What Transformation Problem?

Nerd alert: I know that my videos normally represent the height of fashion. I know that my massive popularity, on the account of all the violence, sex appeal, and sports references have launched me into the top ranks of viral culture, making me a real trendsetter.

But this video will not be like that. So I’m warning you now, this video gets an extremely high nerd rating. It will try to explain the details behind probably one of the nerdiest theoretical debates in marxist economics. But if you watch this video you could very well be set to join the ranks of other fashionable revolutionaries like these guys… (nerd quiz: can anyone name these guys?)….
That being said, the topic I am going to discuss is an important one, but only because the debate behind it lies at the core of claims that Marx’s labor theory of value is “discredited”, “contradictory”, etc. One does not have to look to far into Marxist economic theory before one stumbles upon the quagmire that is “the transformation problem”. And the sheer magnitude of algebra and technical gobbledy-gook involved in most of the discussion of the transformation problem scares most people away from ever really looking into the debate further.

Over the last 100 years there has been furious debating back and forth over the meaning of Marx’s theory of “the transformation of values into prices of production” and over the various criticisms of it- debates of such a stunningly polarized and mathematical nature that it is hard for us normal folks to wrap our mind around the issues at stake enough to know what to make of it all.

The goal of this video is to explain the basic nature of the problem and to defend Marx’s transformation procedure on the basis of some new scholarship on the topic. I will do all of this without any math or any algebra. On my wordpress blog ( http://kapitalism101.wordpress.com/transformation-math-supplement/ ) you will be able to find a supplement with a more detailed discussion and some math examples for all of you super-nerds who want to plow into some simple math. [If you aren't afraid of a little division and subtraction I recommend you check out the math supplement and learn how to solve some transformation problems of your own. It's kind of fun- like a sudoku puzzle for marxists. Then you can scribble them out on paper napkins at bars and parties to impress people. It's always a real hit.]

Value

So everything in Marxist economics centers around the idea of value. Without a theory of value we wouldn’t be able to make most of the arguments that are considered a crucial part of marxisim: exploitation, crisis, class, etc. Value is not some abstract, metaphysical concept. It is a real tangible thing that effects all of us everyday. It is the reason we go to work in the morning. It’s what allows us to buy groceries. It’s why countries go to war. It’s why we have banks and railroads and stockmarkets. The unfolding of the “law of value” is the unfolding of the inner mechanisms of a capitalist society. So it’s important that the concept of value is internally consistent and logical or else its status an explanatory concept is questionable.

If you’ve seen many of my videos then you probably know by now that value is created by human labor, and human labor only! Machines can’t create value. Buying and selling commodities doesn’t create value. Differences in subjective preference don’t create value. Let’s review a few different arguments as to why this is the case. The point of any economy is to coordinate human labor in such a way as to provide stuff for people. There are many different ways this labor has been coordinated throughout history, and there will likely be many more ways it will be coordinated in the future. In a capitalist economy labor is coordinated via commodities.  That is, I make a commodity and you make a different commodity. When we exchange them we are exchanging our labor. That’s how our collective labors are organized.

The only reason all of these diverse commodities can exchange with each other is because they are all products of human labor in the abstract. This is what gives them their value. But commodities don’t walk around with their value written all over them. (If they did, capitalism would be a lot easier to understand and you wouldn’t need to watch this video.) You can’t buy a toothbrush and read on the toothbrush how many hours it took to make it, how many people worked to make it, what their working conditions were, how it was shipped to the store, who put it on the shelf, etc. Value has to be expressed through money. Money prices are an expression of value.

But here is where things start to get confusing. How is value measured in money prices? Is price always equal to value? What happens when price doesn’t equal value? Since anyone can set any price they want when they sell a commodity it may at first seems hard to see how price could realistically reflect value. But we know from our own lives that there seem to be some sorts of forces at work in the universe- some hidden hand of the market that keeps prices from being totally arbitrary. A toothbrush or a new car costs more or less the same anywhere you buy it. Not only that, but the car will always cost more than the toothbrush. So what are these forces that make prices converge? And is it just a coincidence that things that take more work to make usually cost more than things that take little time to make?

The more perfect competition is in a capitalist society, the harder it is to arbitrarily set prices above values. Perfect competition makes it impossible to just conceive of prices as arbitrary or of profit as a mere “mark-up” above costs. (Of course competition is never perfect, but if we are building an abstract model of a capitalist economy we have to identify the inner logic of capitalism in the abstract before we see how outside forces distort this model.) We also can assume that supply and demand balance each other. Obviously if supply ever shrinks this will create a rise in prices above values. But this rise in prices means a rise in profits for those capitalists producing scarce goods. This rise in profits encourages more capitalists to invest in producing this good and this, in turn, increase the supply until prices are back down to an equilibrium point. The opposite happens with decreases in demand.

The argument of the labor theory of value is that, behind all of these fluctuations there lie equilibrium prices and that these equilibrium prices correspond to the value of commodities. Now, what happens when monopoly, trickery or demand allows someone to get away with arbitrarily charging more for a commodity than its value? The answer to this question is really crucial, so listen closely: The total amount of value in society corresponds to the total amount of prices. So if someone is getting away with arbitrarily high prices it means that someone else is not getting the full value of their commodity. In this way, though profit can’t be created through exchange, it can be shuffled around between people. Through monopoly, fads, whatever people can benefit from an inequality in exchange- a defect in the manifestation of capitalist competition. But such an inequality does not create more value! The real source of profit in a capitalist society is the difference between the value of commodities and the wage paid to workers. This, of course, is the theory of exploitation.

So if we abstract from disturbances in competition, or minor fluctuations in supply and demand we see that commodities, in general, have prices that are relatively proportional to their values…. or at least, they would if there wasn’t one other complicating factor…

It is this other factor that required Marx to theorize about “the transformation of values into prices of production” and which has created all the fuss for all these years. It is very similar to what I just described about the way supply and demand equalize. The same way in which supply and demand fluctuate around equilibrium price also creates an average rate of profit amongst capitalists. That is, if one capitalist is making more profit than the rest, other capitalists will start doing whatever (s)he is doing and thus eat into his/her profits. Through this sort of competition an an “average rate of profit” is established among capitalists.

But this average rate of profit seems, at first, to conflict with something else that I’ve talked about in other videos: the organic composition of capital.

Let’s illustrate this with an example. Let’s say there are two industries: one makes coffee and the other cars. Within both industries there is competition to make their workers the most productive by introducing the newest labor-saving machines. Thus within each industry there is about the same ratio of workers to machines. (This is what the “organic composition of capital” is- the ratio of machines to workers. When there are a lot more machines than workers we say the organic composition is high. When there are more workers, we say the organic composition is low.) But between industries this ratio differs.  Some industries just naturally have a higher ratio of machines to workers than others. In our example, the automobile industry uses a lot of machines! The coffee industry uses a lot more workers.

Now if value can only be created by human labor, it would seem that the coffee industry creates a lot more value than the car industry. And, actually this is the case- the more work that’s done in an industry, the more value it creates. Yet, under conditions of competition, under the law of the average rate of profit, both industries receive the same profits, even if one creates much less value.  An average rate of profit means that each capitalist receives the same rate of return on their total investments, regardless of what proportion of this investment goes to workers or machines. How is this possible? (Do the workers in the auto industry just work harder? Are they more exploited? There’s no necessary correlation between the ratio of machines to workers and their wages so lets assume that the rate of exploitation is equal in both industries.)

Here is the solution to this puzzle. The total amount of value in society is equal to the total amount of prices. The total amount profit is equal to the total amount of surplus value (Surplus value is the difference between the value of a commodity and the cost of paying workers and paying for raw materials, machines, etc.) The total rate of profit measured in value, in society as a whole, is equal to the total rate of profit measured in money.

These are the “three aggregate equalities” that form the holy trinity of the theory of the prices of production. Individual capitalists can have money prices or profits that diverge from their values, but in the aggregate these equalities prevail. But how?

