By Freya B.

Marx’s theory of price has been a contentious subject over the history of Marxist political economy. Controversy over Marx’s formulation on “prices of production” has led many to try to “fix” what are perceived to be failures in Marx’s theory (often producing absurd and incoherent conclusions), or to simply abandon Marxist value theory altogether. Other Marxists simply ignore the question and focus on other aspects of the labor theory of value besides price theory. Yet, as Dr. Nicholas insists in Marx’s Theory of Price and its Modern Rivals, a theory of price is really essential. Price is, after all, how commodities in a capitalist economy are circulated. If your theory of price is wrong, everything is wrong. Thus, all of the structural implications of Marx’s value theory (where surplus value comes from, how it is extracted from workers) are really inseparable from the theory of price. What Dr. Nicholas seeks to show is that Marx did in fact have a coherent theory of price, and in the course of this book, he explains that theory in some detail, while also fending off all of the modern competitors to Marxist political economy.

There are of course varying interpretations of Marx’s theory of value which each have implications for how one conceives of his theory of price. Dr. Nicholas’s interpretation is very simple, and it really only rests on two assumptions. The first is that price, while it can differ from value, is determined by value in the final instance. This of course has enormous support from within Capital. The second assumption is that prices are based on current values, not past values. Nicholas argues that to presume otherwise is to argue for a historical cost explanation of price, where prices appear to be determined only by valuations made in the past, which is incoherent. There is also robust textual evidence from Marx himself that Marx did not have a historical cost explanation of price. So both of these assumptions are fairly trivial and are backed up thoroughly by Marx (and Dr. Nicholas provides all the relevant citations). From here, one can proceed to understand a Marxist conception of price.

What are prices?

For Nicholas and for Marx, the most fundamental question is not so much how the specific magnitudes of prices are determined (though this is also important). At the most basic level, the question of political economy is this: what are prices? What purpose do they serve? According to the neoclassical economists, prices serve the purpose of measuring preferences, i.e. demand. This is however untenable. In the real world, commodities need to be produced and reproduced continually. Thus, prices cannot simply be anything. If producers do not recover the cost of production when they sell their products, they cannot produce the commodities again and the economy cannot continue to function. This simple fact is outright ignored by the neoclassical economists, but not by Marx.

The Marxist conception of prices is that the latter fundamentally serve the purpose of reproduction; that is, prices enable commodities to be produced again and again. The most crucial determinant of price, therefore, is cost, because if prices do not allow producers to recover costs, then commodities cannot be reproduced. And how do we measure costs, i.e. the inputs required to make a commodity? We cannot use prices to measure inputs, for prices are what we are trying to explain in the first place! The only thing common between all the inputs of a commodity is labor. Thus, in any economy based on commodity production, the prices of commodities will in the final instance be fundamentally tied to the (socially necessary) labor-time embodied in those commodities. This conclusion is frankly inescapable.

Here Dr. Nicholas posits what he calls “reproduction prices.” These are simply averages of real prices (so-called “equilibrium prices”) and they represent the prices necessary to reproduce a commodity in the context of a balanced system of commodity exchange. Actual prices of course deviate from reproduction prices, but prices in a real commodity exchange system must at least fleetingly tend toward reproduction prices, else the system cannot continue to function in the long run.

Reproduction prices are distinct from values, however they are in the final instance determined by values. Value amounts to the (socially necessary) labor-time actually spent in the production of a commodity. Reproduction price is the quantity of labor-time that needs to be commanded in order to ensure that the commodity can be reproduced in the context of balanced reproduction of all commodities. At first glance, these two categories might seem equivalent. In fact, in a system where there is no profit (simple commodity production), they are identical. That is to say, in simple commodity production, the quantity of labor actually embodied in a commodity is also the quantity of labor that needs to be commanded to reproduce that commodity in a balanced system. However, in a real capitalist economy, where profit enters the equation, reproduction prices can deviate from values, and in fact do so normally. The reasons for this will be explained shortly. Nevertheless, it is still the case in real capitalism that these prices are determined by values, even if the two are not identical.

As a brief aside, note that Dr. Nicholas has defined both values and prices in terms of labor-time. Money is certainly necessary to complete the picture, yet monetary expression is not what distinguishes price from value. This has been a major point of confusion in the various attempts to interpret Marx’s value theory. Again, prices serve the purpose of allowing for the reproduction of goods. Therefore, average price (reproduction price) amounts to the quantity of labor required to reproduce goods in the context of a balanced system. Value, on the other hand, is the quantity of labor actually embodied in a commodity. This is really the most fundamental distinction between price and value.

