Prices of production

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, equipment, operating expenses, and labour) 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. 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; in capitalist production, a profit impost is the normal precondition for the supply of goods and services. When competition for product markets intensifies, the producers' margin between cost prices and sale prices, their true income, shrinks. In that case, the producers can only maintain their profits, either by reducing their costs and improving productivity, or by capturing a bigger market share and selling more product in less time, or both (the only other option they can try is product differentiation). In a well-established product-market, however, the fluctuations in supply and demand are usually not very large. This basic market logic was already well known by medieval merchant capitalists long before the dawn of the modern era. Medieval merchant houses could certainly estimate their own rate of surplus value and profit rate (the amount of (surplus-)labour required to yield a certain financial result or valorization) but they usually did not have so much knowledge about socially average profit rates; few relevant data or statistics were publicly available and a "general rate of profit" might not exist anyhow, for lack of an integrated national market for products and the limited scope of industrialization.

The regulating price of a given type of product is a sort of modal average price level, above or below which people would be much less likely to trade the product. If the price is too high, buyers cannot afford to buy it, or try to get cheaper alternatives. If the price is too low, sellers cannot cover their costs and make a profit. So normally there is a limited range of prices within which the product can be traded, with upper and lower bounds. The production price then refers basically to the "normal or dominant price level" for a type of product that prevails during a longer interval of time. It presupposes that both the inputs and the outputs of production are priced goods and services—that is, that production is fully integrated in fairly sophisticated market relations enabling a sum of capital invested into it to be transformed into a larger sum of capital. In pre-capitalist economies, this was not the case; many inputs and outputs of production were not priced. Marx's claim is that the production prices of products themselves are fundamentally determined by the comparative labour requirements of those products, and therefore are constrained by the law of value. Since, however, not all goods are produced or reproducible goods, not all goods have production prices. A production price in Marx's sense can exist only in markets developed sufficiently for a "normal" rate of profit on production capital invested to become the ruling average for a group of producers.

Substantively, Marx argues that the prices of new products sold will, assuming free competition for an open market, tend to settle at an average level that enables at least a "normal" rate of profit on the capital invested to produce them, and, as a corollary, that if such a socially average rate of profit cannot be reached, it is much less likely that the products will be produced at all (because of comparatively unfavourable profitability conditions). Marx defines the "general rate of profit" as the (weighted) average of all the average profit rates in different branches of production - it is a "grand average" profit rate on production capital.

According to Marx's theory, investment capital is likely to shift out of production activities where the rate of profit is low and toward activities where profitability is higher; the "leading" sectors of industry are those where profitability is highest (today, these are in the production of computer facilities, healthcare, oil products and finance which serve the richer strata of the world population). The precondition is the free mobility of capital and labour, and thus there is a systemic tendency to remove all obstacles preventing investors from investing in sectors where profits are higher. If, for any reason, the free movement of capital is blocked or restricted, large differences in the profit rates of enterprises are likely to occur. In general, the trajectory of capitalist development is determined by the industries where the profits are the best, because their products are in high demand, because of special production or market advantages, etc. According to Marx, the movements of different production prices relative to one another importantly affect how the total "cake" of new surplus value produced is distributed as profit among competing capitalist enterprises. They are the basis of the competitive position of the producers, since they fundamentally determine profit yields relative to costs.

Some writers argue that Marx's production price is similar, or performs the same theoretical function, as the "natural prices" of classical political economy found, for example, in the writings of Adam Smith and David Ricardo (though the concept of natural prices is much older). This is the orthodox Marxist view, based on quotations where Marx says that his concept of production prices recalls the classical idea of natural prices. In this case, Marx's production price would be essentially a "centre of gravity" around which prices for outputs in a competitive market will fluctuate in the long run (cf. Fred Moseley's view). This is an interpretation within the framework of equilibrium economics, which suggests that production prices are really a kind of "equilibrium prices". It can be supported with some textual evidence, insofar as Marx sometimes defines the production price as the price that would apply if the supply and demand for products were balanced. At other times, he refers to a "longterm average price" or a "regulating price". He does not say precisely how these three different concepts are related.