All capitalists contribute to the total amount of surplus value according to how much labor they employ.  So if coffee makers have more workers, they contribute more to the aggregate surplus value than car manufacturers. But capitalists withdraw their money profits from this total surplus value according to the average rate of profit- that is, in proportion to the total cost of their production. Regardless of how many workers they actually employ, they all receive the same rate of return on their investment, even if all of their investment goes into machines!

Thus the price of a commodity is not the cost of inputs plus surplus value. It is the cost of inputs plus the average return on those investments. We call this price the “price of production”. The total prices of production equal the total amount of value. But individual commodities do not trade at their values. They trade at their prices of production. The price of production is still a function of value, but it is not necessarily directly equal to it.

This is why it is possible to have a falling rate or profit (see “Falling Rate of Profit video). Individual capitalists have no way of knowing that they are destabilizing the collective rate of profit, because they don’t receive less profit when they replace workers with machines. It is only when automation has spread throughout the economy to a substantial extent that it can drag down the profit rate.

This relationship between individual action and wider social forces is true to the spirit of much of marxist theory. Individuals are always free to act as they choose. That’s the easy part of social theory.  The hard part of a good social theory is to explain why those free actions coalesce around certain norms. For Marx, it is value which is the central mediating force between individuals and so it is the laws of motion of this value that ultimately govern the success or failure of individual actions.

A Little Bit Of History.

Marx took the ideas of classical political economy to their logical end. After Marx one couldn’t operate as a political economist without accepting the notions of exploitation and crisis that he had so thoroughly developed. And so those who were interested in doing truly bourgeois economic theory had to abandon the notion of a labor theory of value if they were to save economic theory from Marx. In so doing, thinkers like Leon Walras developed what is now called “neoclassical economics”. Neoclassical economists abandoned the notion of value altogether. They essentially took price as a given- refusing to look behind it for any deeper meaning. In doing so they also abandoned the whole notion of social class, and all of the other wider social phenomena that Marx had woven into his theory. Their restricted, narrowed perspective soon developed an obsession with number-crunching and fancy algebra.

I say all this because it was out of the neoclassical school that the critique of Marx’s transformation procedure developed. And it was this new way of thinking about economics that produced the sort of assumptions that led to this critique. In 1907, Ladislaus Bortkiewicz, a Russian economist, published a paper which claimed that Marx’s transformation procedure was internally contradictory- that when taken to it’s logical conclusion it produced mathematical results that simply didn’t add up. Ever since, people doing Marxist economics have had to contend with this accusation that their fundamental theoretical category, value, is not logically valid. Over the course of the 20th century many Marxist economists embraced the neoclassical models of Bortkiewicz and his successors in various, attempts to rescue Marx’s value theory from within the framework of bourgeois economics. It wasn’t until the 1980′s that some scholars began to challenge the assumptions behind this neoclassical critique and to construct a defense of Marx from within the logic of value theory. The most promising of these new defenses is the “Temporal Single System Interpretation” or “TSSI” for short. Let’s take a closer look at the Bortkiewicz argument and the TSSI response.

The neoclassical tradition that Bortkiewicz came out of had several major differences from the Marxist tradition. Where Marxist theory builds a model of capitalism that is dynamic, constantly evolving, prone to disproportion and crisis, the neoclassical school views capitalism in a static, unchanging equilibrium state where the hidden hand of the market naturally smoothes out imperfections. It is important to keep this difference in mind when viewing Bortkiewicz’s critique.

It was Bortkiewicz’s fascination with these static, equilibrium models that led him to question Marx’s transformation procedure. Bortkiewicz put Marx’s argument into a standard neoclassical input-output model.  On the input side went machines, raw materials and wages all measured in their values. On the output side came newly produced commodities, all now priced at their prices of production. Bortkiewicz then asked, quite logically, shouldn’t the inputs into the production process be bought at their prices of production and not their values?

Indeed Marx himself had acknowledged that it only made sense for inputs to be bought at prices of production, but this did not lead him to the same conclusions as Bortkiewicz. Bortkiewicz took those end prices of production and plugged them back into the input side of his equation. When he did this all hell broke loose with the math. Specifically it became impossible to maintain all three of Marx’s original equalities: total money profits equal total surplus value, total money price equals total value, total money rate of profit equals total value rate of profit. Only one equality could be maintained at a time but only by arbitrarily imposing that condition at the expense of the other two equalities. To Marx’s critics this was the end of the labor theory of value.
[Here I decided not to explain the way in which Bortkiewicz created a dual system of value and price.]

The TSSI critique of Bortkiewicz is simple and elegant. They argue that it is illogical to plug output prices back into the inputs of the same production period. They accuse him of two false assumptions: simultaneism and physicalism. Let’s look at each in turn.

Simultaneism

For Bortkiewicz the prices of inputs and outputs are simultaneously determined. In other words, input and output prices have to be equal. Let’s say we have an industry that makes corn. It also needs seed corn as an input. Bortkiewicz would argue that if at the end of the production period corn sells for 10 dollars a bushel then it must also enter production as an input at 10 dollars a bushel. There can be no change in price. But he seems to be arguing for some theory of time travel, as if a farmer would go back in time and sell themselves corn at their future output price. In the real world, the opposite happens.  Values change over the course of a growing season due to the productivity of labor and soil, weather, changes in technology, etc. The price of corn at the end of the production period doesn’t have to equal its price at the beginning. The new prices of production become input prices for the NEXT production period, not the one that’s already happened.

In contrast to Bortkiewicz’s simultaneous determination of prices, the TSSI is “temporal”. It tracks changes in the prices of production through time, from one production period to the next. In each period the input prices are the output prices of production from the previous period. In this way the TSSI is much more faithful to the marxist project- to build a dynamic model of value as it moves through time, constantly expanding.

Physicalism

Bortkiewicz, in a way, defended his simultaneism by constructing his model within the framework of an economy with no growth. He argued that in an economy with no growth prices wouldn’t change over time and thus it would make sense to simultaneously determine input and output prices. This model of an economy with no growth actually came from Marx himself who theorized about Simple Reproduction- an economy with no growth in which the entire social product was produced and sold each production period. Simple Reproduction was an abstract model Marx used to simplify some arguments about exchange before he introduced his more complex model of expanded reproduction. Yet, still the theoretical possibility for simple reproduction to occur does exist and so we do need to consider whether the transformation of values into prices of production works under conditions of zero growth.

The problem is that Bortkiewicz assumed that no physical growth meant no growth in value. This is the essence of physicalism: that changes in value are directly tied to changes in the amount of actual physical commodities. ie. If I produce ten apples instead of five I have twice as much value. This seems to make sense. But look at the way this actually plays out in the real world. (21)When a supply expands its value falls. When a supply shrinks its value rises. In a drought the same amount of apples is worth more than in a glut. So just because there is more of something in physical terms doesn’t mean its value is more. In fact, value can change while physical output remains the same if the production process becomes more efficient or input values change.

This is precisely what happens in the TSSI version of the transformation “problem”. From one period to the next the physical outputs stay the same. The same amount of goods are produced and consumed. But the value of those goods changes overtime. Each production period, new work is done; new labor is added to the social product. And so total value rises each production period. This total value becomes the input for the next production period.

From the TSSI illustration it becomes clear that it would be ridiculous to take the prices from the end of the production period (prices representing an increase in value) and plug them back into the equation at the beginning of that same production period. The Bortkiewicz solution flies in the face of the basic logic of value theory and so it necessarily produces absurdist results.

Conclusion
Bourgeois economics is often thought of as an objective, rational science for number-crunching specialists, divorced from political bias. But all of these matrices and graphs exist within a very narrow range of assumptions. By leaving out questions of value, by treating capitalism as a static, universal entity without change, and by ignoring class it prevents itself from addressing the most essential elements of economic analysis. It is these assumptions which have led to the entire notion of a “transformation problem”, and to the general attack on Marxian economics.

