When Marx uses the term “average” here, it is clear that what he means is not the arithmetic mean, or median average, but the modal average. That is the the conditions under which the bulk of production takes place. The mean average would entail totalling up all of the abstract labour-time required for production of a particular type of commodity, and then dividing the total production of that commodity by this total labour-time. But, the figure derived from that might represent the actual labour-time of no producer. The median average would involve taking the labour-time required for production by the most inefficient producer, and the most efficient producer, and calculating a point midway between the two.
Marx does suggest this when he says,
“If the ordinary demand is satisfied by the supply of commodities of average value, hence of a value midway between the two extremes, then the commodities whose individual value is below the market-value realise an extra surplus-value, or surplus-profit, while those, whose individual value exceeds the market-value, are unable to realise a portion of the surplus-value contained in them.”
But, its clear he does not mean this literally. Firstly, this median point might again be a theoretical average that corresponds to the labour-time required by no actual producer. But, more importantly, as Marx goes on to point out, different producers are of different sizes, and account for different proportions of the total social production. If there is just one large efficient producer, and a large number of small inefficient producers, or vice versa, it would be silly to take a midway point between the two without taking into consideration the fact that the bulk of production is undertaken by the one large producer.
“The value of the entire mass of commodities is equal to the actual sum of the values of all individual commodities taken together, whether produced under average conditions, or under conditions above or below the average. In that case, the market-value, or social value, of the mass of commodities — the necessary labour-time contained in them — is determined by the value of the preponderant mean mass.”
(Capital III, Chapter 10)
Marx sets out the way Market Value actually refers to the same thing, which has different forms depending upon whether we are talking about simple commodity production and exchange, or capitalist production. In both Volume I and Volume III, Marx describes the process by which products become commodities, and value is transformed into social value along with it.
A product is a use value that is produced for individual consumption by an individual (Robinson Crusoe), a collective (primitive commune), or peasant family. As Marx sets out in his letter to Kugelmann, this production is determined by the Law Of Value.
“And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour.”
For Robinson Crusoe, or for the primitive commune, or the peasant family, and the same will apply in future to the communist society, the decision is how to balance the value of the product, i.e. the labour-time required for its production, against the use value obtained from that product. In other words, if it takes 10 hours to produce 10 kilos of fish, and only 5 hours to produce 10 kilos of venison, the decision of whether to spend 10 hours just producing fish, or just producing venison, or some combination of time spent producing both, will depend upon the use value (utility) obtained from different amounts of both fish and venison.
As Engels puts it.
“The useful effects of the various articles of consumption, compared with one another and with the quantities of labour required for their production, will in the end determine the plan.”
“As long ago as 1844 I stated that the above-mentioned balancing of useful effects and expenditure of labour on making decisions concerning production was all that would be left, in a communist society, of the politico-economic concept of value. (Deutsch-Französische Jahrbücher, p. 95) The scientific justification for this statement, however, as can be seen, was made possible only by Marx's Capital.”
To be accurate then, Engels is wrong when he says, in his supplement to Capital III, that the Marxian Law of Value only operates from around 7,000 B.C. until about the 15th century. What applies during that period is the particular form of the Law of Value appropriate to simple commodity production and exchange.
“It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation. Natural laws cannot be abolished at all. The only thing that can change, under historically differing conditions, is the form in which those laws assert themselves. And the form in which this proportional distribution of labour asserts itself in a state of society in which the interconnection of social labour expresses itself as the private exchange of the individual products of labour, is precisely the exchange value of these products.”
(Marx Letter To Kugelmann)
Prior to that period, the Law of Value still applies, but it applies to the value of products not commodities, just as that will be the case under Communism. Under capitalism it applies in a modified form, because commodities no longer exchange at these values, but at Prices Of Production. From around the 15th century, as Engels says, and as Marx describes in Capital III, Chapters 9 and 10, as one industry after another is taken over by capitalist production, so these Prices of Production gradually replace Exchange Value as the basis upon which commodities are sold in the market. This is the basis of the change in the form of the market value of commodities.
Prior to commodity production and exchange, use values are produced as products. For each producer, the product has an individual value determined by the labour-time they require to produce it. But, over time, the various primitive communes come into contact with others, and sporadic exchanges of these products occur, usually as a result of marriages etc. These exchanges between different communities precede, therefore, trade within communities.
“This agrees also with the view we expressed previously that the evolution of products into commodities arises through exchange between different communities, not between the members of the same community. It holds not only for this primitive condition, but also for subsequent conditions, based on slavery and serfdom, and for the guild organisation of handicrafts, so long as the means of production involved in each branch of production can be transferred from one sphere to another only with difficulty and therefore the various spheres of production are related to one another, within certain limits, as foreign countries or communist communities.”
