 On an autumn evening in 1998, I was sitting out on the steps of the memorial church at Harvard after a special ceremony, awarding an honorary degree to Nelson Mandela. There was, you know, garbage here and there in the way that always happens after a big event. And I was talking to another freshman, a new friend of mine, and he explained to me that despite all of the advantages, all of what's compelling and marked, the labor theory of value doesn't work. I had never heard of the labor theory of value, and I was surprised by his explanation, which is that something costs what it does, depending on how much labor had been expended in its production. And this doesn't work, of course, because a house, for example, goes up and down in price, even though no additional labor is spent on it. It struck me at the time that Marx would have had to be quite stupid to put forward such a theory that is so easily rebutted. And in fact, it's not his theory. There's lots of information already on YouTube about Marx's labor theory of value, but I haven't seen any clear presentations of his theory of price. So I thought today I would talk through how price is determined according to Marx. I wanted to include a snippet from a video that expressed the view that this friend of mine back in 1998 had. In fact, I could only find videos with even more profound misunderstandings of Marx that, for instance, talked about baseball players are pay a lot. The ideas of a capitalist in product design contributed to value. But I do trust that the misunderstanding that my friend had is prominent enough that it's worth giving a more precise picture of the determination of price according to Karl Marx. So what is Marx's theory of price determination? Marx distinguishes three kinds of price, market price, price of production, and labor value. And if you want to have a price term for labor value, we can use Anwar Sheikh's term direct price. Market price or the so-called market clearing price is determined by relatively short term supply and demand conditions. I say relatively short term because in the actual short term, the drawing down of inventories has more of a role to play than price adjustments in equalizing supply and demand. All schools of economics, classical, neoclassical, Marxist, Austrian agree at this level of analysis that price is determined by the conditions of supply and demand in the marketplace. So how do you actually know the price of a commodity? The answer is simple. Just look at its price tag. That's how we do it as consumers. So for instance, maybe this toaster has on its price tag 29.99 euros. How you do it as a producer is you try different prices and you see what people will buy. From an empiricist perspective, it's an uninteresting question. You just look at the price and that's the price. But how do we theoretically determine the market price? Well, Marx believes that market price will oscillate around the so-called price of production. It's the price of production that determines what the price of commodity is when supply and demand balance. If you take, I don't know, an automobile and a toaster, the automobile will fluctuate in price. The toaster will fluctuate in price. But overall, there'll be a certain ratio between the average price of the automobile and the average price of the toaster. And that ratio will be determined by their prices of production. Now on to price of production, our second type of price. The price of production of a commodity is its cost price plus its average profit. Cost price is the cost to the producer. So all the raw materials, all the electricity running the factory, all the wages, all of that together what the producer has to pay in order to make it. Is the cost price and then the average profit is the profit that the producer expects to realize in the sale of that commodity. Now just to note a tricky term logical thing profit can refer to two things. The gross profit. Which you can think of as the price of the net product. Or the the profit of enterprise, which is how much the firm actually realizes. Yeah, so the so the gross profit includes things like bank interest and taxes. Whereas the the profit of enterprise is actually how much the capitalist realizes as profit. So we're talking here about gross profit. So just to stick with the example that I've already introduced, which was this 30 euro toaster. Let's say 1125 is the unit raw materials, including the depreciation on the fixed capital. 1125 is the unit wage cost. So how much of the wage bill of the firm is proportionally allocated to that that particular toaster. And then maybe 750 is the unit profit, which is at a profit rate of 25%. Now, just to mention that Alfred Marshall, the neoclassical economist and the PhD supervisor of John Maynard Keynes, he follows us this far. Alfred Marshall sees the price of most commodities as primarily determined by their supply price, which is their price of production in Marxist terms. Now I'd just like to observe that constant capital resolves into wages and profit. So just a quick reminder that constant capital is that proportion of the commodities value that went into the production process as means of production. The proportion of the value of the commodity, which it preserves from its inputs used up, or to say otherwise materially transformed in the process of production. So