While it can be intimidating to wade through the specialist literature on a topic, we should never forget that underneath the numbers lie arguments and assumptions about the real world and that  these are, in the end, the crucial things to be concerned about. There is no reason why you and I should have to take a graduate course in economics in order to understand the debate over value and price. We should never be intimidated by “experts” into not thinking for ourselves and not challenging assumptions. Such timidness in the face of algebra has led to far too much meekness from the left. In the coming economic crisis it will be crucial to assert our ideas clearly and boldly, and without bowing to the tools of bourgeois economics. It is high time to put an end to this tiresome debate about the transformation problem.

Bibliography

“Reclaiming Marx’s Capital” by Andrew Kliman

“One System or Two? The transformation of values into prices of production vs. the transformation problem” a paper by Andrew Kliman and McGlone. This available on Kliman’s website: http://akliman.squarespace.com/

Marx’s Theory of Value and the ‘Transformation Problem- an essay by Anwar Shaikh from the book “The Subtle Anatomy of Capitalism” ed. Jesse Schwartz

“Limits to Capital” by David Harvey

“Das Kapital” vol. 3 Karl Marx

104 Responses to What Transformation Problem?

  1. Jeffrey Curtiss says:

    I could never understand those equations behind the supposed problem, so I would go with the TSSI model for the sake of simplicity, but also cause it appears that the theory is consistant. Again another good video, 20 minutes destroyed 100 years worth of work of neoclassical economics against Marxism.

    Since you are approaching the end of Crisis Theory, Im curious about what you will be putting up next? Obviously you said that models of Post-Capitalism would be going up, but I think one more area needs to be discussed before that. Capitalisms affects on the minds and relations of people are necessary for many hold that humans are too selfish or too stupid to create a future socialist/anarchist society. Marxist theories like Alienation, Commodity Fetishism and Reification require an explaination as well to show the social and individual affects of exploitation, objectification and exchange.

  2. Hi. I just discovered this site. It’s good to see people talking about this stuff who are up-to-date, not mired in the 1970s. Let’s keep in touch.

    Andrew
    (akliman@pace.edu)

  3. GokuEn says:

    Carl Menger, Leon Walras, and Jevons published their work either before or relatively at the same time that Marx’s, so it is innacurate to say that the works of the marginalists were a response to Marx’s Kapital.I agree with you, though that Neo-Classical economy (based mostly on Walras ideas) is flawed as it assumes economy in some sort of tracendent equilibrium. That is obviously wrong.

    What about the twin-brother of the transformation problem, the so called Calculation Problem? How would a Socialist Society know how to allocate resources effectively without prices, which are set in a free-market (a capitalists market)?

  4. GokuEn says:

    I dont quite understand the solution to the problem proposed by Bortkiewicz… The idea that value grows during production would not imply that unfinished objects have value despite being useless (no use-value)?

    • I’m not sure if I understand your question. Can you elaborate?
      Are asking something about how value is determined for partially finished commodities within the production process? The capitalist buys raw materials, machines, partially finished commodities, etc. all at their prices of production. These prices correspond to the amount of labor that went into making (adjusted by the rate of profit). Those values enter into the value of the final product when they are transformed by new living labor in the labor process into the final commodity. This new living labor adds more value to the product. The value of the final product is then the value of inputs plus the value created by the new labor.

      If some of those inputs don’t find their way into the final product than they become devalued. When the exchange value of any commodity can’t be realized in consumption it looses its value.

  5. Jeffrey Curtis says:

    This is a response to GokuEn’s ‘Calculation Problem’ Problem. Granted this is probably too much for his question, but I just kept typing, so here it is.

    The calculation problem really only exists for state planned economies, not a truly socialist or communist economy. Commodity Fetishism or seeing social power as internal to commodities makes it hard to see the underlying value of a commodity as a product of human labor, it also makes commodities appear to be all powerful over people (the hidden hand of the market, the civil society etc.). A state planned economy encorporates elements of capitalist commodity production, but is also organized according to an Asiatic mode of production which is the centralization of natural resources [now capital] in the hands of self-proclaimed gods [now bureaucracy]. The state faces the same problems and as a result can never hope to organize production and distribution in ways that give each according to their deeds (objective accident) or needs (much harder since it’s a subjective accident). A substitute in therefore required to solve this problem.

    First we must destroy the state so this alternative can take its place. As capital expands its rule across the world, it eventually challenges the existance of the state. Just as the equalization of technology across an industry destroys rent or surplus profits, which is performed by capital trying to expand everywhere, it destroys all forms of parasitic activity in the system. The state doesn’t engage in capitalist production and makes money through taxes takes without giving back all of it in spending (if it was debt free), thus violating the basic law of equal exchange. Capital will attempt to privitize and commodify every element of the state from healthcare and welfare to even war, to which the state will maintain national industries everywhere it can. Capital and the state it seems to me have grown side by side through history only because capital had other areas it could grow into (the third world, new industries etc.), but that point where either the state or capital will grow, the other shrinking, I think is here in the form of neoliberalism.

    While this is taking place, the proletariat as a class are being prepared to take control without the state. A countervailing tendency to the falling rate of profit is increasing the intensity of labor, in other words increasing the amount of abstract labor a worker produces in an hour (turning S/(C+V) into S*/(C+V* for example). Education increases the intensity that the proletariat can work at, but it at the same time challanges the old way of looking at the world. Commodity Fetishism (and Reification in general) are challanged allowing people to see the underlying substance of capitalism as well as the potential means to organize a new society. This knowledge that the proletariat possesses will put in danger any attempts at a vanguard party or state that knows more then the proletariat. With that in mind, the proletariat will construct more libertarian models of organization (worker’s councils, coops, communes etc.). Because of their knowledge and organication, this will allow for the free flow of goods and services as well as to reward all according to what they contribute to society.

    As this society takes shape, it is in one sense challanged by futher development. Since the rate of surplus value (now the rate of disposible time to necessary time) is what matters to an individual worker, this extra time would be devoted to developing ones interests and hobbies, becoming a multi-dimentional person. Our ability to interact with the world improves as we develop our skills, but this leds us to want a better world to interact with (lots of social scientists support left-wing politics, many natural scientists support green politics etc.). Eventually people will be willing to help others for this sake, not for monetary gain, but for social gain that has become personal. The original conflict between the individual and society has been resolved and now we have a society which pushes “From each according to their abilities, to each according to their needs.”

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  8. Felipe says:

    To Jeffrey Curtis:

    “The calculation problem really only exists for state planned economies, not a truly socialist or communist economy.”

    That is wrong, the calculation problem gets even more obvious in a “truly” socialist economy since there would be no prices so allocation of resources would be IMPOSSIBLE.

    “in other words increasing the amount of abstract labor a worker produces in an hour (turning S/(C+V) into S*/(C+V* for example)”

    And 2+2=5?

    “Commodity Fetishism or seeing social power as internal to commodities makes it hard to see the underlying value of a commodity as a product of human labor”

    Perhaps because it is NOT labor what determines the value of a commodity?

    “With that in mind, the proletariat will construct more libertarian models of organization (worker’s councils, coops, communes etc.)”

    Socialists would be more libertarians? here is a thought, just be libertarians and stop promoting the state.

    “lots of social scientists support left-wing politics”

    Ad populum fallacy

    “Because of their knowledge and organication, this will allow for the free flow of goods and services as well as to reward all according to what they contribute to society.”

    You cant just solve a problem by saying it will be solved.

    “Eventually people will be willing to help others for this sake, not for monetary gain, but for social gain that has become personal.”

    Without capital saving and investing there is no possibility for social cooperation or rational production

    “The original conflict between the individual and society has been resolved and now we have a society which pushes “From each according to their abilities, to each according to their needs.”

    LOL

    • Wage-Labour Iconoclast says:

      You can read Robin Cox’ “The ‘Economic Calculation’ controversy: unravelling of a myth,” Section 5, “ANATOMY OF A SOCIALIST ECONOMY” to see how a decentralized, polycentric, socialist economy can still operate without the price mechanism.

      Btw, price mechanism will still continue to exist under a NON-Capitalist Free Market (many advocates of which still call themselves “socialists”) consisting of workers’ co-operatives or self-employed people, WITHOUT Capitalist Bosses or State Intervention in their Behalf.

