This entry, submitted to Philip O’Hara’s Encyclopedia of Political Economy but not included in it, contrasts the temporal and simultaneist approaches to the formation of price and its relation to value.price, value, transformation, Marx, TSSI, non-equilibrium, history of economic thoughtprice, value, transformation, Marx, TSSI, non-equilibrium, history of economic thought

Freeman, Alan

English

Research Papers in Economics

1999f (Encyclopedia).doc    Page 1 of 5 
VALUE, PRICE OF PRODUCTION AND MARKET PRICE 
 
Alan Freeman 
The University of Greenwich 
afreeman@iwgvt.org  
1999 
 
 
ABSTRACT 
This entry, submitted to the Encyclopedia of Political Economy but not included in it, 
contrasts the temporal and simultaneist approaches to the formation of price and its 
relation to value. 
Unpublished Manuscript originally submitted to  O’Hara, Phillip A (1999) The 
Encyclopaedia of Political Economy, pp318-320. London and New York: Routledge. 
ISBN 0-415-15426-X 
Keywords: price, value, transformation, Marx, TSSI 
 1999f (Encyclopedia).doc    Page 2 of 5 
VALUE, PRICE OF PRODUCTION AND MARKET PRICE 
The Ricardian school could not reconcile the idea of value as a ‘natural’ or regulatory 
price with its determination by labor-time. The NEOCLASSICAL escape-route, 
which sought to define value in terms of use-value, spawned further contradictions 
forcibly resolved in GENERAL EQUILIBRIUM. 
A radically different idea appears in Marx’s sharp distinction between value and 
exchange value. Value does not directly determine exchange ratios but is the 
substance of which these exchanges consist – the ‘thing which’ money buys. This 
suggests that when the products of labor acquire prices, the value previously created 
by this labor is redistributed so that each money price represents a definite magnitude 
of labor-time – the TRANSFORMATION or form of appearance of this labor-time. 
Since even a small discrepancy implies that labor is not the sole source of value, it is 
essential to ascertain if this value concept yields quantitatively exact results. Capital I, 
Ch 5 seeks to establish that price-value deviations cannot create new value so that a 
specific commodity – LABOR-POWER – which is ‘both within the sphere of 
circulation and without it’ must be the source of value.  
Many phenomena cause market prices (actual sale prices) to deviate from values 
including rent, monopoly, interest, and changes in nominal price. However 
controversy has centered on prices of production – Marx’s term for an ideal price 
expressing the tendency for profit rates to equalise under conditions of complete 
mobility. Capital III, chapter 9, sets out to show this special case constitutes no 
exception to the zero-sum character of circulation established in Volume I; this is the 
import of the famous equalities of total price with total value, and of total profit with 
total surplus value. These signify that profit rate equalisation, the rock which 
shipwrecked the Ricardians, can neither create new value nor transfer existing value 
between classes. 
The counter-attack spearheaded by Böhm-Bawerk led in 1897 to Komorzinsky’s 
allegation that Marx failed to transform the ‘value of constant capital’. Drawing on 
Dmitriev and Tugan-Baranowsky, von Bortkiewicz’s 1906-7 response – especially 
following Sweezy’s 1942 endorsement – became the standard for Marxists and non-
Marxists alike. 
Bortkiewicz did not deny the criticism but added the damning claim that internal 
inconsistency in Marx’s procedure rendered the mistake ineradicable, justifying the 
substitution of his own quite distinct procedure for Marx’s. Subsequent authors 
systematically omitted the distinction so that the construction is universally attributed 
to Marx, its flaws providing the justification for mainstream exclusion of Marx. A 
growing body of work suggests that Marx’s own treatment suffers neither from the 
omissions nor the contradictions attributed to it, focussing renewed attention on 
Marx’s own concept of value and price. 
For Bortkiewicz the decisive issue is not just an alleged failure to transform input 
prices but the very idea that these could differ from output prices. In consequence he 
constrains them to be equal, excluding all change during production. He substitutes 
‘mutual’ determination, taken from Walras and Marshall, for Marx’s ‘successivist 
prejudice’ 
Marx…held firmly to the view that the elements concerned must be regarded as a kind of 
causal chain, in which each link is determined, in its composition and its magnitude, only by 
the preceding links...Modern economics is beginning to free itself gradually from the 1999f (Encyclopedia).doc    Page 3 of 5 
successivist prejudice, the chief merit being due to the mathematical school led by Leon 
Walras. (Bortkiewicz 1906:23-24) 
He thus redefines prices – as in General Equilibrium – as exchange ratios in a 
hypothetical stationary economy yielding profits proportional to annual production 
costs.  
His second redefinition supplied what became, in one form or another, the received 
definition of value for most of his century: a set of exchange-ratios in a second 
hypothetical economy yielding profits proportional to labor-time. Values and prices 
were thus defined to be the solutions to two sets of simultaneous equations – giving 
rise to the appelation ‘dualist’ or ‘two-system’ – representing two hypothetical 
economies, neither one trading nor producing as the actual economy trades or 
produces, but each with a use-value structure loosely derived from it. Transformation 
then consists of specifying an algebraic relation between these two ideal systems. 
There is widespread agreement that, so specified, this cannot be done without great 
damage to the integrity of Marx’s work. 
However this is not the only possible interpretation. The ‘New Interpretation’ argues 
that variable capital, a money sum expended by the capitalists, represents a magnitude 
of value distinct from the value of wage-goods. ‘Single-system’ interpretations extend 
this to constant capital whose value is distinct from the value of the means of 
production. Following Marx, value may be defined as the immediate sum of the value 
indirectly represented by the price of inputs and directly by the living labor acting on 
them: 
The difference between cost-price and value, insofar as it enters the price of the new 
commodity independently of its own production process, is incorporated into the value of the 
new commodity as an antecedent element.
 (Theories of Surplus Value III:167)
1 
This possibility is inherent even in the simultaneous framework (see LABOR 
THEORY OF VALUE). Though it confirms Marx’s contested assertions, most 
Marxism ignores it and has spawned an inventive literature in support of the dual 
definition. Sweezy (see ECONOMIC SURPLUS) presents values as the prices of a 
prior historical stage of ‘Simple Commodity Production’, a phrase not used by Marx. 
He views Marx’s method of abstraction as the definition of complete systems 
constituting successive approximations to really-existing capitalism. The SURPLUS 
APPROACH likewise treats values as the prices of a hypothetical stationary economy 
using existing technology but making no profits. 
These interpretations met the difficulty that, since the connection between their value 
and price systems is synthetic, it appears metaphysical. Initially, the fact that price so 
defined is determined by ‘physical conditions’ fuelled SRAFFA’S critique of 
marginalism, since ‘margins’ cannot further determine what is already fully specified. 
Though many Marxists welcomed this critical advance, Samuelson and later 
Steedman’s insistence that the same objection applies to ‘values’ – so defined – turned 
the question around. 
However Sraffa’s conclusions are devastating precisely because they can be drawn 
from marginalism’s own – simultaneous – algebra. A comparable critique of Marx’s 
concept must establish that it too depends on this algebra. But on the basis of Marx’s 
CIRCUIT OF SOCIAL CAPITAL – a succession of purchase, production and sale 
                                                 
