Editing Exchange value (section)

== Transformation of values into prices ==
In volumes I and II of ''[[Das Kapital|Capital]]'', Marx usually assumed that exchange values were equal to values, and that prices were proportional to values. He was talking about overall movements and broad averages, and his interest was in the social [[relations of production]] existing behind economic exchange. However, he was quite conscious of the distinction between the empirical and microeconomic concept of prices (or exchange values) and the social concept of value. In fact he completed the draft of volume 3 of ''Das Kapital'' before he published volume 1.

Despite this, the fruitless search for a quantitative relationship allowing the logical derivation of prices from values (a labor theory of price) with the aid of mathematical functions has occupied many economists, producing the famous [[transformation problem]] literature.

If, however, prices can fluctuate above or below value for all sorts of reasons, Marx's [[law of value]] is best seen as a "law of grand averages", an overall ''generalisation'' about economic exchange, and the quantitative relationships between labour hours worked and real prices charged for an output are best expressed in ''probabilistic'' terms.

One might ask, how can "value" be transformed into "price" if a commodity by definition already has a value and a price? To understand this, one needs to recognise the ''process'' whereby products move into markets and are withdrawn from markets. Outside the market, not being offered for sale or being sold, commodities have at best a potential or hypothetical price. But for Marx prices are formed according to pre-existing product-values which are socially established prior to their exchange.

Marx sought to theorise the transformation of commodity values into [[prices of production]] within capitalism dialectically, as a "moving contradiction": namely, in capitalism, the ''value'' of a commodity output produced encompassed ''both'' the equivalent of the cost of the used inputs which were initially bought to produce it, as well as a gross profit component ([[surplus value]]) which became definite and manifest only ''after'' the commodity has been sold and paid for, and after costs were deducted from sales. Value was, as it were, suspended between the past and the future.

An output with a certain value was produced, but exactly how much of that value would be subsequently realised upon sale in markets was usually not known in advance. Yet, that ''potential'' value also strongly affected the sales income that producers could get from it, and moreover that value was determined not by individual enterprises, but by all enterprises producing the same type of output for a given market demand ("the state of the market"). The business results of each enterprise were influenced by the overall effects created by all enterprises through their productive activity, as an ongoing process.

This simple "market reality" has stumped many of Marx's interpreters though; they fail to see that value is ''conserved, transferred and added to'' by living labor, between the initial purchase of inputs with money on the one side, and the subsequent sale of outputs for more money, on the other. They see only input prices and output prices, or cost-prices and sale-prices, and not the creation of a product which already has a value ''prior to being exchanged'' at a certain price - a value which is moreover ''socially'' determined by a group of enterprises together, and which sets limits for price fluctuations.

For that reason, the whole process of the ''formation of value'' which Marx so carefully lays out, with its complex determinants, seems like an unnecessary detour from commercial wisdom. If, however, we wish to understand the "deep structure" of market behavior, then we rapidly confront all the issues that Marx was concerned with.