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  11. Andrew says:

    Hey! Nice videos, they have taught me a lot about Marxism, thank you! Nevertheless, due to my lack of training in any kind of economics, I am not totaly sure if I understood the theory compleately and thus I have some questions.

    1) If we assume that prices=values, then the price of a commodity is equal to capital costs + wage costs + surplus value, or simplyfing it, price of inputs + surplus value, am I correct?

    2) If we drop the assumption that value=prices to account for a single rate of profit, then the “price of production” of a commodity is capital costs + wage costs + average rate of profit, or simplifying it, price of inputs + average rate of profit, I am correct?

    3) In your example of coffee plantations vs auto industry the coffee was sold under value and the cars over value, I am correct?

    4) If the question above is correct, then labor-intensive industries sell output under-value and capital intensive over-value? If the ratio of labor to capital is 1:1, then does commodity sells at value?

    5) Borkewitz criticism was that the price of the inputs had to be costs + average rate of profit (prices of production) and that somehow violates Marx aggregates?

    6) If the above is correct, then the TSSI refutes it by saying that the “prices of production” are of a PREVIOUS cycle and not the ones of the same cycle of production?

    • 1-4 yes, you are correct. One thing I probably should have said is that the average rate of profit doesn’t exist in some pure form. It is an abstraction. I reality profits rates differ. But there is a movement toward equalization of profit rates which is why Marx thought it necessary to theorize prices of production…

      5. Bortkewitz argued that if you plug the output prices of production into the input side of the equation that the math goes screwy. It goes screwy because new value is added each production period. That means outputs have value added. If you plug this number back into the input side of the equation you can’t get all the variables to add up.

      6. TSSI argues that output prices should become input prices of the next production period, not the one that’s already happened.

      The math supplement to this video, although tedious, may help.

  12. Andrew says:

    Sorry, another set of questions.

    1) Saying that all industries across the economy have the same rate of profit is not the same than saying that they all have the same amount of profits, right? It means that they enjoy a similar percentage of return from their investment (big investment = big profits)?

    2)If the above is correct, then profits are equal to cost of inputs (both wages and capital) multiplied by the rate of profit?

    3) If the above is correct, then the “price of production” of a commodity coul be expressed as

    W + C + [ (C+W) x R ] Where W is wages, C is capital and R is the rate of profit of the economy?

    Thank You!

  13. eoin hogan says:

    bnandan love the video input into Marxist analyses I would love to see something on Trotsky. I am in the revolutionary socialist tradition and have been focusing some much on Marx’s theory that Trotsky analyses on revolution has been ignored. one other point i would like to raise and somewhat off the point. is there a way of measuring points of antagonistic convergence meaning different social movements that combine antagonistic relationships to the infrastructure of the state, such as the labour movement anti war movements and identity movements into one revolutionary totality.
    I understand that economic crisis produces a generalised antagonism, but is their way of extension to bring in other forces of exploitation to act as grater mass of antagonism. What I mean by that is are there some social movements that contain an explosion of social anger grate enough to release its dialectical force than others. such as the relationship to American imperialism in the middle east a key geo strategic position is Egypt but Obama’s green energy plan to use wheat and other cereals as a bio fuels means that people cant afford bread huge strikes and riots occurred which has the potential as a movement to replace Mubarak.
    Egypt is a key instrument in regulating Israeli aggression on Palestine if Mubarak is removed by a wave of social discontent like revolution then its these antagonist points which should be priorities over others by way of extension surly these dialectical relationships can be expressed on a domestic level or is that to mechanical in my own limited experience of revolutionary struggle I have couple of occupations 100000 take to the streets and election victories in the local elections but my biggest problem is relating Marxist ideas to the workers it a problem I must over come is their helpful tips

    • I’m not sure if I followed all of that. If I had a good suggestion for revolutionary strategy I would be making videos on that topic. I think the left needs a serious regroupment of ideas and strategy. That requires a period of study- to re-acquaint a new generation with the basic contours of Marx’s ideas, not their misinterpretation by various followers, but Marx’s actual ideas. I think that transforming such an analysis of history and capitalism into terms that people can relate to is essential for there to be a critical mass of consciousness that can one day foresee a radical movement and envision an alternative to the present social order.

  14. Andy says:

    Hey! Look, I have been trying to compute this numbers in excel and I cannot find the equality of Profits-Surpluv Value and Value-Prices, the numbers I get are similar but not the same. I suspect it might be Excel rounding them up, but it might also be that I am misaplying Marx’s formulas. Would it be OK if I sent a copy of the worksheet so you can check it? If so, where can I send it to you?

  15. Andy says:

    It is sent

  16. Andy says:

    Sorry to bother you again, but my examples keep not adding up despite setting excel to several decimal places. The only way I can equalize the 3 equations is by having all industries have the exact total amount of constant and variable capital so that C+V is the same in all industries (the ratios C to V can be different, but the total amount not). But this must be wrong, since it would mean that the commodities created in all industries would have the same price of production and the profits of all industries the same. Are you certain that they have to add up in this way?

    • how did you calculate the average rate of profit? Was it total S divided by total C+V? Or was it an average of the individual rates of profit? If the individuals don’t all add up to 100 then will these two ways of finding the average profit rate be different I think. The former way gives you 25.55repeating percent average rate. The latter gives you 25.013repeating. It looks like you used the former method.

      Your method is not an average that shows us the actual weight an industry has relative to its size. It counts all individual profit rates as equal. But they are not. What matters is total surplus value created divided by total cost to the capitalist class. Surplus value is distributed in exchange in accordance what size of the total social capital is represented by a firm.

  17. Andy says:

    That was my mistake. Thank you!

  18. John says:

    Excellent work, Brendan. This is essentially what I was talking about doing with Andrew. I’m so glad I came across it on your site.

  19. Arslan Amirkhanov says:

    I’m having a little trouble understanding average rate of profit to understand prices of production. Is there any way you could make a simple equation with actual numbers, or if you could at least explain how this average rate of profit should be represented, either by some kind of percentage or ratio?

    • If is helps I have a detailed “math supplement” to this video here on the blog. Also, see comment 16 above for a more direct explanation…. Let me know if either of these helps

  20. Pants says:

    This transformation problem was one that I once believed actually was a problem. The same people taught me in school that the labor theory of value had been disproven as had falling rates of profit. The same people also told me another crisis of the magnitude of the Great Depression of the 1930s would never happen again as the economy was too well regulated and adaptable. Now I go back and read Capital and I can see how all this talk was simply the ideological bluster of bourgeois pseudo-science economics. Henryk Grossman’s work is interesting in this respect. Ultimately the transformation “problem” was a straw-man argument that has been brought up again and again.

  21. JH says:

    A question about this section:

    “ie. If I produce ten apples instead of five I have twice as much value. This seems to make sense. But look at the way this actually plays out in the real world. (21)When a supply expands its value falls. When a supply shrinks its value rises. In a drought the same amount of apples is worth more than in a glut.”

    Here it seems like the equation of values and prices leads to a demand theory of value, i.e., it doesn’t matter how much labor is invested in apple production, it matters how much people want apples, and the fewer apples there are, the more one can get away with charging them to those who really want apples.

    Am I missing something?

    • No I think you are correct that this paragraph is a bit confused. I think if you take the sentence about apples out it makes more sense. The idea is that an increase in physical goods doesn’t necessarily mean an increase in value if the same amount of labor-time has gone into creating these goods. The rise in price of an apple in a drought is due to demand rising faster than supply can react to it. This is an instance of price-value divergence, not of an actual change in value. My mistake. Thanks for pointing it out… I wonder why I didn’t catch it before (it’s an old video….)

      • JH says:

        It seems like an easy confusion to make, the equation of values and prices, since we are so used to thinking of value in terms of price. What you are saying, then, is that supply/demand only changes the prices that can be charged for a thing, not the actual value of a thing, and so the mistake in that passage is in equating the price of an apple with its value.