The main objection against equating production prices with natural prices is that Marx's concept of production prices is precisely a critique of the "natural prices". Support for this interpretation can be found in Capital, Volume I, where Marx criticizes and ridicules the concept of a "natural price of labour" - this concept, he argues, rests on confusions of several different economic categories. According to this argument, there is actually nothing "natural" about the allegedly "natural" prices - they are socially determined effects of capitalist production and trade. More importantly, the existence of production prices does not logically depend on, or presuppose, an equilibrium state. If the classical economists talked about the "naturalness" of price-levels, this was ultimately a theoretical apologism; they could not reconcile their labour theory of value with the theory of the distribution of capital. They assumed a market balance, without proving how it could exist. The general theory behind the concept of natural prices was that the free play of markets would, through successive adjustments in the trading process, converge on price levels at which sellers could cover their costs and make a normal profit, while buyers could afford to buy products; with the effect, that relative labour efforts would be genuinely proportional to relative prices. Yet classical political economy provided no credible theory of how this process could actually occur.

In the sphere of capitalist production, Marx argues, commodity values are expressed in the form of prices of production, established jointly by average input costs and by the ruling profit margins applying to outputs sold. It is a result of the establishment of regular, developed market trade; the production price averages reflect the fact that production has become totally integrated into the circuits of commodity trade, in which capital accumulation has become the dominant motive. But what prices of production simultaneously hide, he argues, is the social nature of the valorization process—that is, how exactly an increase in capital value has occurred through production. The direct connection between labour time and value, still visible in simple commodity production, is largely effaced; only cost prices and sale prices remain, and it seems that any of the factors of production (which Marx calls the "Holy Trinity" of capitalism) can contribute new value to output, paving the way for the concept of the production function.

Different types of production prices

The first interpretative difficulty concerns the existence of various production prices. Most Marxists simply took Marx's concept of production prices for granted, as being more or less the same as Ricardo's idea, and they did not inquire into it in precise detail. They believed that the idea of a production price was simple, obvious and not controversial. So they missed altogether the fact that in Capital Vol. 3 Marx identified (though often not very clearly) at least five main types of production prices:

These different prices are revealed when we study the composition of the cost structure of a product at different stages of its production and supply. One source of interpretive difficulty is that Marx often assumes in his drafts that these five kinds of prices are all identical. But that is true only in the special case where one enterprise sells directly to the final consumer.

The reason for this conflation is probably that Marx's real analytical concern was not really with the pricing processes as such, but with the main factors influencing the realisation and distribution of new surplus-value produced, when sales occur. After all, his argument was that competition in capitalism revolves around the quest of obtaining maximum surplus-value from production in the form of generic profit income (profit, interest, rent). The question was: how does a sum of capital invested in production get transformed into a larger sum of capital? What are the dynamics and overall results of that process? What are the implications for the process of economic reproduction?

The existence of different types of production prices implies a much more complex picture than Marx initially provides in his discussion of the leveling out of profit rates through price competition. Thus, for example, in his discussion of ground rent, Marx claims that farm products can be persistently sold for more than their price of production, but below their value, while many manufactured products obtain their price of production only because they are sold for more than their value. In Marx's more developed theory of the circulation of commodities, the values of products, their prices of production and their market prices are all semi-autonomous variables which can both diverge and converge, through constant market fluctuations, affecting the profitability of enterprises. Nevertheless, Marx claims they will tend to converge in the long term.

Oversimplification in the model

A second source of interpretive difficulty is that in his argument Marx often conflates (1) capital advanced (to acquire inputs necessary for production) with (2) capital in use and with (3) capital consumed (that fraction of the value of inputs used up in the production of new output). In his simplified quantitative examples, he just assumes very abstractly, for the sake of argument, that:

Most probably the reason was that his real interest was in the overall dynamics of capital accumulation, competition, and the realisation of surplus value produced, assuming output would sell. He was thinking of grand averages and overall results. The simplified picture does not obtain in reality, among other things because, as Marx himself notes, capitalist competition turns on buying commodities below their value and selling them above their value (or, in the ideal competitive situation, to sell them below their value at a good profit, with a high turnover).

