Skip to Content

Cooking the Books 1: Are prices real?

“Retail prices fall 50% in real terms since 1970s” headlined the Times (31 March) reporting on a recent survey: “According to Pricewaterhouse-Coopers (PwC), the accountants, the prices of everything from a kettle to a camera have tumbled by nearly 50 per cent since the early 1970s. At Argos, prices have fallen 47 per cent in real terms since Richard Tompkins, the founder of the Green Shield Stamps empire, launched the chain in 1973 with a 250-page catalogue. A fan heater in the original catalogue priced at £7.60 would cost £51 in today's money, given the impact of inflation over the past 35 years. A similar product retails today at £12.99.” To say that a fan heater, priced at £7.60 in 1973 and selling at £12.99 today, has gone down in price seems counter-intuitive. The explanation lies in the introduction of the notion of a price “in real terms”, or a “real price”, as a way of comparing prices at two different dates ignoring any depreciation (or appreciation) of the currency in the meantime. To say that a fan heater priced at £7.60 in 1973 would sell at £51 in “today’s money” is to say that the currency has depreciated by 85 percent. That the heater is in fact priced today at £12.99 shows that “in real terms” its price has fallen by about 75 percent. In 1973 money its selling price would have been £1.90. It is in this sense that, in real terms, the price of the heater has fallen. Marx would say that this reflects a fall in its labour-time value. If there was a stable currency then you would in fact expect prices to fall as productivity – the time taken to produce an article from start to finish – rises, meaning that articles have less value, less socially necessary labour-time incorporated in them. Productivity does tend to increase slowly from year to year due to technical advances. But there is not a stable currency, and that complicates comparisons. Although the currency inflation and consequent depreciation is no longer in the double-digits it was in the 1970s, it is still government policy that the currency should depreciate by 2 percent a year. They don’t express it this way, but put it the other way round by setting the Bank of England a target that the general price level should not rise by more than 2 percent a year. Which amounts to the same thing as this is in effect to allow the Bank to inflate the currency by that amount. If the price level rises by 2 percent this means that the purchasing power of the “pound in your pocket” decreases by that amount. Since wages and salaries are also a price – of people’s working skills, or what Marx called “labour power” – with depreciation of the currency they too go up continuously if slowly, with a little help from trade unions. Marx employed the concept of “real wages” but in a slightly different sense, though still as a means of discounting changes in money prices. He defined them as “the sum of commodities which is actually given in exchange for the wages” (Wage Labour and Capital) and as “wages as measured by the quantity of commodities they can buy” (Value, Price and Profit). He gave the example of the prices of the articles workers buy falling while money wages remained the same; in which case, despite money wages remaining unchanged, real wages would have increased. In these days of permanent, if gradual, inflation if the prices of the articles workers buy increase more than money-wages (as has happened in some years), even though money wages have increased real wages have fallen. On the other hand, if money wages rise more than prices (as seems to be the slow, long run trend in this part of the world) then real wages increase.