1 Marx  here uses ‘cost-price’ for what is later termed ‘price of production’.  1999f (Encyclopedia).doc    Page 4 of 5 
under varying conditions – distinct categories of value, price of production and market 
price can be defined in any given period without recourse to stationarity. 
This ‘temporal single-system’ interpretation also serves to illustrate the most radical 
development which arises from Marx’s point that price of production is not an actual 
exchange rate: 
Between these spheres that approximate more or less to the social average, there is again a 
tendency to equalization, which seeks the ‘ideal’ mean position, i.e. a position which does not 
exist in reality. (CIII p273) 
Since all purchases are in fact at market prices, the substantive problem is perhaps 
neither to predict one price from another, nor explain anything from an ideal 
economy. Rather we may ask how, in an actual economy, commodities can transmit a 
definite quantum of labor-time to the product even though their values are effaced in 
the exchange with money.  
Suppose that at the start of production £1 represents 1 hour and that two capitalists C1 
and C2 have spent £30 and £40 on means of production and £5 each on wages, their 
workers adding 15 hours of living labor to their products. If these sell for £40 and £60 
respectively their value is given in hours as 
C1:  30C + 15V+S = 45V+C+S 
C2:  40C + 15V+S = 55C+V+S 
We may express the market price (sale price) of these products, totalling £100, in 
hours if we are able to determine what Ramos terms the Monetary Expression of 
Labour, being the value represented in exchange by a unit of money. For example if 
we further suppose C1 and C2 constitute the whole of production, then products 
embodying 100 hours have sold for £100 so that £1 as before represents 1 hour. 
Market prices are then 40 and 60 hours. In exchange, therefore, C1 sells 45 hours for 
money representing 40 hours, transferring 5 hours to C2 who sells 55 hours for 60 
hours. 
The price of production is an ideal price expressing what would happen if goods sold 
at an equal profit rate. Surplus value for C1 in hours is 15V+S less the 5 hours 
represented by the £5 wage, namely 10 hours, as is C2’s surplus value; hence the total 
is 20 hours. Profit must necessarily be the same in total: it is respectively 5 and 15, 
reflecting the transfer of 5 hours from C1 to C2. 20 divided by the advanced capital of 
70C + 10V = 80C+V gives the general rate of profit of 25%. The ‘price rate of profit’ is 
thus equal to the ‘value rate of profit’, responding to a further objection of 
Bortkiewicz’s. Price of production of C1’s output is then 35 C+V ×1.25 = 43.75 and 
that of C2 is 45C+V ×1.25 = 46.25, either in £ or hours.  
This meets both ‘equalities’ and differs from Bortkiewicz in that the value transmitted 
to the product by constant capital is given by the actual money paid, not by an ideal 
input price dogmatically equated to output price.  
References 
All other cited authors referenced in Freeman, A. and Carchedi, G (1995). Marx and Non-Equilibrium Economics. 
London and Vermont: Edward Elgar. 
                                                 