Marx's theory is frequently confused with input-output economics and the marginalist theory of capital, in which total inputs and total outputs are always exactly equal, an equality accomplished by treating the factor income which is gross profit as an input, so that profit is both a cost and a revenue at the same time. Marx did not talk about inputs and outputs in this double-entry bookkeeping sense, where the source of funds balances against the use of funds; instead, he was concerned with how a sum of capital was transformed into a larger sum of capital through a net addition of new value created by workers in production. He was not really talking about quantities of input commodities and quantities of output commodities, but about quantities of capital required for commodity production and quantities of capital created by commodity production.

If indeed the value of inputs bought was exactly equal to the value of outputs sold, capitalists would not even invest in production, because they would get no profit out of it. So from Marx's point of view, input-output economics really mystified the "capital-relationship", i.e. the ability of the bourgeoisie to capitalize on the surplus labour of the workforce in virtue of its ownership of the means of production (in chapter 48 of Capital Vol. 3, he refers satirically to the factors of production theory as the "holy trinity" of political economy).

Theoretical status of production prices

A third source of interpretive difficulty concerns the question of what kinds of prices production prices really are. Do these prices really exist, and if so, in what way? Or are they only theoretical or ideal prices? What exactly is the "average" an "average" of? What does the "cost-price" really refer to, and at what point in the process (inputs purchased, output produced before sales, output sold)? Marx talks about production prices variously as:

Consequently, it remains somewhat ambiguous in what way such prices exist in reality. The conceptual challenge in modelling is to show how these three variables are related. It could, in principle, also be argued that some types of production prices are empirical price averages, while other ones only express theoretical price-levels. Obviously, if production prices are regarded only as purely "theoretical" entities, then it is not possible to claim also that they really regulate actual prices. A price level which exists only in theory, and not in reality, cannot be said to determine real price-levels (other than in the sense of publicly available price information influencing market expectations).

In grappling with these issues, it must also be remembered that when Marx lived there was little macro-economic statistical data available that would enable theoretical hypotheses to be tested and relativised. Marx had deduced the motions of capital essentially from an enormous amount of economic literature he read, but when, towards the end of his life, he toyed with the idea of investigating economic fluctuations econometrically, Samuel Moore convinced him this was not possible, because relevant economic data and mathematical tools did not exist yet. Comprehensive macro-economic data became available only half a century later.

Marx had pointed the way to solving the problems raised by the classical political economists, without however providing a complete answer. He really believed though that a "general rate of industrial profit", applying economy-wide to all industries, would be formed (at least in the sense of the minimally acceptable profit rate that is the bottom line for the average business operation) but in truth he lacked the data to prove it. He did not discuss in any detail the difference between distributed and undistributed profit, or tax requirements, and how this might affect profit statements. His discussion was limited to physical capital and labour employed, abstracting from ancillary costs and incomes unrelated to production which enterprises usually have (including tax imposts and subsidies), asset transactions and changes in market prices.

Production prices and the transformation problem

The concept of production prices is one "building block" in Marx's theory of "the tendency of differences between rates of profit on production capital to level out through competition" which aimed to tackle a theoretical problem left unsolved by David Ricardo. This problem concerned the question of explaining how an average or "normal" return on production capital invested (e.g. 8-16%) could become established, so that capitals of equal size reaped equal profits, even although the enterprises differed in capital compositions and amounts of labour performed (see labor theory of value) and consequently generated different amounts of new value. Intuitively, if the labour theory of value is true, then firms which use more labour to produce products would also create more value, and receive bigger profits. In reality, it is just the other way round: more efficient firms which use less labour to produce products receive bigger profits.

