The market price is the price at which a good or service "Service (economy)") can be purchased in a free market. It is an economic concept applicable both in historical aspects of the discipline and in its concrete use and daily life.
The concept has given rise to both technical and theoretical discussions in the development of economic sciences. These discussions range from the definition of what a market is to what is meant by price, difficulties that acquire particular importance in microeconomics, an area in which one of the most important functions of an economist is the determination of prices that maximize the profit of a company. However, the problem also extends to the macroeconomic sphere, in which price calculations play a central role in determining the hypothetical economic equilibrium.
Overview
Historically, the classical school considered that there are two market prices:[note 1] the one due to competition (or natural price) and the one generated without competition (or monopolistic price). In the words of Adam Smith:
The natural price depends directly, in this view, on the value of a good, and that value is equivalent to the amount of labor necessary to produce the good in question. This is known as the labor theory of value.
The general assumption is that, in a free market and given that there is competition "Competition (economy)"), market prices decrease to the possible limit: that of the cost of production. Consequently, from this point of view, the market price of a good or service depends on production or supply.[note 2] If, for any reason, that cost of production changes, the market price will change.[note 3] For example, when technological advances facilitate production, decreasing costs, market prices decrease.
The above implies that, assuming competition, products are exchanged for others at a certain fixed "exchange rate" in the short or medium term,[note 4] whatever the currency we choose to express that relationship: the rate is determined by the amount of work or value of the goods in question. This is known as the "neutrality of money": variations in the quantity of currency only affect nominal prices, without having any effect on real variables (quantity produced and consequently demanded, etc.).
However, this conception gives rise to a variety of problems. Among these is the so-called transformation problem: basically, what would be the calculation necessary to transform that amount of work (however it is measured) into market price.[note 5].
Competition Price Analysis
Introduction
The market price is the price at which a good or service "Service (economy)") can be purchased in a free market. It is an economic concept applicable both in historical aspects of the discipline and in its concrete use and daily life.
The concept has given rise to both technical and theoretical discussions in the development of economic sciences. These discussions range from the definition of what a market is to what is meant by price, difficulties that acquire particular importance in microeconomics, an area in which one of the most important functions of an economist is the determination of prices that maximize the profit of a company. However, the problem also extends to the macroeconomic sphere, in which price calculations play a central role in determining the hypothetical economic equilibrium.
Overview
Historically, the classical school considered that there are two market prices:[note 1] the one due to competition (or natural price) and the one generated without competition (or monopolistic price). In the words of Adam Smith:
The natural price depends directly, in this view, on the value of a good, and that value is equivalent to the amount of labor necessary to produce the good in question. This is known as the labor theory of value.
The general assumption is that, in a free market and given that there is competition "Competition (economy)"), market prices decrease to the possible limit: that of the cost of production. Consequently, from this point of view, the market price of a good or service depends on production or supply.[note 2] If, for any reason, that cost of production changes, the market price will change.[note 3] For example, when technological advances facilitate production, decreasing costs, market prices decrease.
The above implies that, assuming competition, products are exchanged for others at a certain fixed "exchange rate" in the short or medium term,[note 4] whatever the currency we choose to express that relationship: the rate is determined by the amount of work or value of the goods in question. This is known as the "neutrality of money": variations in the quantity of currency only affect nominal prices, without having any effect on real variables (quantity produced and consequently demanded, etc.).
That problem remained unresolved for a long time.[2] Nowadays, and although the issue remains debated, many consider, based on the analysis of Piero Sraffa,[3] that the solution is simply that there is no such transformation: the calculation in terms of value is not translatable to calculations in money. The producer (or capitalist or entrepreneur, etc.) is not interested in producing extra value nor does he know how to carry out the calculation in those terms.
Even before Sraffa's analysis, the marginalist school had proposed that market prices depend mainly on demand "Demand (economics)"): whatever the cost or effort of producing a good, it can only be sold at the price that the consumer is willing to pay. And that willingness to pay depends on consumers' perception of the utility "Utility (economics)") of the product.