Prices in capitalism

Looking now toward real capitalism and Marx’s description of it, how do we understand price if we add profit to the mix? In volume I of Capital, Marx makes the assumption for the sake of argument that price is equal to value and subsequently defines the price/value of a commodity as having three components. These are: the value of constant capital (C), or the value transferred from the means of production to the commodity; the value of variable capital (V), or the value added by the worker equivalent to the value of hir labor-power; surplus value (S), or value added by the worker that goes beyond the value of hir labor-power. In other words, in volume I of Capital,

value/price = c + v + s,

and this “S” component—surplus value, which amounts to value workers produce that goes unremunerated—is the source of profit.

This rudimentary understanding is enough to grasp the core of what makes capitalism tick. However, in reality we know we cannot just assume that value = price anywhere outside the realm of simple commodity production. By volume III of Capital, Marx finally establishes the relationship between value and price in the real world.

Capitalism is competitive, and even in the age of monopoly capital (which we currently live in), competition does not go away completely. What this means is that capital tends to flow in and out of various sectors depending on where the most profit can be generated, i.e. capital will flow out of less profitable sectors into more profitable ones. This enforces an average rate of profit that industries must tend towards if they are to survive in the long term. Thus, because of the enforcement of an average rate of profit, prices in a real capitalist economy cannot simply be said to be c + v + s.

Here Marx defines what he calls the price of production. This amounts to the value of constant capital plus the value of variable capital, and an average rate of profit (r) on that value.

price of production = (c+v)(1 + r).

This “price of production” is what actual prices must tend towards, at least fleetingly, if industries are to survive in the long term. Of course, Marx was not an equilibrium theorist; whether prices actually do tend toward the prices of production is another matter, but if the system is to continually reproduce itself, then actual prices must at least occasionally approximate the prices of production. We can see, therefore, that the price of production is the reproduction price for a capitalist economy. That is, the price of production is the price that facilitates the continued reproduction of commodities in the context of a balanced system, and here reproduction includes reproducing profit. We can see here that price of production—reproduction price—is determined by value. It depends upon the value of constant capital and variable capital primarily. The average rate of profit itself also depends upon value, namely economy-wide surplus value relative to the total value of capital invested. However, the price of production is also distinct from value. The actual value embodied in commodities is simply c+v+s. It is obvious from the above equation that on an individual level, prices of production can deviate significantly from this.

To summarize what we have so far: The purpose of price is to facilitate the continued reproduction of commodities. Thus is it useful to conceive of “reproduction price.” Reproduction price is determined by value, but nonetheless it is distinct. Value is the quantity of socially necessary labor actually embodied in commodities. Reproduction price is the quantity of socially necessary labor that needs to be commanded to produce the commodity again in the context of a balanced system. In a capitalist economy, reproduction prices are prices of production, which represent the value of capital invested and an average rate of profit on that investment. Prices of production are average prices, “equilibrium prices” that actual prices must gravitate toward, at least fleetingly, if goods are to be produced and reproduced indefinitely. These prices of production are fundamentally dependent upon value, but they can be different from the actual value embodied in commodities.

The so-called “transformation problem”

Remarkably, Dr. Nicholas manages to demolish the entire hubbub surrounding the so-called “transformation problem” in a single paragraph. The idea behind the “transformation problem” is that Marx supposedly “failed” in his explanation of prices of production to transform the inputs (c+v) also into prices of production. When one attempts to do this, Marx’s value theory and the two fundamental identities (total value = total price and total surplus value = total profit) fall apart. However, as Dr. Nicholas points out, it would have been completely illogical for Marx to have transformed inputs into prices. Marx was trying to explain prices. To transform inputs into prices would have been to explain prices in terms of prices, a useless and nonsensical endeavor! Thus the “transformation problem” is simply not a problem, it is a result of a fundamental misunderstanding of Marx’s theory of price and of what Marx was attempting to do. By extension, the entirety of the literature which seeks to explain away or “correct” the non-existent “transformation problem” is a total distraction.

Other sources of deviation between price and value

We have discussed already the most fundamental way in which price differs from value. There are other sources of variance between price and value also. Fluctuations in supply and demand can alter actual prices above and below the price of production, for example. It is also possible that simple errors can predominate, given that the market obscures the conditions under which things get produced and capitalists do not consider all of the information when they set their prices. Nevertheless, prices of production are still necessarily the average of real prices, so the most fundamental distinction between price and value is that the price of production is the labor that needs to be commanded to allow goods to be reproduced in a balanced system, while value is the actual quantity of labor embodied in commodities.