According to Marx, this was not simply a logical problem, a social accounting problem or theoretical problem, but a structural contradiction intrinsic to the capitalist mode of production, which had to be continually mediated. The fact that more or less value could be appropriated by investors from the labour-efforts of the workers employed, and thus that different labour efforts were unequally rewarded, was in his eyes central to the competitive process - in which the norms of labour effort continually clashed with the norms of profitability. On the surface, it looked to the individual observer as if profit yields on capital determine expenditures on labour, but in aggregate, it is - according to Marx - just the other way around, since the volume of labour-time worked determined how much profit could be distributed among producing capitalists, via the sales of their products. The mass of surplus labour performed in the sphere of production set a limit for the mass of surplus value that could be distributed as profit in the sphere of circulation.

Accounting interpretation

In some interpretations of the Marxian transformation problem, total "(production) prices" for output must equal total "values" by definition, and total profits must by definition equal total surplus value. However, Marx himself explicitly denied in chapter 49 of the third volume of Das Kapital that such an exact mathematical identity actually applies. As soon as synchronic and diachronic variability in labour productivity is admitted, then the two famous identities cannot be true even in theory. Subsequently, Frederick Engels emphasized in this regard that an idealization of reality is not the same thing as reality itself, in a letter to Conrad Schmidt dated March 12, 1895. At best, it is an assumption used in modelling, which is justified if - as Marx believed - the divergence between total values and total production prices is quantitatively not very great, because actual labour expenditures constrain their divergence. But all this has never bothered neo-classical scholars such as Paul Samuelson in their interpretation of what Marx tried to do.

Logically, the only way Marx has to express an identity of aggregated output prices and aggregated output values, is to say that both of the totals are equal to exactly the same quantity of abstract labour time, or a quantity of gold. But this equivalence is only asserted "by definition." In the real world, there exist no causal forces that could guarantee such an exact match. Moreover, the identity cannot be empirically proved in any direct way, since to find the quantitative relationship between labour-time and value, a relationship between labour-time and money must already be assumed.

The "accounting" interpretation of production prices (value/price identity at the macro-level) by economists, according to which price distributions and value distributions can be inferred from each other, would suggest that the production price is empirically obtained from a straightforward statistical averaging of aggregated cost prices and profits. In that case, the production price is a theoretical midpoint which fluctuating actual prices would match exactly only by exception.

Production prices as dominant price-levels

In another interpretation, however, the production price reflects only an empirical output price-level which dominates in the market for that output (a "norm" applying to a branch of production or economic sector, which producers cannot escape from). That is, the prevailing value proportions set a range or band within which prices will move. In practice, that means simply that there exists a minimum sale price at which a commodity can be viably and profitably produced; if it is not possible to sell a product at that price, it is unlikely that it will be produced at all.

These readings of Marx imply that traditional interpretations of the transformation problem are really rather meaningless; the apparent mathematical wizardry is based on false interpretations of the concepts involved, and the reciprocal effects of individual actions and aggregate social outcomes is overlooked. Mathematical equations cannot substitute for conceptual precision in the definition of measuring units; they can only reveal the logical and quantitative implications of concepts and measurement units.

Statics and dynamics

At the beginning of Capital Vol. 3, Marx provides a clue to how he thinks the "transformation problem" is solved in reality. He implies that it can be solved only by examining capital and profit distributions as a dynamic process, rather than statically. His argument is, that what industrial competition really revolves around, is principally the difference between the value of the new commodities produced, and their cost-prices, i.e. the potential surplus-value which can be realized from them. There are constant disparities in space and time between labour-expenditures and capital returns, but also just as constant attempts to overcome or take advantage of those disparities. Thus, unrestricted economic competition has the result that the law of value regulates the trade in newly produced commodities: the ultimate limits of what products will trade for, i.e. their supply price, are set by comparative costs in labour-time.