In this regard the intention of the marginalists was, in the words of Jevons: "to free themselves from the 'Wage Fund Theory', the doctrine of the value of the cost of production, the natural rate of wages and other erroneous or confusing Ricardian doctrines." Jevons, in complete agreement with Menger and others, adds: "Repeated reflection and investigation have led me to the rather novel opinion that value depends entirely on utility."[4]
To explain price variations, marginalists introduced the Principle of Diminishing Marginal Utility.[note 6] In Ricardo's view, for example, diamonds are conceived of as having value because some people work to find them and transport them over great distances. And, since this is not only difficult and dangerous but also requires a lot of effort in relation to the diamonds produced, they cost a lot. In the marginalist view, miners look for diamonds because there is a demand for them. But, to the extent that someone owns them, what that individual is willing to pay for them decreases; Consequently, the price of the diamond is not fixed, it depends on how much a potential buyer wants them. In the same way, the first glass of water for a thirsty person is worth more than subsequent ones. And by the same principle, individuals would be willing to pay more for a house to live in than for one for vacations.[note 7].
In the words of Jevons: “Value depends only on the final degree of usefulness. How can we vary this degree of usefulness? Having a greater or lesser quantity of the merchandise to be consumed. And how do we have a greater or lesser amount? (adding work). Which leads him to the conclusion that:.
Thus, from this point of view, the stable market price is the point at which marginal utility begins to diverge from total utility. Lower sales leave unmet demand and imply that the company has not sold as much as it could. Sales higher than those determined by that point imply losses: either not everything produced will be sold or it will be sold at prices lower than possible.
Alfred Marshall, considered the founder of the neoclassical school, reintroduces the marginalist vision through the metaphor known as "Marshall's scissors", the consideration of the effect of supply, formalizing the Law of supply and demand.
Marshall calls the natural price of any good or service the price that is found at the point at which the blades of the scissors of supply and demand intersect.[6].
The above implies that the natural price is the stable market price but transformed into a stable market price: the one in which the market is emptied, that is, in which everything produced is sold and there is no unsatisfied demand. This leads directly to the conception that, at certain prices, production levels, etc., the market will enter a situation of economic equilibrium, whether partial (in the market for a given good) or general (for all goods).
This conception still has general acceptance, especially in introductory courses to the discipline, with later authors generally introducing partial rather than substantive modifications or adaptations.
Indeed, the main problem with Marshall's formalization is generally considered to be that it assumes a condition of perfect competition. In other words, both demand and supply are independent of each other. Further redundancy: a situation in which no buyer or seller controls, or has the power to manipulate, the market. If that is not the case, it cannot be said that the price determined by the intersection of supply and demand lines is the long-term stable price or the natural price in a free market.
From the first decades of the century it became evident that this situation is not only not the case but will not be the case: in an era of trade increasingly dominated by international companies, the pretense that market prices are being determined according to the conditions of perfect competition cannot be maintained.[note 8] Some modern authors believe that attempting to return to that perfect competition is not only an exercise in futility, but would also not produce "an economy of great stability, growth and efficiency."[7]
On the other hand, it is not the case that this is a situation of monopolistic control as exposed in Jevons' analysis. The real situation is that we are in a condition of imperfect competition. Authors such as Joan Robinson[8] and others, introduced the analysis of market price determination in conditions of oligopoly and oligopsony, with theories and models such as the Theory of Monopolistic Competition,[9] Stackelberg Competition and the Spider Web Theorem, etc.
All of these situations can be described as a market failure, with the consideration that they are recurrent and possibly stable rather than transitory. This could justify government intervention to prevent such failures or distortions from causing major problems.
Alternative conceptions
One of the best-known alternative theories is a variant of the marginalist approach known as the theory of dispersed knowledge, according to which prices are based on information about supply and demand spread throughout a market. In this perception there is neither a way nor is it relevant to try to determine the existence of perfect or imperfect competition. What is relevant for price formation is simply that each individual has a rough idea—indicated either by the historical price (that is, the price at which goods have been selling in the recent past) of the goods in question or any other perception of demand—of the sum of the agents' subjective valuation of goods and services. From this perspective there is no system or way to calculate economic variables "in principle" or in the abstract (as, for example, in neoclassical calculus), consequently the only relevant and possible information is the price, but, since this changes, there is no guarantee that the result is correct or long-term: economic action implies an irreducible risk.[note 9] Thus, from this point of view, an intervened market would inevitably lead to inefficiency, since it would falsify the correct information about the prices.
The most common criticism of this theory is similar to that made of the rest of marginalism. Additionally, it is suggested that a school that abandons or disdains economic calculation cannot really be called an economic school.[10][11][12].