        It just seems more and more that when Marx talks about value, he’s using the word to refer to something completely different than what most people, on a gut level, associate with the word. In your other videos on LToV, I had understood the concept of labor imparting value as basically a matter of opportunity cost: if there’s only so much socially necessary labor time to go around, the more is “spent” producing one thing, the more it is worth compared to another. I only realized this when I watched these videos and saw the part about coffee… I still don’t understand how “more workers” means “more value” in this instance, why a $10k car has less value than a number of coffee beans worth $10k, at that point I realized I had no idea what Marx really meant by “value.”

        I feel like I have all the conceptual pieces but I am not putting them together. I suspect the key to understanding this is in the difference between use and exchange value (and I think there was a third, but I don’t remember right now…) which I might not get either.

      • “It just seems more and more that when Marx talks about value, he’s using the word to refer to something completely different than what most people, on a gut level, associate with the word.”
        In some senses, yes. Marx’s approach is to inquire into the underlying social relations behind the surface appearance of reality. There is a mismatch between many of the appearances of capitalism (equality, freedom, individualism) and the actual social realities than underlie them (exploitation, inequality, violence). Marx wants to interrogate the notion of price and show that this is not just a property of objects, or even of isolated individuals interacting with objects, but a social relation.

        But not all of Marx’s concepts, including value, are “completely different than what most people, on a gut level, associate with the word.” This is because the surface appearances of capitalism are self-contradicting and unstable. Value is often used in common parlance to refer to an intrinsic property and not just to price. This happens anytime someone says that something is “overpriced” or “a great deal”. Here we intuitively assert a notion of intrinsic value lying behind price. For Marx, price is an expression of value, one that constantly fluctuates around value. In fact this fluctuation is the mechanism by which value asserts itself.

        “I had understood the concept of labor imparting value as basically a matter of opportunity cost: if there’s only so much socially necessary labor time to go around, the more is “spent” producing one thing, the more it is worth compared to another. ”

        I would shy away from any analogy to neoclassical economic concepts. These terms imply very different theoretical approaches. I have made this sort of argument in some videos (that the only ultimately scarce thing is human labor and that we can only understand value relations as an unconscious apportioning of this scarcity.) Rather than representing an appeal to bourgeois theory this is an attempt to ground bourgeois notions of scarcity in an actual theory of the specific type of productive activity and organization of society that conditions scarcity.

        “I still don’t understand how “more workers” means “more value” in this instance, why a $10k car has less value than a number of coffee beans worth $10k, at that point I realized I had no idea what Marx really meant by “value.” ”

        I think that this might reflect either a mistake on my part or a misunderstanding of what I said. A $10k car has the same value as $10k of coffee.

        In regards to the previous discussion about apples/gluts… Trying to remember why I wrote this I believe my intention was this: In a bad harvest the same amount of labor goes into less commodities. Thus each individual commodity is worth more. In a good harvest the same amount of labor goes into more commodities, thus each individual commodity is worth less. The total amount of labor and total value of the commodities stays the same. It is the division of the labor time into individual physical units that changes.

      • JH says:

        Thanks for getting back to me. It’s interesting that in another comment I made to another post, “appearance” was central: that LToV asserts one thing, but it appears to be another thing in mainstream economic terms. I guess the issue of appearance vs. reality is what’s really central, and that while it could be called a matter of perspective, one perspective encompasses more than the other (i.e., social relations). I’m still working through a lot of these videos.

        re: coffee and cars, I may have misunderstood you. You had said that since the coffee industry is more labor intensive, it creates more value. If you say that 1 car priced at $10k has the same value as X bags of coffee collectively priced at $10k, then I am not sure about the relationship between labor and value and commodities produced. Am I not factoring in the output per worker?

        re: apples and gluts, I had made another reply to another poster on this point, relating to changing conditions of labor and final market price.

      • Ah- I see. You are referring to the notion of prices of production. Here is a different notion of price-value divergence than those associated with fluctuations in supply and demand. This is the problem of organic composition of capital and average profits that I attempt to explain in the 2nd part of my video “What Transformation Problem?” The explanation may not be clear enough. I hope to do another take at this issue in one of the last videos in my Law of Value series. But that video is months off and I don’t know if I have the time to really explain it fully at the moment.

  22. arharris says:

    I think this is the way it goes:

    1. It depends on how much (socially necessary) labor is used to produce the 10 apples. In a year with good weather, rain, etc., less labor is needed to produce the ten apples than is needed in bad yrs to produce the five apples. Thus the five apples actually have more value than the 10 apples. More labor (soc. necessary), more value. This is revealed in the price. The greater supply of apples relative to demand will result in a lower price of apples. If a machine (apple picker) is added, then the productivity is raised, the supply is increased and the price is lowered; assuming the same amount of labor is used to produce the increased supply.

    2. Supply and demand only regulate the temporary fluctuation of prices. With high supply/low demand, prices will fall; low supply/high demand, prices will rise. In a “free market,” if one person tries to control supply and raise prices, then sooner or later someone else will produce more apples to bring the price down. Over time, therefore, the “natural price” (Adam Smith) will be determined by the ups and downs of the market.

    I think that what Marx said was that value (or the “natural price”) was determined by the socially necessary labor contained in the commodity (apples.) In other words, if the true cost of producing a lb of apples was $5.00, then the natural price was $5 a lb. Thus, commodities (apples and money) are always, on average, exchanged at equal value.

    Profit, therefore, can (on a general social scale) only be made by exchanging commodities at equal value. How can a profit be made by exchanging equal values? Marx answered this question by showing that, in a capitalist economy, the owner of the commodity, the capitalist, does not pay the worker the full value of his labor; if he pays the worker, say $3 for the labor of picking the apples, and $1 for other costs (interest, rent, supplies, etc) the capitalist can then pocket the difference, and makes a 20% profit by selling 5 lb of apples for $5 but only paying $4 in costs. He has to pay the full value of interest, supplies, because he is dealing with other capitalists; but when dealing with workers he pays less than the full price of their labor.

    How is the capitalist able to do this? Marx argued that there was an unseen component of labor, and therefore, everyone thought full value was being paid for the labor, including the worker. In my opinion (and I am no economist) the answer may lie in the fact that in a capitalist economy there is always (on average) a huge surplus of labor and, therefore, an artificially low price for it. This oversupply is maintained by force, sometimes by open and violent attacks on labor unions and sometimes by sustained anti-labor propaganda (i.e. constant stories about union “bosses.”

    • JH says:

      Thanks for the reply. I have a concern about your first point. What you are saying is that SNLT can be influenced by changing circumstances, thus changing the value. So as you say, in a year with better weather, etc. less work is required to produce more apples, and the value goes down, and the price reflects this. But what if the growing season is just fine, producing a lot of apples, but a freak hailstorm occurs just before harvesting, and destroys most of the crop? Now the amount of labor required to produce apples as a commodity has gone down: the weather and other circumstantial conditions were good up until then, thus requiring less workers to tend to the trees (watering them, protecting them from insects, etc.) and after the hail, there are fewer apples to pick, thus requiring fewer apple pickers. However, but the price will go up since there are fewer produced apples, regardless of the lowered “value” due to less SNLT.

      This may seem like a temporary freak occurrence, but it can occur on a longer and larger scale. In the early 20th century, the Brazilian economy was very dependent on producing coffee for foreign consumption. As agricultural technology improved, more and more beans could be produced for the same labor, glutting the market, which resulted in less money for the Brazilian planters. But it was always possible that a freak condition, such as a drought, could result in lower crop yields in a given year. Due to this, it was risky to simply cut back on production costs such as labor, since workers laid off in a good year could find employment elsewhere by the time a bad year rolled around (as Brazil was industrializing during this same period, resulting in the usual movement from rural agricultural to urban industrial labor). In any case, even in a drought year there would be excess coffee crop from the previous years, and so despite the lower yields in that year, the planters weren’t making much more, despite the greater effort (SNLT) required to produce coffee. Thus the supply influenced the price more than the labor invested in production. The Brazilian government came up with a “valorization” scheme, whereby in years of glut it would buy up and store surplus coffee at the lower price, “artificially” keeping the price high, and then recoup its expense in fallow years by selling stored coffee, which helped Brazilian planters and resulted in a lot of comical howling from consumer nations such as the US about hos Brazil was a tyrant abusing the poor consumers of coffee with its schemes, etc. The point is that changing circumstances affecting SNLT don’t always result in a correlation between (Marxist) value and price: if the product is sold under different circumstances than it was produced, or if circumstances change over the total production period, there can be no correlation at all.