In the real world,

When Marx created a simplified, abstract model of profit distributions, he was not primarily trying to prove that the two famous identities (total profit=total surplus value, and total product value=total production price) are compatible with price-value divergences and with profit distributions according to capital employed (to the contrary: for analytical purposes, Marx assumes that they are compatible). Instead, he was trying to model the basic parameters of business competition for a share of the new surplus-value produced by the working class. By identifying what the business competition is ultimately about, Marx was able to explain both what really motivates the business owners, and why the surface appearance of the business process perceived by an individual is almost the exact inverse of the real economic process in society as a whole.

Value and price

A lot of criticism of Marx's concept originates from the ambiguities referred to earlier. Consequently, many of the criticisms can, according to some Marxists, be dispelled simply by a more exact definition of the cost, product and revenue aggregates used, and of the timing of transactions (see e.g. Temporal Single System Interpretation).

In doing so, it must be admitted though that Marx's draft manuscript often shows sloppy use of terminology and concepts, and that Marx's purpose was often not fully explicit. At a high level of abstraction, he moves very easily and cavalierly from values to prices and back again, and restricts his discussion of "capital invested" to intermediate goods, fixed capital and labour power only.

It never becomes quite clear how exactly these different ideas can all be reconciled. Quite likely Marx would have ironed out inconsistencies if he had prepared his own draft for publication, but he did not do so, leaving his readers with important issues of interpretation.

In Marx's view, a capitalist production process was a valorisation process in which new value was formed. The theoretical problem was, that this value-forming process - the process vital for capital accumulation - took place mainly external to the market, being bracketed by the transactions M-C (purchase of inputs, C, using money, M) and C'-M' (sales of new output, C', for more money, M'). Between the successive exchanges, however, economic value was conserved, transferred and added to. Management then tried to estimate the cost and profit implications of different tasks and activities in production for the growth of capital, without full certainty of results.

But in that case, the domains of product-values and product-prices, and consequently the domains of value relations and price relations, were separate but co-existing and overlapping domains (unless one is willing to argue that goods have an economic value only at the point where they are being sold for a price). "Price management" was not really possible insofar as prices were determined by markets which individual producers could not control, but value-based management was possible.

How could this business reality best be modelled? In contemporary "value-based management" by corporations, we can witness a continual cross-reference between past prices, current prices and future prices occurring, because there is practically no other way to do it for business purposes. In the words of group controller Gerard Ruizendaal of Royal Philips Electronics,

A partner of McKinsey & Company comments:

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In that case, it is impossible for the sum of input values to be exactly equal to the sum of output values. Indeed, that is exactly what, according to Marx, capitalists are in business for: to invest a sum of capital in production in order to get a larger sum of capital out of it. In bourgeois theories, value appears spontaneously out of trading activity in the sphere of circulation. The more the market expands and the more buying and selling there is, the more value there is, on this view. For Marx, it is in reality exactly the other way around: the more value workers create for their company, the faster companies can increase their revenues and deploy more capital at attractive rates of return. Marx regarded the prices of production as the "outward expression" of the results of a valorisation process in production, and in order to be able to talk about price aggregates at all, he thought reference to value relations was completely unavoidable.

Not only was a value-theoretic principle required simply to group prices, relate them and aggregate them (meaning principles of value equivalence, comparable value, value transfer, value conservation, value creation and value used up or destroyed), but most of the stock of labour-products in an economy at any time had no actual price, simply because they weren't being traded. To what extent their value could be realised through exchange in the future could be known definitely only "after the fact", i.e. after they were actually sold and paid for. In the meantime, one could only hypothesize about their price, working from previous data. But in the final analysis, the attribution of value to products implied a social relation, without which value relations could not be understood. A community of independent private producers expressed their co-existence and mutual adjustment through the trading prices of their products; how they were socially related was expressed through the forms of value.

Facts and logic

The concept of "average profit" (a general profit rate) suggested that a process of competition and market-balancing had already established a uniform (or ruling average, or normal) profit rate previously; yet, paradoxically, what profit volumes would be (and consequently profit rates) could be established only after sales, by deducting costs from gross revenues. An output was produced before it was definitively valued in markets, yet the quantity of value produced affected the total price for which it was sold, and there was a sort of "working knowledge" of normal returns on capital. This was a dynamic business reality Marx sought to model in a simple way.