Another relatively common alternative approach is that originating in Sraffa's criticism.[3] Sraffa argues that the marginalist and neoclassical approach to the concept of price formation, etc., is logically inconsistent given that the concept of surplus value has been discarded. For Sraffa, the reality is that economic activities are of interest, both at an individual and general level, to the extent that they produce more than what is invested in producing, measured not only in terms of money, but also in terms of product, that is, to the extent that they produce value. It is on that basis that profit exists. For Sraffa, the mistake of marginalists and neoclassicals is trying to determine profit in terms of money: to do that we first need to know the prices of production. But we cannot determine these production prices without establishing the prices of the factors of production, but the prices of these factors in turn depend on the price of other elements used in their production, which leads us to circularity or an infinite return.
On the other hand, the error of the classics in general, and Marx in particular, was in believing that market prices in general, and profit in particular, depended on and can be determined in money solely from the work involved in production, which requires a numeraire that allows solving the problem of transformation. The reality, in Sraffa's opinion, is that cash is a package of basic products or merchandise that are fundamental for the production of goods of all kinds. It is the relationship between any good and those basic commodities used in its production and placing on the market that determines market prices, whatever the monetary unit we choose to express it. That is, in Sraffa's opinion, a diamond will generally cost the equivalent of many liters of water because in its production and transportation to the market a certain amount of oil, machines, and even other consumer goods (expressed and measured in the salary of workers and profits to employers, etc.) has been used that is equivalent to that necessary to produce those many liters of water.[note 10].
This position makes its presence felt, although not always explicitly, in many areas, from the so-called heterodox economy to financial circles. It is common, for example, for newspapers, especially those dedicated to finance, to regularly publish both the prices of "basic commodities" and the relevant conditions of their production and availability.[note 11].
References
[1] ↑ Conviene mantener presente que estas son las primeras aproximaciones metódicas a problemas complejos. Todavía no se habían «descubierto» perspectivas que, en el presente, nos parecen obvias. Desde el punto de vista de los clásicos, especialmente los tempranos, lo observable era que, dada la presencia de demanda por algún bien o servicio, todo lo producido se vendía: ninguna empresa tenía, por sí misma, la capacidad de abastecer la totalidad del mercado. Al mismo tiempo, los métodos de producción eran relativamente simples y bien conocidos. En esa situación, se hacen evidentes dos casos generales: cuando una sola empresa produce el bien o servicio en cuestión, y, segundo, cuando muchas lo hacen. Es decir, producción con y sin competencia.
[3] ↑ Ver: Ley de Say.
[4] ↑ Conviene recordar que en aquellos tiempos las empresas eran pequeñas, y solo podían contribuir, cada una, fraccionalmente a satisfacer la demanda total. Esto, junto a la existencia de competencia, hacía que los «precios naturales» disminuyeran al máximo posible, tendiendo al costo de producción, el que, a su vez, depende de consideraciones técnicas, no de la demanda.
[5] ↑ En términos económicos, el largo plazo es el lapso de tiempo necesario para que las empresas puedan responder a cambios en las condiciones de producción. Por ejemplo, el tiempo necesario para comprar nuevas máquinas, etc.
[6] ↑ Marx mismo introdujo el problema en el capítulo 9 del tercer volumen de El Capital donde lo trató de resolver. El problema central desde el punto de vista de Marx es este: dado que la ganancia o plusvalía se deriva del trabajo, y dado que la relación trabajo/capital varía entre diferentes productos o mercaderías, ¿cómo se puede reconciliar esa variación con una hipotética tasa de ganancia promedio para todo el capital invertido? ¿cómo derivar de lo anterior la tendencia -postulada no solo por Marx sino por los clásicos en general- a la reducción de la tasa de ganancia?
[10] ↑ Ver: Primera Ley de Gossen.
[11] ↑ Ver: Paradoja del valor.
[14] ↑ Ver, por ejemplo: Índice de Lerner.
[18] ↑ Ver: Cálculo económico.
[22] ↑ Ver: La mercancía patrón como numerario.
[23] ↑ Ver: Valor agregado.
However, this conception gives rise to a variety of problems. Among these is the so-called transformation problem: basically, what would be the calculation necessary to transform that amount of work (however it is measured) into market price.[note 5].
That problem remained unresolved for a long time.[2] Nowadays, and although the issue remains debated, many consider, based on the analysis of Piero Sraffa,[3] that the solution is simply that there is no such transformation: the calculation in terms of value is not translatable to calculations in money. The producer (or capitalist or entrepreneur, etc.) is not interested in producing extra value nor does he know how to carry out the calculation in those terms.
