What Are Prices Of Production?

Suppose one rejects the labor theory of value as a theory of prices. Or, even more, one could reject Marx's theory of value in volume 1 of Capital. Still, one could elaborate the theory of prices of production. In my published works, I have tried to extend the theory a step or two. And the theory of prices of production is opposed to a marginalist theory, a theory of supply and demand, if any such coherent theory exists.

In this post, I offer one explanation of the setting of the theory of prices of production. I am heavily indebted to Alessandro Roncaglia. Heinrich Bortis is another point of reference here. As usual, my favorite textbook expositions of the details of prices of production are by Luigi Pasinetti and Heinz Kurz and Neri Salvadori. I have yet to read Fabio Petri's recent textbook.

Suppose, for purposes of exposition, time is broken up into discrete intervals, namely, years. And the economy to be considered is a capitalist economy. Managers of firms, at the start of the year, hire so many workers and buy so many commodities on the market for fuel, raw material, tools, and so on.

One can imagine taking a snapshot at the end of the year, after the harvest. Produced commodities are in the hands of the (owners of) firms which have produced them. They need to be redistributed, among industries and among consumers, for production to continue.

Workers will purchase some commodities, with their wages and through a retail sector. Capitalists will also purchase some commodities for consumption. Firms that continue in business will buy their needed inputs from firms in other industries to continue production in the next year. Some firms will retain some of their output for use in production. I am thinking, for example, of seed in agriculture. Used machinery or a plant can be thought of as jointly produced with a more obvious commodity. Joint production proper occurs in oil refineries and breweries, I guess.

A realization problem arises here. Some will find that the (market) prices at which they buy and sell deviate from what they expected. Capitalists had certain expectations and plans when they made production decisions at the start of the year, and they may find those plans incapable of being realized at the end of the year.

But one can ask what must be prices be such that capitalists would find no need to modify their plans? These are prices of production. In a competitive capitalist economy, one assumes a common rate of profits rules in all industries. In calculating prices of (re)production, one takes either the real wage or the rate of profits as given. One might think of the wage as embodying all sorts of conventions and norms about what workers in different strata are expected to be able to purchase. At any rate, prices of production allow buying and selling that go on after the harvest to be such that produced commodities are redistributed such that a capitalist economy can be reproduced.

Some points on this abstract description of a capitalist economy:

• Decisions on what and how much to produce are made upstream from the realization problem, so to speak. At no point in time can one simultaneously validate current decisions.
• Decisions on production also generate, at the end of the year, the income used to purchase the output. Many of these decisions are for the production of capital goods quite distant from consumption.
• The workers are are hired with the promise of a payment of a money wage. The possibility arises of a conflict over distribution at the end of year in which total money claims add up to more than the output produced.
• Say's law is not assumed. Realization problems may lead to some capitalists having more unused capacity than planned or too little capacity. (Typically, firms plan to have some unused capacity so as to meet unanticipated demands.)
• No need exists to talk about supply and demand functions in explaining prices of production. No assumptions are made about any tendency for the labor market to clear in calculating prices of production.
• Perhaps capitalists can approximate prices of production, given accounting conventions about markups. Would deviations of market prices from prices of production be taken into account when they revise their plans? Or should such a story only be concerned with market prices?
• The equations for prices of production provide an open model, in some sense. The level of aggregate demand and the distribution of income are taken from outside the model.

I hope you can see some family resemblances between the approaches of Sraffa and Keynes to economics. A parallelism to the works of Marx also exists here.