Lack of a formal proof

Marx's critics interpreting his models often argue he keeps assuming what he needs to explain, because rather than really "transforming values into prices" by some quantitative mapping procedure, such that prices are truly deduced from labour-values, he either (1) equates value quantities and price quantities, or else (2) he combines both value quantities and price quantities in one equation. Somewhat confusingly, the cost price refers at one point to the capital advanced (input), and at another point to a component of the value of the new product (output).

Thus, for example, either Marx infers a rate of profit from a given capital composition and a given quantity of surplus-value, or else he assumes a rate of profit in order to find the amount of surplus-value applying to a given quantity of capital invested. That might be fine if the aim is to just investigate what profit an enterprise or sector would receive on average, having produced a certain output value with a certain capital composition. But this manoeuvre of itself cannot contain any formal proof of a necessary quantitative relationship between values and prices, nor a formal proof that capitals of the same size but different compositions (and consequently different expenditures of labour-time) must obtain the same rate of profit. It remains only a theory.

Marx insists both that output prices obtained will necessarily deviate from values produced, but also that the sum of prices would equal to the sum of values in the pure case, yet, critics claim, he fails to show quantitatively how a distribution process could then occur such that price magnitudes map onto value magnitudes, and such that a uniform profit rate returns equal profits to capitals of equal sizes (a mapping relation is used here in the mathematical sense of a bijective morphism, involving one-to-one correspondence between value quantities and price quantities via mathematical equations). In that case, there is again no formal proof of any necessary relationship between values and prices, and Marx's manuscript really seems an endless, pointless theoretical detour leading nowhere. In modelling, simple logical paradoxes appear of the type that:

All these conceptual and logical issues mentioned become crucial when attempts are made to model value and price aggregates mathematically to study capitalist competition. Different kinds of theoretical assumptions or interpretations will obviously lead to very different results.

What is the transformation?

In general, many modern Marxists nowadays think that Marx's idea of "transformation" was badly misinterpreted. It does not refer to a "mathematical conversion of values into prices". After all, constantly shifting product-values and product-prices co-exist side by side all the time according to Marx's theory, and operate in tandem. Rather, the transformation means that the direct regulation of the exchange of commodities according to their value is, in a capitalist mode of production, transformed into the regulation of the exchange of commodities by their production prices - reflecting the fact, that the supply of commodities in capitalist society has become conditional on the accumulation of capital, and therefore on profit margins, within the framework of market competition. Nevertheless, Marx argues that production prices are still determined by underlying product-values (i.e. the average labour requirements for their supply). There is no logical proof available for that argument, only an empirical proof, insofar as there is a close correspondence between the magnitudes of producers' product prices and the magnitudes of labour-time required to produce them, across longer intervals of time (see below).

If market trade consisted only of simple exchange (the exchange of things of equal value by the direct producers themselves), then balancing production effort, output and demand would be a fairly simple, straightforward matter. But in reality it is not so straightforward precisely because capitalist market trade is not simple exchange. Production effort, output and demand can be balanced in capitalism, only if sufficient profits are made and the accumulation of capital grows. In reality, products are constantly being sold above or below their value, according to what makes the best possible profit on the turnover, given market fluctuations.

Whatever view one takes on the theoretical issues, no one can evade the (either simultaneous or sequential) reciprocal effects of individual business behaviour and aggregate economic outcomes. Additionally, it must also be recognised that "prices" are not all of one kind; actual market prices realised are not the same as ideal prices of various kinds, which may be extrapolated from real prices.

