What is a Price?

This pair of headlines exemplifies a common, if puzzling, price narrative that validates mainstream economic theory.11Hat tip to Professor Jonathan Nitzan for first making me aware of this narrative.

The marginalist economic model tells us that when the supply of a product increases, the price of the product will decrease. This idea informs the first headline: oil prices are falling because oil supplies are increasing. However, prices frequently move in ways that defy the theory. But the headlines still validate it by expressing consternation at this improper behaviour, as in the second headline: oil price are falling despite oil supply also falling. This oscillation occurs because marginalist theory grossly over-simplifies the complex reality of price-formation.

Marginalist theory explains prices as the outcome of the famous “law of supply and demand.” This can be visualized with two lines on a graph that describe distinct relationships between price and quantity. If price rises, the quantity demanded falls (plotted as the downward-sloping demand curve). And, as price rises, the quantity supplied also rises (hence the upward-sloping supply curve). At the intersection of supply and demand we find the equilibrium combination of price and quantity: the “market clearing” price.

This relationship makes much intuitive sense, as we can see it operate in our own behaviours. Economists have leveraged this intuition to build a theory that substitutes the simple aggregation of individuals for the emergent complexities of society. But at the level of a society, the relationship between price and quantity, between supply and demand, is orders of magnitude more complex than is captured by the supposed “law of supply and demand.” In place of the mechanical equilibrating process (discussed in the column “What is The Market?”, SDUK02), we must understand prices as constructions that temporarily—and incompletely—resolve and obfuscate myriad diverse social relations. Oil prices crystalize everything from American car culture to Middle Eastern politics.22See, among many others on the political economy of oil prices, Timothy Mitchell, Carbon Democracy: Political Power in the Age of Oil (London: Verso, 2011); James Marriott and Mika Minio-Paluello, The Oil Road: Journeys from the Caspian Sea to the City of London (London: Verso, 2012); Ken Silverstein, The Secret World of Oil (London: Verso, 2014). These vastly exceed and defy the supply and demand functions of the marginalist model. The contradiction between the simplicity of the model and the complexity of reality explains the incongruous because/despite narrative.

One consequence of marginalist theory dominance within economics is a neglect for research and analysis on actual price-formation processes. Why is a barrel of oil $59.14USD as of 28 May 2019? Why did it hit an all-time high of $147.27USD on 11 July 2008? The complex array of entangled entities involved in—affecting and affected by—oil markets include the Saudi royal family, environmental regulations, Wall Street speculators, U.S. foreign policy, solar panel efficiency, Canadian pipeline capacity, fracking technologies, urban development, biofuel subsidies, oil industry unionization, on and on and on. All of the nuances and interconnections disappear into the over-simplifying law of supply and demand.

Karl Marx offered an alternative explanation for prices: labour. Supply and demand caused exchange value, i.e. prices, to fluctuate around their core determinant, value, which in Marx’s construction was ultimately determined by socially necessary abstract labour. The problems with Marx’s labour theory of value are well documented.33See chapter 5 of Jonathan Nitzan and Shimshon Bichler, Capital as Power: A Study of Order and Creorder (London: Routledge, 2009) for an overview of those criticisms. Also see Cornelius Castoriadis, “Value, Equality, Justice, Politics: From Marx to Aristotle and from Aristotle to Ourselves,” in Crossroads in the Labyrinth (Cambridge, MA: The MIT Press, 1984) for a critique of the very concept of labour value as theorized by Marx. One result of Marx’s reduction of price to labour value is that his adherents also largely have abdicated study of actual prices. Why is a share of Amazon $1,836.43USD (28 May 2019), making the value of the entire company $904.1 billion? Why is a subscription to Amazon Prime in Canada $7.99CAD/month? Why is a subscription to Amazon Prime in the United States 12.99USD/month? Why is one Canadian dollar currently priced at 74 cents in American money?

There are people who try to understand these specific prices; many people, in fact. Currency traders, for example, need to understand the complex array of forces that push currencies up and down in order to make profitable trades. However, they focus their understanding without the kind of social and historical perspective that a social science like economics ought to offer an analysis. Further, these instrumental understandings do not question the fundamental mechanism of price.

The failure of both mainstream and critical political economy to centre the price-formation process is consequential. Price is the world’s most universal language: from a bushel of wheat, to a Picasso painting, to an hour of plumbing service, to a parcel of land in Brazil, to the disposal of an old television… almost every part of our social order is, or has been, priced. Those prices emerge from the complex web of social relations and have wide-ranging effects. Housing prices in Toronto are making life in the city unaffordable for many people. The price of Amazon shares has made Jeff Bezos incredibly wealthy and powerful. The lack of a price on carbon emissions is implicated in the climate crisis.

I want to suggest an alternative basis for developing a critical perspective on price, derived from Marx’s critique of Aristotle. In the course of introducing his labour theory of value, Marx takes on Aristotle, approving of the Greek thinker’s early acknowledgement of value. However, Marx argues, Aristotle failed to develop a true understanding by primarily conceived prices as merely “makeshift for practical purposes.” This quote comes directly from Volume 1 of Capital and is offered by Marx as, according to historians, a highly idiosyncratic translation of Aristotle.44See Ricardo F. Crespo, Philosophy of the Economy: An Aristotelian Approach (Springer, 2013). However, what matters is not the accuracy of the translation or Marx’s critique, but rather the inadvertent insight it contains.

In essence, Marx’s translation of Aristotle suggests that prices are not determined, they are constructed. And with this insight every part of the value-price matrix can be dissembled and queried. What are prices made of? What are the practices involved? What are the purposes and motivations? Only by examining the complex network of relationships that coalesce in a given price can we understand where it comes from and what its function is. And only then we can develop conceptual frameworks and analytical tools to further our understanding of prices as social objects.