      • arharris says:

        Thank you for taking the time to discuss this. I am more or less thinking off the top of my head right now. If in a normal season 1 hr of labor (say, $10) is required to produce 1 bushel of apples, then the value of the bushel is 1 hr of labor, or $10. If in a bad yr. 2 hrs of labor are required to produce 1 bushel, then the bushel is worth $20. But if there is a hailstorm, it would still take 1 hr of labor to produce 1 bushel, even though the total number of bushels produced is say, 1/2. Thus, each bushel would still be worth $10, I think.

        In a normal market 1 bushel of apples would cost 10. In the hailstorm market 1 bushel would cost 20. The only thing that has changed is the supply, assuming demand for apples remains the same. Thus, the price in the hailstorm case would simply be reflecting the fluctuation of supply and demand. Once the market adjusted, the price would return to normal. And, I think, we would still be required to show where value comes from. Also, I think this is a good reason why farmers would destroy their crop (such as milk, for instance) if there was a glut of supply. Which is why we now have price supports for farmers to support them in bad yrs.

        Thus, this is what happened in Brazil. Mechanization hugely increased coffee production, lowering the value of coffee. For a while there was a huge glut of coffee. The Brazilian government, made up mostly of giant planters, then bought up the excess supply, raising the market price by artificially shrinking the supply. I suspect that in bad years the govt. would simply give the stored coffee to the growers to sell. As far as the workers, with industrialization there was need for far fewer workers. I am not sure there was really much movement from the cities to plantations by the workers. Besides, the planters had full access to death squads to keep the rural workers in line.

        I agree that there is no exact, perfect correlation between value and price. However, once supply and demand balance over time, then I think that value is reflected in the price. The question, as I stated above, then is Where does value come from?

      • arharris says:

        I wanted to make another post on labor and value to try and simplify my “thinking” on it.

        In normal times, 1hr of labor produces 1 bushel, and the price-value is 1 hr/1 bushel.
        Using more machinery, 1 hr. labor produces 10 bushels, for a price-value of 1/10.
        After a hail storm, 1 hr of labor produces .5 bushels, for a price-value of 1/.5.

        Thus, you have 3 prices (per bushel): normal price is 1.0, with machinery .10, and after a hail storm, 2.0. The difference, therefore, is the amount of SNL worked into the commodity.

  23. arharris says:

    It seems to me that the “transformation” problem is one that does not exist. It is not a question of value being transformed into price. Both value and price can easily be measured in money units (dollars, for instance.) What happens, I think, is that value is expressed or revealed in price.

    Thus, to use the corn example:

    $5 labor costs + $5 non-labor (interest, supplies, etc.) = $10.00 price.
    value = price

    However, of course, where does the profit come from? It comes from the fact that the true cost of the labor is $5, but the worker is only paid $4 for it. I must say that Marx was not able to easily show how the unpaid labor was extracted, since the worker traded his labor time, $4, for his labor power $5. I don’t think much progress can be made by distinguishing labor time from labor power.

    I now think that the low price for labor is caused by the perpetual shortage of labor. Thus, an artificially high supply will cause an artificially low price. In fact, did capitalism not begin with an artificial supply of labor caused by the eviction of tenants from feudal property? From looking at BLS labor statistics it seems to me that the only time the U.S. has ever been close to full employment was during WW II.

    • JH says:

      On this note, I took a course in modern French history, and in discussing its economic history, the textbook suggested that among the reasons France industrialized more slowly than other nations was that it did not have enclosure. Since French factory workers could always just go back to the farm if they didn’t like the deal they were getting or the working conditions at the factory, it was harder for French capitalists to attract workers. Considering how dismal peasant farming was even in 19th century post-feudal France, this is very telling. I have been unable to find a more specific scholarly treatment of the subject, though.

  24. Phillip says:

    Hi,

    The TSSI model is very interesting. However, we must remember that it doesn’t solve the transformation problem. There is no way of knowing how much value is embodied in any good. Each input price and output price is independently determined through time, that is the only contribution of the TSSI model.

    Even when we make assumptions that value is transferred towards profits of capital intensive production from labor intensive production in the equalisaiton of rate of profit, we are assuming the rate of surplus value is equal in all sectors. This is a flawed assumption, for in coffee production for e.g. labor is only worked for less than half the year, how is it that one can then assume that the rate of surplus value is equal to other sectors where labor is fully employed? Another issue is how we understanding what is socially necessary labor, when in different countries, different wage rates persist, and more or less capital/labor ratios are employed in the production of the same good, and yet all methods may be equally competitive.

    • Phillip,

      How does your 3rd sentence (“no way of knowing how much value is embodied in a good”) support your second sentence (“TSSI doesn’t solve the transformation problem”)? I don’t understand the connection.

      Also, how does assuming a uniform rate of surplus value nullify the TSSI refutation of the transformation problem? The transformation problem is the specific accusation that marx’s price of production procedure does not add up mathematically in simultaneous input-output equations. The uniformity of the rate of exploitation has nothing to do with that.

      Also, why would the length of the work year (ie your coffee example) have anything to do with the rate of exploitation? The rate of exploitation is a measure of the intensity of exploitation over any given amount of time, not the absolute duration of exploitation in time.

      And how does your critique of SNLT (which merely argues that SNLT differs in different national economies- something which I don’t think does anything to nullify the usefulness of the concept) have anything to do with the transformation problem?

      Brendan

      • Phillip says:

        Many thanks for your comments Brendan. Well lets be clear, nobody will ever know what level of value is embodied in any good. I don’t see what you are trying to get at by comparing my second and third sentences.

        With regards to my comment on coffee (this follows from the example given in your video); it is easy to see that if much of the year is spent not working, (due to natural barriers) then most of any value produced in that year will go towards subsistence of the worker, as opposed to the capitalist. This is simply because not enough value has been produced, and a large proportion of value goes towards subsisting the worker and thus the rate of surplus value is less than in other (industrial) sectors.
        Indeed, this is what hinders accumulation in many underdeveloped countries.

        My comment on the internationalisation of labor, is that what we understand as socially necessary labor (which is the source of value) has become obscured, where in different countries, wages may differ substantially, and cost competitiveness may arise despite increased working hours for the production of the same good. If that good is internationally traded, then you may ask, is the excess labor used in more backward countries, socially unnecessary? what if the good is more competitively produced by means of cheap labor?

        Phillip

      • Phillip. My point regarding the 2 sentences is this: They seem to be implying that if we can’t know the value of a good then therefore the TSSI refutation of the transformation problem does work. But whether we know or don’t know the value of a commodity has nothing to do with whether or not prices of production are formed through a temporal process. At no point in the TSSI argument does the argument depend on individuals being conscious of the value of an input or output.

        In regards to this and your other comments, I don’t think any of them have to do with transformation problem as I understand it, which is specifically the charge that there is a mathematical error in Marx’s transformation of values into prices of production. Rather you seem to be drawing more general criticisms about the notion of prices of production and SNLT. I think it is really important to be extremely clear about what the TSSI and the transformation problem is all about. The TSSI has shown that the transformation problem doesn’t exist if we look at the problem temporally and as a single system. Your comments bring nothing to bear on this specific issue.

        While it has nothing to do with the transformation problem I still have to disagree with your point about the work year and coffee. I don’t think the length of the work year has anything to do with the rate of exploitation. You are implying that workers are paid a wage for a whole year but they only work for part of the year. I suppose this could happen. It could also happen that workers pay ends when the work season ends and that they rely on alternative means of subsistence in the off-season. Either way, you appear to be making a criticism of the concept of prices of production with this point since we often hold the rate of exploitation constant in discussing prices of production. Yet I don’t think one has to have a uniform rate of surplus value for SV to be transferred in exchange. Prices of production are not some static set of prices that Marx actually thinks all prices tend toward. It’s not the same as general equilibrium prices in neoclassical econ. As marx says, supply and demand are constantly in flux and so are lots of other factors. The take-away point from the prices of production stuff is merely that SV is transferred in exchange and that individual values deviate from social values. That is all.