(Capital III, Chapter 10)
As soon as we move towards simple commodity production and exchange, it becomes necessary to determine a single market value for each commodity, as opposed to the range of individual values of products that precedes it. The means of achieving this, is of course, competition. Each individual producer is led to produce under the most efficient conditions, because the market value of their commodity is determined as stated at the beginning by the average conditions of production. Even if production remains in the hands of a multitude of small producers this is the case, because the output of these producers is brought together in large masses by merchants.
“Looking closer, we find that the conditions applicable to the value of an individual commodity are here reproduced as conditions governing the value of the aggregate of a certain kind of commodity. Capitalist production is mass production from the very outset. But even in other, less developed, modes of production that which is produced in relatively small quantities as a common product by small-scale, even if numerous, producers, is concentrated in large quantities — at least in the case of the vital commodities — in the hands of relatively few merchants. The latter accumulate them and sell them as the common product of an entire branch of production, or of a more or less considerable contingent of it.)
So, we have here the form of Market Value as it applies to commodity production and exchange prior to Capitalism. But, as Marx sets out, this Market Value has to be distinguished from Market Price. The market price for these commodities only corresponds with the market value, if the supply of commodities into the market at that value matches the demand for those commodities at that value. If for any reason, the supply of commodities into the market is less than the demand for those commodities at that value, then the market price will rise, and vice versa.
This is important for understanding the transition from Exchange Value to Prices of Production. The individual commodity producer is only interested in producing commodities to exchange, in order to obtain in return other commodities to consume. It is this fact, which confuses Smith, Ricardo, Say and Mill, as Marx describes in “Theories of Surplus Value”, in the shape of “Say's Law”. The individual commodity producer supplies a certain value of commodities into the market, and either by direct barter, or via the intermediary of money, then acquires the commodities they require for their own consumption – supply creates its own demand.
But, this is not the case for capitalist production. The capitalist does not engage in production of any commodity in order to exchange it for some other commodity to consume, or even for pure exchange value – money – in order to buy other commodities to consume. They produce only to obtain exchange value, and they seek exchange value only in order to reproduce the capital they have consumed, and by realising surplus value, to expand that capital. Capitalist production is no longer production for consumption, but purely for production! Consequently, so long as the capitalist producer can continue to increase their profits by producing more, they will continue to expand their production. But, the necessary consequence of this is that production is expanded, beyond the point where demand is satisfied at the market value/exchange value. The market price, must, thereby fall below the market value/exchange value. This will continue until such time as the rate of profit that capital can obtain in this line of production falls beneath that it can obtain by engaging in some other form of commodity production. This is the historical process, Marx describes by which capital invaded one line of production after another in that period after the 15th Century.
The more capitalist production spreads from industry to industry, so the different rates of profit in each of these industries will tend to be equalised, because capital will continually move out of those areas of production where the rate of profit is low, and into those where the rate of profit is high. As capital moves out of the former, supply into the market declines, pushing up market prices, and with it profits. As capital moves into the high profit areas, so supply will increase, and that will cause market prices to fall, and with it the rate of profit.
So, now the locus around which the market price rotates is no longer the Exchange-value of the commodity, but its Price of Production, because Price of Production is the cost-price of the commodity plus the average profit. It is now the Price of Production not the Exchange Value which constitutes the market value. Now, if the demand exceeds the supply at this Market Value/Price of Production, the market price will rise, and vice versa.
Where the actual rate of profit in any industry is higher than the average rate of profit, the market price must be higher than the market value, therefore. And in order for the actual rate of profit to fall, the market price must fall to the market value. But, unless this is merely a short term fluctuation, the only means by which the market price can fall to the market value is if the supply increases accordingly, and that requires that more capital is employed in that production.
Similarly, if the actual rate of profit is lower than the average this means that the market price is lower than the market value, and in order for both the rate of profit and the market price to rise, supply must contract, capital must be withdrawn.
The implication, as Marx says here, is that demand itself plays an important role. In the first part of his analysis he had, for simplification, assumed that everything produced found an adequate demand in the market, but no such assumption can be made.
“...to say that a commodity has a use-value is merely to say that it satisfies some social want. So long as we dealt with individual commodities only, we could assume that there was a need for a particular commodity — its quantity already implied by its price without inquiring further into the quantity required to satisfy this want. This quantity is, however, of essential importance, as soon as the product of an entire branch of production is placed on one side, and the social need for it on the other. It then becomes necessary to consider the extent, i.e., the amount of this social want.”
(Capital III, Chapter 10)
“Now, the difference between the quantity of the produced commodities and that quantity of them at which they are sold at market-value may be due to two reasons. Either the quantity itself changes, becoming too small or too large, so that reproduction would have taken place on a different scale than that which regulated the given market-value. In that case, the supply changed, although demand remained the same, and there was, therefore, relative over-production or under-production. Or else reproduction, and thus supply, remained the same, while demand shrank or increased, which may be due to several reasons. Although the absolute magnitude of the supply was the same, its relative magnitude, its magnitude relative to, or measured by, the demand, had changed. The effect is the same as in the first case, but in the reverse direction.”