The distinction between real prices and ideal prices is a distinction between actual prices paid for products, services, assets and labour (the net amount of money that actually changes hands), and computed prices which are not actually charged or paid in market trade, although they may facilitate trade.Makoto Itoh and Costas Lapavitsas, Political economy of money and finance. London: Palgrave Macmillan, 2002, p. 6. The difference is between actual prices paid, and information about possible, potential or likely prices, or "average" price levels."...existing price-theories do not concern themselves directly with actual market-prices, at which commodities are in fact sold and bought on the market, but with purely theoretical ideal 'equilibrium' prices. The only way in which such theories are allegedly related to real prices is indirectly, through the supposition that the ideal unit-price of each commodity-type is the long-term time-average of its real unit-price." Emmanuel Farjoun & Moshe Machover, The Laws of Chaos. London: Verso, 1983, p. 103.
This distinction should not be confused with the difference between "nominal prices" (current-value) and "real prices" (adjusted for price inflation, and/or tax and/or ancillary charges).A "nominal price" is sometimes also understood as a price formality which is only a reference, and differs from the actual deal struck. It is more similar to, though not identical with, the distinction between "theoretical value" and "market price" in financial economics.Nasser Saber, Speculative Capital, Vol. 1. London: Pearson Education, 1999, p. 39.
In commercial business, an “ideal price” may be thought of as an “optimal” price, at which buyers are queueing up to buy a good and are satisfied with their purchase, while sellers obtain the best possible profit or income for the longest possible time. In the real world, this happy situation may be difficult to reach completely, but a “target price-level” shows at least what to aim for. Such a price is, however, only one sort of ideal price; all kinds of hypothetical or assumed prices can be used in all kinds of price calculations, to understand the effects of different assumptions in the given business situation.
Characteristics Ideal prices, expressed in money-units, can be "estimated", "theorized" or "imputed" for accounting, trading, marketing or calculation purposes, for example using the law of averages. Often the actual prices of real transactions are combined with assumed prices, for the purpose of a price calculation or estimate. Even if such prices therefore may not directly correspond to transactions involving actually traded products, assets or services, they can nevertheless provide "price signals" which influence economic behavior.
For example, if statisticians publish aggregated price estimates about the economy as a whole, market actors are likely to respond to this price information, even if it is far from exact, if it is based on a very large number of assumptions, and if it is later revised. The release of new GDP data, for instance, often has an immediate effect on stock market activity, insofar as it is interpreted as an indicator of whether and how fast the market – and consequently the incomes generated by it – is growing or declining.
Ideal prices are typically prices that would apply in trade, if certain assumed conditions apply (and they may not). The number of ideal prices used for calculations or signalling in the world vastly exceeds the number of real prices fetched. At any point in time, most economic goods and services in society are being owned, stored or used, but not traded; nevertheless people are constantly extrapolating prices which would apply if they were traded in markets or if they had to be replaced. Such price information is essential to estimate the possible incomes, budgetary implications or costs associated with a transaction.
The distinction is currently best known in the professions of auditing,Handbook of international standards on auditing and quality control. New York: International Federation of Accountants, 2009. "A difference between the outcome of an accounting estimate and the amount originally recognized or disclosed in the financial statements does not necessarily represent a misstatement of the financial statements. This is particularly the case for fair value accounting estimates, as any observed outcome is invariably affected by events or conditions subsequent to the date at which the measurement is estimated for purposes of the financial statements." (pp. 472–73) "However, estimation uncertainty may exist even when the valuation method and data are well defined." (p. 479) "...International Accounting Standard (IAS) 39 defines fair value as "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction." The concept of fair value ordinarily assumes a current transaction, rather than settlement at some past or future date. Accordingly, the process of measuring fair value would be a search for the estimated price at which that transaction would occur." (p. 512). econometrics and banking, which calculate and apply many different kinds of prices, to value labour, products and assets. The distinction has enormous significance for economic theory, and for econometric measurement and price theory; the main reason is that price data is very often the basis for government and business decisions which have a very large impact.