Even before Sraffa's analysis, the marginalist school had proposed that market prices depend mainly on demand "Demand (economics)"): whatever the cost or effort of producing a good, it can only be sold at the price that the consumer is willing to pay. And that willingness to pay depends on consumers' perception of the utility "Utility (economics)") of the product.
In this regard the intention of the marginalists was, in the words of Jevons: "to free themselves from the 'Wage Fund Theory', the doctrine of the value of the cost of production, the natural rate of wages and other erroneous or confusing Ricardian doctrines." Jevons, in complete agreement with Menger and others, adds: "Repeated reflection and investigation have led me to the rather novel opinion that value depends entirely on utility."[4]
To explain price variations, marginalists introduced the Principle of Diminishing Marginal Utility.[note 6] In Ricardo's view, for example, diamonds are conceived of as having value because some people work to find them and transport them over great distances. And, since this is not only difficult and dangerous but also requires a lot of effort in relation to the diamonds produced, they cost a lot. In the marginalist view, miners look for diamonds because there is a demand for them. But, to the extent that someone owns them, what that individual is willing to pay for them decreases; Consequently, the price of the diamond is not fixed, it depends on how much a potential buyer wants them. In the same way, the first glass of water for a thirsty person is worth more than subsequent ones. And by the same principle, individuals would be willing to pay more for a house to live in than for one for vacations.[note 7].
In the words of Jevons: “Value depends only on the final degree of usefulness. How can we vary this degree of usefulness? Having a greater or lesser quantity of the merchandise to be consumed. And how do we have a greater or lesser amount? (adding work). Which leads him to the conclusion that:.
Thus, from this point of view, the stable market price is the point at which marginal utility begins to diverge from total utility. Lower sales leave unmet demand and imply that the company has not sold as much as it could. Sales higher than those determined by that point imply losses: either not everything produced will be sold or it will be sold at prices lower than possible.
Alfred Marshall, considered the founder of the neoclassical school, reintroduces the marginalist vision through the metaphor known as "Marshall's scissors", the consideration of the effect of supply, formalizing the Law of supply and demand.
Marshall calls the natural price of any good or service the price that is found at the point at which the blades of the scissors of supply and demand intersect.[6].
The above implies that the natural price is the stable market price but transformed into a stable market price: the one in which the market is emptied, that is, in which everything produced is sold and there is no unsatisfied demand. This leads directly to the conception that, at certain prices, production levels, etc., the market will enter a situation of economic equilibrium, whether partial (in the market for a given good) or general (for all goods).
This conception still has general acceptance, especially in introductory courses to the discipline, with later authors generally introducing partial rather than substantive modifications or adaptations.
Indeed, the main problem with Marshall's formalization is generally considered to be that it assumes a condition of perfect competition. In other words, both demand and supply are independent of each other. Further redundancy: a situation in which no buyer or seller controls, or has the power to manipulate, the market. If that is not the case, it cannot be said that the price determined by the intersection of supply and demand lines is the long-term stable price or the natural price in a free market.
From the first decades of the century it became evident that this situation is not only not the case but will not be the case: in an era of trade increasingly dominated by international companies, the pretense that market prices are being determined according to the conditions of perfect competition cannot be maintained.[note 8] Some modern authors believe that attempting to return to that perfect competition is not only an exercise in futility, but would also not produce "an economy of great stability, growth and efficiency."[7]
On the other hand, it is not the case that this is a situation of monopolistic control as exposed in Jevons' analysis. The real situation is that we are in a condition of imperfect competition. Authors such as Joan Robinson[8] and others, introduced the analysis of market price determination in conditions of oligopoly and oligopsony, with theories and models such as the Theory of Monopolistic Competition,[9] Stackelberg Competition and the Spider Web Theorem, etc.
All of these situations can be described as a market failure, with the consideration that they are recurrent and possibly stable rather than transitory. This could justify government intervention to prevent such failures or distortions from causing major problems.
