2020s >> 2020 >> no-1390-june-2020

Cooking the Books II: Negative prices: how come?

‘US oil prices turn negative as demand dries up’, the BBC reported on 12 April. A ‘negative price’? How can that be? Why would a seller want to pay a buyer to buy their goods? Actually, something similar, though described differently, frequently occurs when supply exceeds market demand; in that case, if they want to sell their goods, sellers have to cut their price, sometimes even below the cost of production. This is what happened with oil when, as a result of governments shutting down productive activity to combat the spread of the virus, the supply came to exceed the market demand for it for delivery on certain dates. This presented the oil producers with the problem of where to store the excess oil. This (e.g. hiring oil tankers) can be expensive and explains why the oil producers were prepared to sell their oil at a lower price to someone else to buy and store; cutting their losses by in effect paying someone else to store it. It is only described as a ‘negative price’ because of the way oil is traded and its price determined on futures markets where delivery is for a fixed future date.

Marx employed a similar concept, though not the terminology, to explain the source of the profits of capitalist businesses engaged in merely buying and selling commodities (he called it ‘merchants’ capital’ but today ‘dealers’ capital’ might be better). According to the labour theory of value, only the labour employed in activities connected with the actual transformation of materials that originally came from nature into something useful to humans created value and so surplus value, the source of profits. Where, then, did the profits of capitalists whose business didn’t do this come from?

At first sight, the profits of dealers seem to come from simply increasing the price of what they buy; hence their unpopularity especially amongst small-scale producers as unproductive middlemen exploiting them. Under developed capitalism, Marx explained (in chapter 17 of Volume 3 of Capital on ‘Commercial Profit’), this is just an appearance. The ‘producers’ that the dealers would be ‘exploiting’ would then be productive capitalists (whether engaged in agriculture, mining or manufacturing), but why would these latter allow this? Why wouldn’t they avoid it by themselves selling their commodities directly to the final consumer?

Marx’s answer was that this would tie up some of their capital and not be the most profitable use of it. So what evolved, as capitalism developed, was a situation in which they in effect pay dealers to sell their commodities to the final consumer by selling them to the dealer at a price below what they could get if they did this themselves, allowing the dealers to pocket the difference. Which explains how dealers share in the surplus value produced in the productive sector of the economy without their capital being invested in any value-producing activity.

Thus dealers make their profits, not by selling a commodity above what Marx called its ‘price of production’ (cost of production plus the average rate of profit), but at it, having bought from the productive capitalists below that price. As Marx put it:

‘The merchant’s sale price is higher than his purchase price not because it is above the total value, but rather because his purchase price is below this total value’.

The price at which the productive capitalists sell their commodities to a dealer could be described as a ‘negative price’ but this is not a passing effect of the operation of the law of supply and demand when supply comes to temporarily exceed market demand as it did with oil in April. Rather it is a permanent feature of the circulation of commodities that has evolved as it has proved more profitable for there to be a division of capital between productive capital and dealers’ capital.

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