2 Marx  here uses ‘cost-price’ for what is later termed ‘price of production’.  
3 Technically, if the norm of the transition is less than 1. 1999f (Encyclopedia).doc    Page 5 of 5 
Böhm-Bawerk, E. von (1984), ‘Karl Marx and the Close of his System’ in Sweezy (1984).  
Bortkiewicz, L. von (1952), ‘Value and Price in the Marxian System’(part I), in International Economic Papers, 
1952(2), 5-60.  
________ (1984), ‘On the Correction of Marx’s Fundamental Theoretical Construction in the Third Volume of 
Capital’, in Sweezy (1984)  
Dmitriev, V.K. (1974), Economic Essays on Value, Competition and Utility (ed. D. M. Nuti) Cambridge: 
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Komorzynsky, J. V. (1897), ‘Der dritte Band von Carl Marx “Das Capital”: eine Kritische Abhandlung über die 
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Morishima,M. and Catephores, G. (1978), Value, Exploitation and Growth. London: McGraw Hill. 
Pasinetti, L. (1977), Lectures in the Theory of Production. New York: Columbia. 
Samuelson, P. A. (1970), ‘The Transformation from Marxian Values to Competitive “Prices”: A Process of 
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Seton, Francis (1957), The ‘Transformation Problem’, Review of Economic Studies, 24, pp149-160. 
Shaikh, Anwar (1973), ‘The So-called Transformation Problem: Marx vindicated’, mimeograph, New School for 
Social Research, New York. 
Shibata, K. (1933), ‘The Meaning of the Theory of Value in Theoretical Economics’, Kyoto University Economic 
Review, 8(2), 49-68. 
Sraffa, Piero (1960), Production of Commodities By Means Of Commodities: Prelude to a Critique of Economic 
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Steedman, Ian (1977), Marx after Sraffa. London: New Left Books. 
Sweezy, P.M. (1970), The Theory of Capitalist Development; Principles of Marxian Political Economy, New 
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________ (ed.), (1984), Karl Marx and the Close of his System, Philadelphia: Orion Editions  
Tugan Baranowsky, M. (1905), Theoretische Grundlagen des Marxismus, Duncker & Humbolt, Leipzig. 
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All other cited authors referenced

Der dritte Band von Carl Marx “Das Capital”: eine Kritische Abhandlung über die Arbeitswerttheorie und die Socialistische Lehre vom Capitalsertrage’, Zeitschrift für Volkswirtschaft, Socialpolitik und Verwaltung,

if the norm of the transition is less than 1. 1999f (Encyclopedia).doc Page

Karl Marx and the Close of his System, Philadelphia: Orion Editions Tugan Baranowsky,

Lectures in the Theory of Production.

On the Correction of Marx’s Fundamental Theoretical Construction in the Third Volume of Capital’,

Production of Commodities By Means Of Commodities: Prelude to a Critique of Economic Theory. Cambridge and New York:

The ‘Transformation Problem’,

The Meaning of the Theory of Value in

The So-called Transformation Problem: Marx vindicated’, mimeograph, New School for Social Research,

The Theory of Capitalist Development; Principles of Marxian Political

The Transformation from Marxian Values to Competitive “Prices”: A Process of Rejection and Replacement’,

Value and Price in the Marxian System’(part I),

Value, Exploitation and Growth.

Value, Price of Production and Market Price

Value, Price of Production and Market Price

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