Commodity

The word commodity is a term with distinct meanings in business and in Marxian political economy. For the former, it is a largely homogeneous product, whereas for the latter, it refers generically to wares offered for exchange.

Linguistically, the word commodity came into use in English in the 15th century, being derived from the French word "commodité" , meaning today's (2000) "convenience" in term of quality of services. The Latin root meaning is commoditas, referring variously to the appropriate measure of something; a fitting state, time or condition; a good quality; efficaciousness or propriety; and advantage, or benefit. The German equivalent is die Ware, i.e. wares or goods offered for sale. The French equivalent is "produit de base" like energy, goods, industrial raw materials.

Business usage

Definition

In the world of business, a commodity is an undifferentiated product whose value arises from the owner's right to sell rather than the right to use. Example: commodities from the financial world include oil (sold by the barrel), electricity (most users of electric power are only concerned with overall energy consumption; only a minority of users are concerned with the quality and technical details of voltage and frequency deviations, phase imbalance, etc.), wheat, bulk chemicals such as sulfuric acid, base and other metals, and even pork-bellies and orange juice. More modern commodities include bandwidth, RAM chips and (experimentally) computer processor cycles, and negative commodity units like emissions credits.

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product. One can reasonably say that food commodities, for example, are defined by the fact that they substitute for each other in recipes, and that one can use the food without having to look at it too closely.

Commodities exchanges include:
*Chicago Board of Trade
*Euronext.liffe
*London Metal Exchange
*New York Mercantile Exchange

Microeconomists also include labor, and currency as commodities that can be bought and sold.

Examples

Wheat is an example of a commodity. Wheat from many different farms is pooled. Generally, it is all traded at the same price; wheat from farm A is not differentiated from wheat from farm B. Some uniform standard of quality must necessarily be assumed. There may be various standards leading to different pools: one say for genetically modified wheat, and one for unmodified wheat. Failures to match the consumer's assessment of risk and usefulness for some purpose, can lead to lower prices or the necessity of dividing the market into different pools - a very major issue in agricultural policy.

Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity.

In classical political economy and especially Karl Marx's critique of political economy, a commodity is simply any good or service offered as a product for sale on the market. Some items are also seen as being treated as if they were commodities, e.g. human labour or labor power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods.

Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic value of goods, using the labor theory of value. This problem was extensively debated by Adam Smith, David Ricardo and Karl Rodbertus-Jagetzow among others. Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists.

Characteristics of commodity

In Marx's theory, a commodity has value, which represents a quantity of human labor. The fact that it has value implies straightaway that people try to economise its use. A commodity also has a use value, an exchange value and a price.
*It has a use value because, by its intrinsic characteristics, it can satisfy some human need or want, physical or ideal. By nature this is a social use value, i.e. the object is useful not just to the producer but has a use for others generally.
*It has an exchange value, meaning that a commodity can be traded for other commodities, and thus give its owner the benefit of others' labor (the labor done to produce the purchased commodity).
Price is then the monetary expression of exchange-value (but exchange value could also be expressed as a direct trading ratio between two commodities without using money).

According to the labor theory of value, product-values in an open market are regulated by the average socially necessary labour time required to produce them, and price relativities are ultimately governed by the law of value.

Illustration

To understand the concept of a commodity, consider a chair. It is a commodity if the chair is a tradeable product of human work possessing a social use-value. By contrast, a fallen log of deadwood sat upon in the forest is not a commodity, as it was not produced by human work for the purpose of trade. A chair created by a hobbyist as a gift to someone is not a commodity. Nor is a chair a commodity (as a chair) if its only use would be as scrap firewood (unless one purchases a chair specifically to chop it up for fire wood). A chair that nobody could sit on has no use-value, and cannot be a commodity (unless it has an ornamental value, e.g. in a doll's house).

Historical origins of commodity trade

Commodity-trade historically begins at the boundaries of separate economic communities based otherwise on a non-commercial form of production. Thus, producers trade in those goods of which they have episodic or permanent surpluses to their own requirements, and they aim to obtain different goods with an equal value in return.

Marx refers to this as "simple exchange" which implies what Frederick Engels calls "simple commodity production". At first, goods may not even be intentionally produced for the explicit purpose of exchanging them, but as a regular market for goods develops and a cash economy grows, this becomes more and more the case, and more and more production becomes integrated in commodity trade.

Even so, in simple commodity production, not all inputs and outputs of the production process are necessarily commodities or priced goods, and it is compatible with a variety of different relations of production ranging from self-employment and family labour to serfdom and slavery. Typically, however, it is the producer himself who trades his surpluses.

However, as the division of labour becomes more complex, a class of merchants emerges which specialises in trading commodities, buying here and selling there, without producing products themselves, and parallel to this, property owners emerge who extend credit and charge rents. This process goes together with the increased use of money, and the aim of merchants, bankers and rentiers becomes to gain income from the trade, by acting as intermediaries between producers and consumers.