that's what constant capital is. So in the case of the toaster, it's the components, the metal, maybe the electricity that was spent in the production process. These things cost the capitalist something and that cost has to be recouped in the sale price. So a certain portion of that sale price can be seen as corresponding to those input prices. So from the perspective of a given capitalist, that constant capital is fixed and its value has to be recovered in the price of the finished commodity. But the capitalist buys those components on the market. And from the perspective of the suppliers, as we go down the supply chain, that is a price of production for an input that in turn breaks down into the constant capital, the variable capital, which is the wage bill and the profit. So to talk through the example of our toaster, we had 1125 of toaster components. Now, in the toaster component manufacturing industry, maybe 422 is the unit raw materials. 422 is the unit wage bill in that sector and 281 is the average profit. And then we can go back to the toaster components components industry and the toaster components components components industry ad infinitum. And in this way, the constant capital can always be broken down into constant capital wage and profit. And at the limit, the constant capital component disappears and we are left only with wages and profit. And David Ricardo goes this far, the notion that the value of a commodity is it's vertically integrated labor time that that then is divided in terms of two classes that enjoy the revenue that comes from that labor wages and profit. That is David Ricardo's theory. And to this point, Ricardo would agree with Marx. So summing up on prices of production, the price of production is determined by the conditions of production. That is, for example, how much metal goes into making a toaster, the wage rate, and the profit rate. So the conditions of production are, are determined by the social and technological totality of society. And we don't need to say more about that now. But what determines the wages? Well, I have a separate video about that. But here we can say in short that the price of production of the basket of wage goods consumed by workers is the wage. Yeah, so because because a worker spends his wage on a basket of commodities, the value of that basket of commodities is the value of his wage. And the wage is also determined by the state of class struggle. The way to conceptualize that is how is the total means of subsistence available to society divided annually between the class of workers in the class of capitalists. That is determined by the state of class struggle. So if you like the state of class struggle decides the basket of wage goods, the price of production of the basket of wage goods is the workers wage, and that wage goes into the price of production of a specific commodity. But what determines average profit? Here, things get tricky. The average profit is determined by the ratio of total, for example, annual surplus value to total, for example, annual capital. Average profit rate is regulated by competition between sectors. That's that's how it's enforced sociologically. So to determine total surplus value and total capital, we need to turn to the labor theory of value. And this is where we get to our third level of price. We've gone through market price and price production. So now we move on to labor value. The value of commodity is the socially necessary abstract labor time required to produce that commodity. Socially necessary needs to be understood in several senses. First, we're talking about vertically integrated labor time. The question is not just how long does it take to assemble a toaster from its component parts but also how long does it take to make those component parts and the component parts of those component parts in the way that we discussed when talking about prices of production in the immediately proceeding slide. The second meaning of socially necessary is that the productive technique used in making the commodity is the regulating technique for that society, regulating in the sense that it's the most efficient generally reproducible technique. In other words, that no more time is spent on the unit product than is necessary. We're setting aside both monopolistically efficient techniques and outdated inefficient techniques that are still functioning in the economy. And then the third sense in which labor time is socially necessary is that the proportional allocation of the total labor force to the branch of production in question is no more than necessary to meet the given demand. Perhaps everybody uses the regulating productive technique but still more toasters are produced than people need in a given year. The unit price the toaster would drop. And the way to understand that is that the total value allocated to toaster making in the economy is fixed by the demand. And if you make more toasters in that you don't you don't get more value than that. So in our example, we can suppose that our toaster requires around maybe a little less than 15 minutes of socially necessary abstract labor time. So we've introduced the idea of value. Now how do we arrive at total annual value. This can be approximated by the total hours worked in an economy in a year. So, you know, some people will be using particularly efficient