Note that we can conceive of the differences between price and value entirely in terms of labor-time and without any monetary expression. This is because what separates price from value is not that one is monetary and the other is not. In truth, price and value are qualitatively distinct, that is to say, they are two different things. Price is determined by value, but price is not simply the monetary expression of value. The difference between the two is much more fundamental, as has been discussed already—i.e. price (of production) is the labor commanded by the sale of a commodity in the context of a balanced system, and value is the labor actually expended in the production of that commodity.


We have yet to include money in our analysis. Obviously, we need to include this if we want a complete picture of capitalism. For most of Capital, money is for Marx a universal commodity that is used to facilitate exchange between all other commodities. Money therefore has a value which is given by the labor expended in the production of the money-commodity, and the money-commodity also has a price of production given by the labor that needs to be commanded to produce the commodity again in the context of a balanced system. Of course, commodity money is not a reality anywhere in the world currently. Today, money amounts to bits of paper that are not directly tied to any one commodity. Nevertheless, the relationship fiat money has to labor-time is not as complicated as one might think.

Fiat money must still represent labor-time in some way if we are to make sense of capitalism. Today, the value represented by money is given by the average amount of value that money is able to circulate over a period of time. In other words, if in a given period money is able to circulate some number of commodities on average, then the (socially necessary) labor expended in the production of those commodities is the value represented by money, or simply the value of money. Fiat money can also be thought of as having a “price,” given by the price of commodities money commands at any given moment. Therefore, money today represents labor-time just as much as it always has. This is the basis for the expression of prices (which are founded in a quantity of labor) in terms of money, the latter being the only way prices are actually measured in the real world.

Market prices and monopoly prices

Marx refers to actual prices as “market prices.” Again, the prices of production are averages of these market prices. In money terms therefore, the average actual money prices are the money prices of production, i.e. the prices of production expressed monetarily as opposed to direct expression through labor-time. Marx does not however have a fleshed-out theory of monopoly prices, other than to say that monopoly allows big conglomerates to set prices systematically above the prices of production. This results in a transfer of surplus value to the monopoly from outside the monopoly. Thus in capitalism there is an inherent tendency toward centralization of capital. A more complete theory of monopoly prices is one arena where further investigation is needed. Although there has been a good deal of literature already on monopoly capital, the theories of price have in large part been plagued by insufficient interpretations of Marx’s theory of value.

Concluding remarks

Dr. Nicholas’s exposition on Marx’s theory of price is confined to the first 60 pages of the book. This allowed me to finish this section of the text in a single evening, a pleasant surprise. The rest of the book is devoted essentially to polemicizing against other theories of price and against other interpretations of Marx’s theory. This can be interesting to read as well, but it is not the real meat of the text. The main substance is contained in the first three chapters. What is truly remarkable about these initial chapters is that Dr. Nicholas manages to coherently summarize all three volumes of Capital in a very short space. For that reason alone, this book can be recommended. The book also manages to cut through a tremendous amount of the confusion that has surrounded Marx’s price theory for so many years. Though the text can at times be a bit jargon-filled, ultimately if read patiently, it serves to enlighten, not to obscure. The solid foundation provided by Dr. Nicholas (and really by Marx) serves as a jumping-off point for further elaborations on the nature of capitalism today, free of all the distortions and confusion that has generally plagued Marxist political economy in the past.

Marx’s Theory of Price and its Modern Rivals is the first in a series, according to Dr. Nicholas. I greatly look forward to the rest of what he has to offer on this front.

Works cited:

Nicholas, Howard. Marx’s Theory of Price and Its Modern Rivals. Houndmills, Basingstoke, Hampshire, England: Palgrave Macmillan, 2011. Print.

Join the conversation! 3 Comments

  1. Nicholas’ book looks really interesting, especially in light of this review. I’ve been waiting for a good marxist engagement with the “so-called ‘transformation problem'” that was satisfying for a long time and it seems, if this book lives up to the review’s endorsement, that this might be the case. Of course the LTV is not invalidated if there is a problem in the transformation of price, and it appears as if Nicholas has provided a thorough interpretation, but that still works according to the concept of price, that attacks this annoying criticism.

    Now if only this book wasn’t so bloody expensive…

  2. Unfortunatelly the author himself has confusions in his understanding of Marx’s approach to prices, values and especially money.
    What I’d highly recommend instead is this post and this great blog of Sam Williams in general:


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