Inflation and Prices

Why do individual prices rise and fall and why, at certain times, is there an upward movement of prices, which is called inflation, or the opposite movement, a downward movement of prices, which is known as deflation? There is no need to stress the importance of the subject, but it may be useful to point out one or two of the difficulties that we come up against. There are, for example, people who think that capitalism would not be so bad if prices were not so high. They believe that prices are high simply because manufacturers and shopkeepers want them to be high and that the Government ought to tell them to stop it. On the other hand, there are people who think that prices are high because trade unions put up wages and that the Government ought to tell them to stop it too. The fact is that there are real economic causes of high prices that have not much to do with the wishes of the shopkeepers, trade unionists and others.

One particular reason for looking at the question of inflation is that in Great Britain and in a number of other countries, for the past 25 years, we have had prices rising more or less continuously; we cannot afford not to know why this happens. The subject is a somewhat difficult one; with three separate aspects. First, we have to consider what determines what we may call the normal price of each article that is sold, what Marx in some places called the natural price. Secondly we have to consider what causes deviations in the normal price of each article, and third, we have to consider what causes the broad general movements of prices up or down, affecting all prices equally and not merely the prices of particular articles. The next point that must be borne in mind is that you cannot study prices and inflation as something separate and distinct from other economic questions.

Before we can understand the movements of prices, we have to go back to the commodity’s value. Almost all of the things which have a price have it because they are the products of human labour and the amount of human labour required in their production is the measure of their value. The things bought and sold are also useful or have a use value, but that is a different quality, not to be confused with value. Value is a social relationship of capitalism, a relationship between persons that expresses itself as a relationship between the things produced for sale, which we call commodities. If, under average conditions of production in a given industry, it takes 24 hours of socially necessary labour to produce a certain commodity, then that commodity will have the same value as other commodities which also take 24 hours of socially necessary labour.

However, if one firm in that industry is inefficient and takes 30 hours, the value of its product will still be the social average of 24 hours. On the other hand, if an exceptionally efficient firm can do the job in 20 hours on average it is still the socially necessary labour that counts.

It has to be borne in mind that when we talk about producing a commodity, we mean all of the processes that are necessary for its production. Suppose we assume as an example that the socially necessary labour for producing a bicycle is 24 hours, this means not merely the time taken in assembling the bicycle but all the necessary processes, from obtaining the rubber and metal and other materials, right down to the finished product, including any necessary transporation of materials including wear and tear of factory machinery and the consumption of electricity or other power to drive the machinery, and so on. Having taken as an example that it takes 24 hours of socially necessary labour to produce a bicycle, let us now carry it a stage further and assume that a suit of clothes also takes 24 hours, then the bicycle and the suit of clothes would be of equal value.

Let us also assume that 24 hours of socially necessary labour would produce one ounce weight of gold; then we have three different kinds of articles with different uses and of different materials and different weights, but all having the same value. Now one stage further is to turn our one ounce of gold into money and to assume, which is approximately true in Great Britain before 1914, that the Government by law fixed the pound sterling, or the sovereign as it was called, at one quarter ounce weight of gold, then if you had 4 gold sovereigns, or £4, you had about one ounce of gold, and on our assumption, its value was the same as the bicycle or the suit of clothes.

Now it would be very simple if we could say that price and value are identical. We would then be able to explain all prices of all articles simply by saying that the price of the bicycle and of the suit of clothes was £4 and that the prices of all other commodities would be according to their value, measured in terms of the amount of socially necessary labour required in their production. Unfortunately, we cannot treat the matter as simply as that. We cannot say, in other words, that price and value of individual commodities are identical. In actual practice it is rarely so, because all sorts of other factors come into play.

When Marx dealt with this subject in Chapter 6 of his pamphlet Value, Price and Profit, and said that commodities on an average sell at their values, he added that this was apart from the effect of monopolies and some other modifications, although he did not deal with these modifications either in Value, Price and Profit or in the first volume of Capital. As the chief purpose of this series is to deal with the general rise of prices—that is to say, inflation—it is not necessary here to deal with all these modifications. It will be sufficient merely to refer to them briefly and to refer to sources of information on some of the others.

Now the first cause of deviations of prices from their normal price arises through what is called supply and demand, when although the value of a commodity remains unchanged, its price may rise or fall because of variations of supply and demand. To take an example, suppose that storms at sea prevent fishing trawlers from entering a port. This interrupts the supply of fish and immediately prices go up. When later on the trawlers do arrive, probably a large number of them together, and all land their catches of fish, then the prices will fall again. These are examples of variations in supply and demand.

The other factor referred to by Marx was monopoly. Monopoly is a particular form of interruption of supply. If a company controls all or most of the supply of an article, it can force up the price until such time as new sources of supply come into operation or until substitute articles come on the market and break the monopoly. In Great Britain for many years, there have been monopolies in alcohol and tobacco which are created not by the companies but by the Government. The Government controls the production and import of alcohol and tobacco and can thus establish a monopoly price far above the value of these commodities and can use that monopoly price as a means of skimming off excess profit for government revenue. There is also a kind of opposite example, and that is government subsidies. Whereas a monopoly such as those referred to operated by the government can force up the prices far above value, the government can and has for many years subsidised certain foodstuffs so that they can be sold well below their value. What happens in effect is that the government pays the producers to sell the article cheaply.

H.

(To be continued.)