        I don’t think the internationalization of labor somehow makes the concept of SNLT problematic. If anything it is SNLT working itself out on an international scale as capitalists compete to lower the SNLT. The concept of SNLT doesn’t claim that at a given point all labor and the conditions of all labor are equal. It merely says that value is set by the social average. There are plenty of producers above and below this average and they benefit or suffer from this. In answer to your question “is the excess labor used in more backward countries, socially unnecessary” the answer is “yes”, of course, “excess labor” is the definition of “socially unnecessary labor”.

  25. Phillip says:

    Hi Brendan, The transformation problem is the problem of reconciling prices of production with values. Although this is abstractly possible in that total social prices = total social value, on sectorial or individual commodity basis, this is impossible.

    To be clear, once you allow for divergences in wages at an international levell, it is perfectly feasible for a capitalist to produce an internationally traded good with more – not less – labor time (saving capital costs), and still defeat other capitalists in high wage countries.

    • Phillip,
      That is not the transformation problem. It is merely the context within which the transformation problem occurs. The transformation problem is Bortkiewicz’s claim that if we transform input prices into prices of production the math doesn’t add up and therefore Marx’s procedure is invalid.

      You are referring to more general criticism of the idea of prices of production, not the transformation problem. If it is abstractly possible for total price and total value to coincide how is it “impossible” on the individual commodity basis for there to be a price-value relation?

      Re, international wage etc, ah- now I see what you are saying- wasn’t following you before. Yet I still don’t understand the relevance of the point.

  26. Phillip says:

    Thanks for this. The transformation problem was first identified by marx in his critique of ricardo, whereby ricardo thought that values correspond directly to prices, and then marx tried to solve this problem by showing how value is actually tranfered between sectors, according to their capital composition. The point is, the price of capital goods themselves may be far from their actual value, and the final output price cannot be reconciled with value on the basis of the organic composition of capital in the production of that good alone. It is impossible to trace back infinitely to the actual value embodied in any output. Although theoretically, overall prices must reconcile with value overall.

    • Phillip,

      The use of of the term “transformation problem” in the specialist literature on the subject does not refer merely to Marx’s solution to the problem of average profit. It refers to the claim by Bortkeiwicz that there is a “problem” with Marx’s transformation procedure- hence “transformation problem”. When people talk about Marx’s critique of Ricardo they are not talking about the transformation problem (and no, Marx was not the first to point to this problem in Ricardo. I’m no economic historian but I believe Ricardo himself was aware of this problem…). The term “transformation problem” does not refer vaguely to Marx’s “transformation of values into prices of production”. It refers to the claim that there is a mathematical inconsistency in this procedure.

      I agree that “the final output price cannot be reconciled with value on the basis of the organic composition of capital in the production of that good alone.” This is not a problem for value theory, as Marx demonstrates.

      • Phillip says:

        The transformation problem derives from the contradiction of individual prices equalling value due to the tendency for rates of profits to equalise – when different value compositions of capital are involved in various spheres of production. Bortkeiwicz is only a mere contributor to this problem in attempting to falsify value theory.

      • I completely disagree about the term “transformation problem.” Either way, when the TSSI and its opponents talk about the “transformation problem” they are specifically talking about Bortkeiwicz and the notion of internal inconsistency. If you want to use the term in a broader sense then be aware that for many people the term has a restricted definition.

  27. Phillip says:

    The point on the differences in wage, is that for the same good, there may be at any one time differences in labour time used to make it, and it is possible that those producers which used more labor rather than less labor are the more compeitive due to their location in a low wage country. This then means that the excess labor as it were, is actually necessary labor, and the lesser labor used in high wage countries, unnecessary. This is counter intuitive to me.

  28. Phillip says:

    When production is shifted to lower wage countries, using relatively more labour in production for a given good, it must be that the good is sold in international markets at an equal or lower price, to gain market share, otherwise production would not go to lower wage country. This increased value (increased labour time) translates strangely to lower prices. I think in marx’s analysis of increased capital composition, increasing the productiVity of labor, is the key to understanding that the value of labor is linked to its productivity, if this were the case, the before mentioned paradox is resolved.

  29. Phillip says:

    Hi Brendan, I meant that if the value created by labor is linked to productivity of that labor then we can solve the seeming paradox in this context. For although production is shifted from a high wage, high productiVity setting, using relatively less labor – to a low wage, lower productivity region, using relatively more labor, the value created per unit time of labor in that lower wage country must be less, otherwise we have more value being created and yet this translates to lower prices of production.

  30. Everpresent says:

    Brendan,

    What is your take on Ben Fine his take on the transformation problem? I found it astonishing that Kliman in his excellent book never refers to Ben Fine his take on it.

  31. Alexander says:

    Brendan,

    I have two questions in the value-prices issue.

    1. Is the value therefore quantitative? Does this mean that all prices really are all values except not in individual instances?

    2. What about land? I believe Marx said that the price of land is anticipated rent. So does that mean that the equality of prices and values exists over all time since land is an anticipated price? Maybe that would work if value is supposed to be abstract, but if prices are to equate value then that would mean that the total prices which certainly are quantitative would also be abstract.

    Thanks

  32. Frank Arango says:

    What is your opinion of this solution?http://communistvoice.org/45cTransformation1.html

    • Wow. That’s a long article… no time at the moment. What do you think of it?

      • Frank Arango says:

        The actual heart of the article is not long for those versed in Marx’s theory. But for others it has to begin by laying out some basic formulas and concepts from the labor theory of value that are needed in discussing the transformation problem. Further, the author has to dwell on the issue of vagueness and indeterminacy of money, as well as of value, because this has to be taken into account in order to solve the transformation problem. True, the article is lengthened by beginning a critique of Paul M. Sweezy, the “new solution” people, and Anwar Shaikh, but it isn’t necessary to read those sections to grasp what it says.

        Most briefly, I think the article corrects a defect in the mathematical side of Marx’s discussion of the transformation problem and modifies certain of the formulas he gave. In doing so, it doesn’t undermine, but strengthens the case for Marx and Engels’ overall view of the transformation process.

      • I see there is no mention of the TSSI refutation of the transformation problem in the article. Why is that?

  33. Frank Arango says:

    Brendan,

    I could only give a speculative answer to your question. But you can directly write the author, Joseph Green, at mail@communistvoice.org.

    Meanwhile, assuming that your description of TSSI is accurate, for my part I think it slips and slides around issue it’s supposedly trying to resolve: the transformation problem.

    For example, you criticize Bortkiewicz for not taking time into account, e.g., the price of corn might not be the same at the beginning of a production cycle as at the end. (Of course, the input and output prices might also be the same, which would only lead us back to where we started.) But change of price over time because a commodity becomes scarce, or because the weather or productivity of labor changes, etc., has nothing to do with the transformation problem. Instead, you’ve begun discussing price changes that reflect the change in value. True, departing from the static model, such changes in price do in fact take place. But those changes are different from those due to equalization of the rate of profit. The transformation problem discusses not the price changes due to changes in value, but the price changes due to deviation from value.

    Well, after departing from the static model, the TSSI people apparently come back to it, i.e., you write that: “we do need to consider whether the transformation of values into prices of production works under conditions of zero growth.” But you later say that: “In fact, value can change while physical output remains the same if the production process becomes more efficient or input values change”—which forgets that in the static model, it is assumed that not just the output is the same, but that the production processes are the same. So you have to argue that the input value is constantly growing, e.g., “each production period, new work is done; new labor is added to the social product. And so total value rises each production period. This total value becomes the input for the next production period.” But such a presentation has again strayed from discussing the change in prices due to the formation of prices of production, to discussing changes in price due to changes in value! Do you really mean to be doing this? Moreover, while arguing that the value of the social product has to be constantly increasing, even though its physical size is the same, you seem to forget about the needed deductions from the value of the accumulated social product as the articles of consumption of the workers and of luxury of the capitalists are used up.