Alternative conceptions
One of the best-known alternative theories is a variant of the marginalist approach known as the theory of dispersed knowledge, according to which prices are based on information about supply and demand spread throughout a market. In this perception there is neither a way nor is it relevant to try to determine the existence of perfect or imperfect competition. What is relevant for price formation is simply that each individual has a rough idea—indicated either by the historical price (that is, the price at which goods have been selling in the recent past) of the goods in question or any other perception of demand—of the sum of the agents' subjective valuation of goods and services. From this perspective there is no system or way to calculate economic variables "in principle" or in the abstract (as, for example, in neoclassical calculus), consequently the only relevant and possible information is the price, but, since this changes, there is no guarantee that the result is correct or long-term: economic action implies an irreducible risk.[note 9] Thus, from this point of view, an intervened market would inevitably lead to inefficiency, since it would falsify the correct information about the prices.
The most common criticism of this theory is similar to that made of the rest of marginalism. Additionally, it is suggested that a school that abandons or disdains economic calculation cannot really be called an economic school.[10][11][12].
Another relatively common alternative approach is that originating in Sraffa's criticism.[3] Sraffa argues that the marginalist and neoclassical approach to the concept of price formation, etc., is logically inconsistent given that the concept of surplus value has been discarded. For Sraffa, the reality is that economic activities are of interest, both at an individual and general level, to the extent that they produce more than what is invested in producing, measured not only in terms of money, but also in terms of product, that is, to the extent that they produce value. It is on that basis that profit exists. For Sraffa, the mistake of marginalists and neoclassicals is trying to determine profit in terms of money: to do that we first need to know the prices of production. But we cannot determine these production prices without establishing the prices of the factors of production, but the prices of these factors in turn depend on the price of other elements used in their production, which leads us to circularity or an infinite return.
On the other hand, the error of the classics in general, and Marx in particular, was in believing that market prices in general, and profit in particular, depended on and can be determined in money solely from the work involved in production, which requires a numeraire that allows solving the problem of transformation. The reality, in Sraffa's opinion, is that cash is a package of basic products or merchandise that are fundamental for the production of goods of all kinds. It is the relationship between any good and those basic commodities used in its production and placing on the market that determines market prices, whatever the monetary unit we choose to express it. That is, in Sraffa's opinion, a diamond will generally cost the equivalent of many liters of water because in its production and transportation to the market a certain amount of oil, machines, and even other consumer goods (expressed and measured in the salary of workers and profits to employers, etc.) has been used that is equivalent to that necessary to produce those many liters of water.[note 10].
This position makes its presence felt, although not always explicitly, in many areas, from the so-called heterodox economy to financial circles. It is common, for example, for newspapers, especially those dedicated to finance, to regularly publish both the prices of "basic commodities" and the relevant conditions of their production and availability.[note 11].
References
[1] ↑ Conviene mantener presente que estas son las primeras aproximaciones metódicas a problemas complejos. Todavía no se habían «descubierto» perspectivas que, en el presente, nos parecen obvias. Desde el punto de vista de los clásicos, especialmente los tempranos, lo observable era que, dada la presencia de demanda por algún bien o servicio, todo lo producido se vendía: ninguna empresa tenía, por sí misma, la capacidad de abastecer la totalidad del mercado. Al mismo tiempo, los métodos de producción eran relativamente simples y bien conocidos. En esa situación, se hacen evidentes dos casos generales: cuando una sola empresa produce el bien o servicio en cuestión, y, segundo, cuando muchas lo hacen. Es decir, producción con y sin competencia.
[3] ↑ Ver: Ley de Say.
[4] ↑ Conviene recordar que en aquellos tiempos las empresas eran pequeñas, y solo podían contribuir, cada una, fraccionalmente a satisfacer la demanda total. Esto, junto a la existencia de competencia, hacía que los «precios naturales» disminuyeran al máximo posible, tendiendo al costo de producción, el que, a su vez, depende de consideraciones técnicas, no de la demanda.
[5] ↑ En términos económicos, el largo plazo es el lapso de tiempo necesario para que las empresas puedan responder a cambios en las condiciones de producción. Por ejemplo, el tiempo necesario para comprar nuevas máquinas, etc.
[6] ↑ Marx mismo introdujo el problema en el capítulo 9 del tercer volumen de El Capital donde lo trató de resolver. El problema central desde el punto de vista de Marx es este: dado que la ganancia o plusvalía se deriva del trabajo, y dado que la relación trabajo/capital varía entre diferentes productos o mercaderías, ¿cómo se puede reconciliar esa variación con una hipotética tasa de ganancia promedio para todo el capital invertido? ¿cómo derivar de lo anterior la tendencia -postulada no solo por Marx sino por los clásicos en general- a la reducción de la tasa de ganancia?