techniques that aren't generally reproducible. And some people will be using out of date techniques that are inefficient to a certain extent those will cancel each other out. And the actual total hours work can be taken as an approximation of the socially necessary labor time across the economy. But if the data were available, it would be much stricter to go sector by sector multiplying the total output of that sector by the unit labor time of the regulating technique in that sector. Now is a good moment, I think, to introduce the notion of the monetary expression of labor time or the so-called melt. This is what allows us to switch between denominating values in dollar terms and in our terms. The monetary expression of labor time can be arrived at by taking the total annual value in labor time and dividing by the GDP. So for example, using data from the US, the GDP was $25.896 trillion and the hours worked. I think these are in 2022 are 210.4 billion hours. So the monetary expression of labor time is $123 per hour. That is the amount of added value that working one hour in the US economy provided. Now, just to note that the annual average hourly wage in the US is $33.74. Alright, so now let's move to arriving at total surplus value. So the total surplus value is the amount of unpaid labor done in the economy. And the way to arrive at this is to subtract the necessary labor time that's the paid labor from the total value. So this would again most accurately be done by subtracting the consumption of the working class in value terms from total value calculated sector by sector. But let's try and do it a slightly quicker way. We can use the rate of necessary labor per hour and multiply by the total hours. The proportion of necessary labor per hour is 27.4% using these numbers that we already have. So people are paid 33.7 per hour and they produce $123 of value in that hour. So 27.4% of the hour they're working for themselves and the rest of the time they're working for the capitalists. Now we multiply the GDP of 25.9 trillion by this 27.4% and we get 7.104 trillion. So 7.104 trillion is the amount that workers were working for themselves and this is actually effectively the total wage bill for the US. Okay, now the total surplus value is the total value minus the necessary labor. So that's this 25.9 trillion minus 7.104 trillion. Then we get 18.792 trillion. That's our total surplus value. Now moving on to the profit rate. The profit rate is the total surplus value divided by the total capital stock. If we imagine the whole of society as one capitalist factory, the question is how much has the capitalist advanced that he wants a return on? And how much surplus value does he extract from the labor force and what's the ratio of those two things? The amount of surplus he gets for the capital he advances. The most accurate way to calculate the total capital stock of a society would be to measure the replacement cost according to the socially necessary labor time using the respective regulating techniques in different sectors to replace all of the fixed and circulating capital in that society. But what I did was just ask Bard what is America's capital stock and it said 69.059 trillion. And I think its understanding of capital stock is only fixed capital. So I've added the wage bill into this. And then we get $76.11 trillion. So the profit rate is the surplus value, which is 18.792 trillion over the value of the capital stock, which is 76.11 trillion. And that is a profit rate of 24.7%. So taking a step back, the point is that the labor theory of value provides us with the average profit rate that we need to calculate the prices of production. Whereas for Smith or for Ricardo, the average profit rate is a mystery. Marx derives it using his version of the labor theory of value. Now, summing up about price determination in Marx, in order to predict the price of a toaster, you need to know the input output coefficients for the whole economy, things like how much rubber, how much steel goes into a toaster. You need to know the monetary expression of labor time, which is basically knowing the price level. You need to know how many hours of surplus labor are performed in the economy as a whole. You need to know the replacement cost of the economy's entire capital stock, and then you need to know the short-term market conditions. Just to talk through the three levels of price determination at the level of labor value, knowing the total surplus value for the economy and the value of the total capital advance for the economy, we can determine the profit rate. Knowing the profit rate and the input output coefficients for the whole economy, we can calculate the price of production for our toaster. And knowing the short-term market conditions, we can know whether the market price is above or below the price of production. In conclusion, price will very seldom coincide with value, but value regulates price in the sense that, in particular, and this is not a point I emphasize in the presentation, the derivative of price movements and the derivative of value movements will closely correlate. A simple way of putting that is that if the efficiency of labor in a particular sector of the economy increases, then the market price of the commodities produced by that sector decreases, and I think no one would object to that.