” (Harvey 2019, 94). In addition Silvia Federici credits the role of state policy in setting prices in the 1450-1650 period of the European Price Revolution as instrumental in the development of capitalist accumulation. Federici notes that government policies that prevented laborers from organizing and giving merchants maximum freedom resulted in the loss of two-thirds of the wage’s purchasing power in a few decades (Federici 2004, 76). In this case, rise in prices of goods corresponded with a decrease in wages. This also challenges Hayek’s notion that the price system is the best way to share knowledge. Rather than a representation of value or a signal to alter commodity production, Federici’s analysis reveals that price was used to specifically change the economic and social status of laborers. In considering how prices deviate from value, it is crucial to understand how price can re-shape value rather than being a representation of it.
(See Capital, Neoliberalism, Fetishism)
Bibliography
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