Level of abstraction

A more serious criticism of Marx is that the theory of prices of production is still pitched at a far too abstract theoretical level to be able to explain anything like specific real price movements. That is, Marx only illustrated with examples the general results towards which the competitive process would tend to move in capitalism as a social system. He tried to establish what regulates product prices in the "simplest and purest case". He believed that if one could not do that, then one could also not explain all the variations from the pure case. He had not however provided a model for accurately predicting specific price movements. In this regard, it is interesting to study the writings of Michael Porter, in order to see how Marx's original intent relates to modern competitive business practice, and how it might be elaborated on (see further the important studies by Willi Semmler, Christian Bidard, Peter Flaschel and Anwar Shaikh).

Some critics conclude that because Marx fails to "transform" value magnitudes into price magnitudes in a way consistent with formal logic, he has not proved value exists, or that it influences prices; in turn, his theory of labour-exploitation must be false. But the validity of Marx's value theory or his exploitation theory may not depend on the validity of his specific transformation procedures, and Marxian scholars indeed often argue that critics mistake what he intended by them. In particular, since value relations - according to Marx - describe the proportionalities between average quantities of labour-time currently required to produce products, value proportions between products exist quite independently of prices (and irrespective of whether goods are currently priced or not). As the structure of product-values changes across time, the structure of prices is likely to change as well, but product-prices will fluctuate above or below product-values and typically respond to changing value proportions only with a certain time lag.

Essentially, the advantage of distinguishing sharply between values and prices in this context is that it enables us to depict the interaction between shifts in product-values and shifts in product-prices as a dynamic process of real-world business and market behaviour, given the reality of different growth rates of supply and demand, i.e. not a study of the conditions for market balance, but a study of the actual process of market balancing occurring with a specific social framework, through successive adjustments which occur in a specific pattern.

Arguably ideal prices could substitute for values in this analysis, but Marx's argument is that product-values will, ontologically speaking, really exist irrespective of corresponding product-prices, i.e. irrespective of whether product-values are actually being traded, whereas ideal prices do not really exist other than in computations; they are only an hypothetical description. The reason is that product-values refer to empirical quantities of labour-time performed, which are not hypothetical, but an inescapable physical and social reality. This type of analysis paves the way for an important new Marxian criticism of Piero Sraffa's otherwise brilliant critique of capital theory.

In Sraffian theory, the value of a commodity "contains" both the average labour directly involved in making it ("direct labour") and past labour contained in the materials from which it is made ("indirect labour" or "dated labour"). Luigi Pasinetti subsequently provided a methodological foundation for measuring the labour content of commodities, in this sense, developed further by Anwar Shaikh and Eduardo Ochoa. In Marx's developed theory, however, the value of the commodity represents the average labour currently required to make it, given the current state of the whole production complex - it is the current social valuation (the replacement cost) of that commodity. This is a synchronic valuation, not a diachronic one. This was not so clearly realized during the 20th century, because economists could not grasp how, in the course of Marx's dialectical story, the meaning of the operative concept of value itself could undergo some important changes. Because Marx's developed concept of value differs from the simplified concept of value, economists thought that Marx's theory was formally inconsistent.

Empirical evidence

Some economists and computer scientists, such as Prof. Anwar Shaikh and Dr. Paul Cockshott, argue with statistical evidence that even just a "93% accurate Ricardian labour theory of value", is a better empirical predictor of prices than other theories. That is, the only real proofs of Marx theory and its applicability, beyond showing its internal logical consistency, are to be found in the evidence of experience.

Whether more scholars will take up this challenge for research more comprehensively remains to be seen. Mostly, economists have preferred to build abstract mathematical models on the basis of a bunch of assumptions, rather than comprehensively investigate available empirical data for the purpose of creating an empirically-based theory about economic life. This contrasts with business managers, who have a strongly empirical theory of how business actually works, based on their daily experience of how things go in business.

It is not difficult to prove a close positive correlation between the value of net output and the labour hours worked to produce it, since the payments which constitute that value, are themselves earnings which are necessarily proportional to time worked and paid for. Even if it is assumed, that gross profits are not proportional to time worked, by some margin, the total labour-cost involved in the total net output is nevertheless typically more than half of the value of the total net output or gross value added (in the US, labour compensation is nowadays around 55% of the value of total net output).