Differences between real and ideal prices
A distinction between real (or actual) prices and ideal prices, was introduced in Karl Marx's Grundrisse notebooks.Karl Marx, Grundrisse. New York: Vintage Books, 1973, p. 402. In A Contribution to the Critique of Political Economy (1859),Karl Marx,A Contribution to the Critique of Political Economy (1859), chapter 2, Note B: Theories of the Standard of Money. Marx already criticizes James Steuart and John Gray because they fudged the distinction between actual prices and ideal prices.Costas Lapavitsas, Profiting without producing. London: Verso, 2014, p. 79. In chapter 3 of the first volume of Das Kapital, Marx states:
The activity of pricing goods, services and assets, facilitating transactions, communicating prices and keeping track of them in fact consumes a very large amount of human labour-time, irrespective of whether it happens to occur in a centralized or decentralized way. Millions of workers are professionally specialized in such activities, whether as clerks, tellers, buyers, retail assistants, accountants, financial advisors, bank workers, or economists etc. If that work is not done, price information would not be available, with the result that the trading process would become difficult or impossible to operate. Whether or not this is considered "bureaucratic", it therefore remains an essential administrative service. People cannot "choose between prices" if they don't even know what those prices are; and, normally, they cannot just "make up" any kind of price they like, because costing, budgets and incomes depend precisely on what price is charged.
The creation of price information is a production process – its output is worth money, because it is vital for the purpose of trade, and without it the circulation of goods and services could not occur. Price information can therefore be bought and sold as a commodity as well. But the production process of prices themselves is often hidden from view and hardly noticeable. Therefore, people often take the existence of price information for granted and as obvious, meriting no further inquiry. "A mysterious certainty dominates our lives in late capitalist modernity: the price. Not a single day passes without learning, making, and taking it. Yet despite prices' widespread presence around us, we do not know much about them."Koray Çalışkan, "Price as a Market Device: Cotton Trading in Izmir Mercantile Exchange". In M. Callon, Y. Millo and F. Muniesa (eds.) Market Devices. London: Blackwell Publishing, 2007, p. 241. A price may also be attached in the course of another activity, or the pricing procedure may be a closely guarded secret rather than accessible in an open market because if competitors knew about it, this could adversely affect business income."According to the Information Security Oversight Office, which keeps watch over the U.S. government's secrets, more than 3.5 million new secrets are created each year.' That works out to almost 10,000 new secrets a day. No doubt many more secrets were not even recorded. Until recently, even the rules and criteria for classifying and declassifying secret information were themselves secret. There are now two million officials in government and another one million in private industry with the authority to classify documents." Dennis F. Thompson, "Democratic Secrecy," Political Science Quarterly, Vol. 114, No. 2, Summer 1999, p. 181. In the fiscal year 2017, the US Information Security Oversight Office “reported 58,501 original classification decisions made across the government (1,398 top secret, 48,056 secret, and 9,047 confidential). In addition, 49 million derivative classification decisions were made (9,615,440 top secret, 36,115,33 secret, and 3,710,737 confidential)." Lauren Harper, “New bipartisan Senate bill seeks to reduce overclassification”. Brooklyn, NY: Freedom of the Press Foundation, 28 August 2024. But if pricing processes are viewed as production processes, it turns out that much more is involved than the observation of a price-tag or number might suggest.
For most of the history of economics, economic theorists were not primarily concerned with explaining the actual, real price-levels. Instead their theorizing was concerned with theoretical (ideal) prices. Simon Clarke explains for example:
It is only relatively recently that economists tried to create generalizations about the actual pricing procedures used by business enterprises, based on information about what business people actually do (instead of an abstract mathematical model).Frederic S. Lee, Post-Keynesian Price Theory. Cambridge University Press, 1999.
Illustrations of ideal prices An example would be an equilibrium price calculated by an economist. This is a price which a type of product or asset would theoretically have, if supply and demand were balanced. This price does not exist in actual trading processes except in special and rare cases; it is only an ideal or theoretical price level, which at best is only approximated in the real world. In accounting practice, ideal prices are used all the time. For example, when accountants have to value a stock of assets, or a set of transactions across an interval of time (for tax, commercial or audit purposes), they apply rules and criteria to arrive at a price reflecting the cost or market-value of the stock or flow of transactions. In grossing and netting, they apply certain rules of inclusion and exclusion to obtain the desired measure. But the valuation obtained following a standard procedure is in truth only hypothetical, because it represents a price which the assets or flows would have if they were traded or exchanged under assumed (stylized or standardized) conditions, or if they were replaced at a certain point in time. In principle, they need not refer to any real transaction flows at all, being only an imputation. Yet, the ideal price obtained may nevertheless influence very many transactions based on it, to the extent that it provides information and a measure of how a related market process is thought to be evolving.