Modern Capitalism however is a mode of production based on generalised commodity production (Marx's German term is verallgemeinerte Warenproduktion), a universal market (see also capitalist mode of production). This means that both the inputs and the outputs of most production in society have become priced, tradeable goods (including the means of production and human labour power), and that what and how much is produced is largely determined by the response of producers to the "state of the market". Production is now explicitly engaged in for the purpose of market sales only, which implies both that its whole organisation is reshaped for this aim, and that people can meet their own needs by purchases in the market (rather than producing goods for their own consumption).

Forms of commodity trade

The 7 basic forms of commodity trade can be summarised as follows:
*M-C (an act of purchase: a sum of money purchases a commodity)
*C-M (an act of sale: a commodity is sold for money)
*M-M' (a sum of money is lent out at interest to obtain more money, or, one currency is traded for another)
*C-C' (countertrade, in which a commodity trades directly for a different commodity, with money possibly being used as an accounting referent, for example, food for oil, or weapons for diamonds)
*C-M-C' (a commodity is sold for money, which buys another, different commodity with an equal or higher value)
*M-C-M' (money is used to buy a commodity which is resold to obtain a larger sum of money)
*M-C...P...-C'-M' (money buys means of production and labour power used in production to create a new commodity, which is sold for more money than the original outlay).

The hyphens ("-") here refer to a transaction applying to an exchange involving goods or money; the dots in the last-mentioned circuit ("...") indicate that a value-forming process ("P") occurs in between purchase of commodities and the sales of different commodities. Thus, while at first merchants are intermediaries between producers and consumers, later capitalist production becomes the intermediary between buyers and sellers of commodities. In that case, the valuation of labour is determined by the value of its products.

The reifying effects of universalised trade in commodities, involving a process Marx calls "commodity fetishism," mean that social relations become expressed as relations between things; for example, price relations. Markets mediate a complex network of interdependencies and supply chains emerging among people who may not even know who produced the goods they buy, or where they were produced.

Since no one agency can control or regulate the myriad of transactions that occur (apart from blocking some trade here, and permitting it there), the whole of production falls under the sway of the law of value, and economics becomes a science aiming to understand market behaviour, i.e. the aggregate effects of a multitude of people interacting in markets. How quantities of use-values are allocated in a market economy depends mainly on their exchange value, and this allocation is mediated by the "cash nexus".

In Marx's analysis of the capitalist mode of production, commodity sales increase the amount of exchange-value in the possession of the owners of capital, i.e., they yield profit and thus augment their capital (capital accumulation).

Capitalists as businesspeople are interested in use-values primarily from the point of view of their money-making potential, i.e. their exchange-value; any useful object may in principle become an object of exchange and profit-making, although that may in practice take quite some doing. In simple terms, the primary concern of businesspeople here is commercial: the money they can obtain from owning or selling the commodity.

But if an increase in capital-value is to be realised, it is essential that sales of commodities occur. Consequently, the accumulation of capital must go together with the expansion of market sales of commodities. In that sense, businesspeople cannot be indifferent to the use-values in which they trade.

Cost structure of commodities

In considering the unit cost of a capitalistically produced commodity (in contrast to simple commodity production), Marx claims that the value of any such commodity is reducible to three components equal to:
*variable capital used up to produce it, plus
*fixed and circulating constant capital used up per unit, and
*surplus value per unit.

These components reflect respectively labour costs, the cost of materials and operating expenses including depreciation, and generic profit.

In capitalism, Marx argues, commodity values are commercially expressed as the prices of production of commodities (cost-price + average profit). Prices of production are established jointly by average input costs and by the ruling profit margins applying to outputs sold. They reflect the fact that production has become totally integrated into the circuits of commodity trade, in which capital accumulation becomes the dominant motive. But what prices of production simultaneously hide is the social nature of the valorisation process, i.e. how an increase in capital-value occurs through production.

Likewise, in considering the gross output of capitalist production in an economy as a whole, Marx divides its value into these three components. He argues that the total new value added in production, which he calls the value product, consists of the equivalent of variable capital, plus surplus value. Thus, the workers produce by their labor both a new value equal to their own wages, plus an additional new value which is claimed by capitalists by virtue of their ownership and supply of productive capital.

By producing new capital in the form of new commodities, Marx argues the working class continuously reproduces the capitalist relations of production; by their work, workers create a new value distributed as both labour-income and property-income. If, as free workers, they choose to stop working, the system begins to break down; hence, capitalist civilisation strongly emphasizes the work ethic, regardless of religious belief. People must work, because work is the source of new value.

References

The concept of the commodity is explored at length by Karl Marx in his:
Contribution to a Critique of Political Economy [1]
Das Kapital Volume 1 Part 1 Chapter 1 [2]

A useful commentary on the Marxian concept is provided in: Costas Lapavitsas, "Commodities and Gifts: Why Commodities Represent More than Market Relations". Science & Society, Vol 68, # 1, Spring 2004

Commodity: Encyclopedia BETA

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