The netted totals in the US National Income and Product Accounts (NIPA's) for 2015 show, that annual labour costs were about $9.7 trillion while the total operating surplus or gross profit (net of depreciation) was about $4.5 trillion.In other words, total US labour earnings are twice the size of total gross profits directly generated by production. Since total wage costs are based on time-wages, it is simple math to understand that any measure of the net value added (gross labour compensation + gross profits) must necessarily show a strong positive correlation with the total labour hours worked.

What is statistically much more difficult to prove, is the relationship between prices and values in the actual distribution of net output (a traditional example mentioned, is that while in South Korea workers on average work the most working hours in the world, per capita per year, Korean value-added per capita has been much lower than might be expected; it is not so easy to explain, why this is the case).

A very interesting confirmation of the basic idea that Marx had is provided from a most unexpected source: post-Keynesian economics. After mustering a lot of empirical evidence about pricing practices, the leading heterodox "real-world" economist Fred Lee concluded that:

However, a sharp distinction must be drawn between Marx's own theory and subsequent Marxist or Sraffian theories. As Lee emphasizes, "the typical statement made by Sraffians and Marxists that prices equal their costs of production (which includes a uniform rate of profit) in long-period positions has no conceptual correspondence to the concepts of costs and prices used by business enterprises." Consequently, the Marxist and Sraffian theories are not grounded in the real world of business operations, because Marxists and Sraffians confuse a purely abstract model with empirical reality. Fred Lee admits that the magnitude and the relative stability of the profit mark-up for products in modern capitalism "remains theoretically underexplained in Post Keynesian theory"

The total circuit of capital and Shaikh's solution

One possible solution to the "transformation problem", largely ignored in the literature, is that Marx tried to sketch a redistribution of value in too simplistic terms, considering the profitability of different production capitals in abstraction from the total circuit of capital.

The problem that Ricardo failed to solve, was one of how capitals of equal sizes could empirically attract very similar profits, despite empirically manifest unequal expenditures of labour-time. But that problem may be solved more credibly, if we properly consider competition in the sphere of capital finance, i.e. the sphere of credit. In this sense, David Harvey for example mentions that "the growing power of the credit system in relation to industry also tends to force an equalization of the rate of profit (the connection between profit of enterprise and the interest rate is now very strong)."

Andrea Salanti stated in 1985 that there is an "urgent need" of "reconsidering the whole methodological foundations of the theory of prices of production". In his major 2016 treatise on the economics of capitalist production, Anwar Shaikh has overhauled the theory of prices of production in the light of empirical evidence, arguing that production prices in the classical sense can only be theoretical notions, which strictly speaking do not exist in reality. What does exist in real capitalist competition are a type of regulating prices, the dynamics of which he explicates in detail. Shaikh agrees with Keynes and with businesspeople, that what matters financially in business, is the relationship between the real rate of interest on capital and the real rate of profit on capital (at the micro level of individual firms and at the macro-level of aggregated business results).

According to Shaikh's calculations, the discrepancies between the different empirical measures of product-values, prices of production, regulating prices and market prices which are feasible (using input-output data, labour data and capital stock data) turn out to be, on the whole, not very large. This suggests that the enormously long Marxist debate about the relationship between values and prices was, in a sense, unwarranted; overall, the differences between average product-prices and the underlying product-values are, as far as can be established, just not very great. If Marxists could have measured price-value relationships empirically, earlier on in the controversy, they might not have given the issue so much weight; but the measurement techniques were perfected only from the 1980s onward.

Shaikh largely side-steps a more precise conceptual discussion of the relationship between Marxian "values" and the forms of prices as such, preferring to demonstrate a strong positive correlation between movements in labour requirements and movements in actual price-levels for outputs. His analysis suggests, that the real dynamics of capitalist competition in the sphere of production are indeed remarkably similar to how Smith, Ricardo and then Marx originally described them, even although Marx's theory must be elaborated and modified to complete the classical theory, so that it is fully consistent and can properly explain the economic facts.