    So I don’t think the TSSIers really deal with the transformation problem. On the other hand, I think Joseph Green’s article does, and in a way that helps achieve a deeper understanding of Marx’s critique of money and value.

    • MrEverpresent says:

      Have you read any Kliman, especially his latest book: Reclaiming Marx capital.I don’t see any direct references to Kliman.
      I think we should really stop discussing this so called transformation problem.Kliman has taught me that. There is really no “problem”. Not even a reduction problem. It all depends on interpretation. The problem is straw man argumentation. One could write a phd just on this logical fallacy and Marx capital.

    • Because the output price of period one is the input price of period two, and because the output prices of year one reflect a redistribution of SV in order to equalize the rate of profit, the input prices must change for period two which means that the same physical amount of goods have a different price structure. In simple reproduction this is not due to changes in the productivity of labor but due to the redistribution of SV which results in prices of production that then enter production period 2 at these new prices of production. In the TSSI refutation the same amount of labor takes place in each production period and the same physical amount of products are exchanged. There is no change in productivity and supply always equals demand, as required by simple reproduction.

      The problem with the Bortkeiwicz argument is that it tries to plug the output prices of period one into the input prices of period one, which makes no sense since new labor has been added to the social product. You say that the consumption of capitalists and workers will make value vanish from the social product. 1st: this consumption can’t happen before the social product is purchased by capitalists and workers. The output of period 1 must be purchased as the input of period 2 before any consumption can take place. 2nd: Capitalists advance c+v at the start of production. These means of production and these wages are entirely used up in simple reproduction. But c+v becomes part of the value of the final product (c+v+s). The fact that surplus has been added means that the final product contains more value than the capital advanced for c+V. We can immediately see how plugging these final prices back into the input prices of period one is a recipe for mathematical errors (and logical errors since products are sold via time travel).

      • Frank Arango says:

        O.K., you’ve separated out the sphere of exchange from the sphere of prodution. But, for example, there is no addition to the social product whatsoever if the capitalists and workers consume the social product produced (which includes the surplus product) in the first cycle by the end of the second cycle. Thus, in this reasonable example the “input” for period three becomes the same as it was for period one: the hoard that the capitalist had somehow primitively accumulated before the first cycle. And, actually, this identical hoard is also the “input” for reproduction cycle two, where it would be nonsense to have a social product that’s already in its final form as an input.

        Well, what about outputs? If the output of the first cycle is consumed in the sphere of commodity exchange (where the capitalists also recover their original outlays) then there’s really no other output from the sphere of production. And that’s consistent with this model, where there is no accumulation.

      • FRank,

        Are you arguing that the C+V the capitalist spends at the beginning of period 2 doesn’t form the cost price which enters the calculation of c+v+s at the end of period 2?

        Brendan

      • Oh- and have you read the “Math Supplement” that goes along with this original post? It covers, I think, the details of the transformation fairly well, addressing some of the potential confusions that arise upon first seeing the TSSI refutation of the Transformation Problem.

  34. allan says:

    “Bortkiewicz would argue that if at the end of the production period corn sells for 10 dollars a bushel then it must also enter production as an input at 10 dollars a bushel.”

    It seems to me that this is also what Marx said. The question is, how can a profit be made if this is true? The capitalist produces a product at a cost input of $10 and sells it at a cost output of $10. What Marx showed was that the capitalist does not pay the full $10 cost. The cost of the corn is $5 material, $3 labor and $2 (for example) unpaid labor. The labor creates more value than it consumes. This extra value is the profit which the capitalist makes.

    The neo-classics argue that the extra value comes from the magical operation of the market. In my opinion, that view still operates.

    Marx also said that price is the monetary expression of value. If $1 of gold is equal to 1 bushel of wheat, then no one is concerned how the value of gold is transformed into wheat. It is simply an exchange of values. Marx showed that $1 gold = $1 wheat = $1 labor (socially necessary).

    Why would the question not be: How is value transformed into a monetary expression, or rather, how is value transformed into money? Or how is one hour of labor transformed into, say, $10?

  35. Frank Arango says:

    Brendan,

    In reply to your question, no. But I would hasten to add that I think dealing with inputs and outputs is a diversion away from dealing with the transformation problem. Marx’s model of simple reproduction presumed a fully formed capitalist system of production, with a labor market, markets for raw materials and machinery, etc. More, there was no accumulation in it, no increase in the social product. So if you want to impose periods into it there’s always a previous one, which means that whatever is taken as the “first period” is arbitrary. Further, if you want to separate commodity exchange from commodity production in doing this, no matter how you adjust when the exhanges take place, in the end all of the surplus product is unproductively consumed and therefore cannot be the input to a next period. It’s a static model, simple reproduction, the movement of an autonomous part of the social capital.

    Marx divided this model into two essential departments: Department I, which produced means of production (articles which served for productive consumption); Department II, which produced articles of personal consumption. And he showed how the exchanges between the capitalists and workers of the two departments laid the basis for repeated production on the same scale. Part of this basis, of course, was that the the original outlay of the capitalists was reproduced. So however Bortkeiwicz dealt with outputs (I haven’t read him), I think that it’s correct to plug THIS reproduced amount back into the model as the “input,” and only this amount.

    Nevertheless, the model of simple reproduction raised the transformation problem in its most simple way: there would inevitably be different compositions of capital between and within the departments; a general rate of profit would therefore be used to establish prices of production; prices would therefore systematically deviate from values; the numbers wouldn’t exactly add up to satisfy Marx’s helper formulas. Thus, if one had a mathematical solution to the transformation problem it should have worked in this model.

    Well, Joseph Green has now supplied that solution. But to arrive at it he had to keep in mind that the amount of value represented by a certain sum of money varies, depending on the organic composition of what you buy with that money. (From your description, the TSSI ignores this, and thus upholds a mechanical interpretation of value.) Further, keeping this in mind, he had to leave open the possibility that Marx’s formulas are only approximately correct, and therefore needed modification. (This is why good mathematicians of the past couldn’t get things to exactly add up.)

    • Frank,

      The transformation problem is quite specifically about input and output prices. I don’t understand why you write “I would hasten to add that I think dealing with inputs and outputs is a diversion away from dealing with the transformation problem.”

      From the Dictionary of Marxist Thought: “Marx’s solution has been criticized on the ground that as the prices of produced commodities change, the cost of those same commodities as inputs to production or as elements of workers subsistence will also change. Marx… neglects this link between the sale prices of commodities and costs.” (entry by Duncan Foley) Every single account of the transformation problem I have ever read accords with this notion that Marx “forgot” to transform input prices into prices of production. The TSSI simple counters that prices of production become the input prices of the next period not the one that has already happened. When this is done there are no internal consistencies in Marx’s transformation procedure at all. Marx’s own logic is perfectly sound and requires no “fixing”.

      The issue I believe you are having, and I do address this in the “Math Supplement” that I mentioned, is with the interpretation of Simple Reproduction as a system of physical simple reproduction with changing values in each period. If you actually read Marx’s description of simple reproduction in Vol. 2 you can see that the conditions of simple reproduction are not a static price structure for successive production periods. Rather it is that specific proportions are maintained between the departments so that the entire social product is consumed and none of it is reinvested in an expansion of production. In the mathematical examples I give in my Math Supplement is is clear that there is no expansion of production even though the total value of each period increases. For Marx expanded production required an change in the proportions of investment such that there is a transfer of value into the production of means of production and out of the private consumption of capitalists. In the simple reproduction examples I give in the Math Supplement the same amount of physical product is bought and sold in each period.

      This is why I asked two simple questions of you when you argued that simple reproduction has to be understood in value terms. Question 1: is the total price equal to total c+v+s?; and Question 2: Isn’t the end of period one, by definition, the input of period two?

      It seems to me that both of these questions have to be answered “yes” no matter how you look at it. Value can be destroyed through devaluation of fixed capital, crisis, etc. but none of these fall within the realm of the model of simple reproduction. If we just look at Marx’s own numerical examples of simple reproduction it is clear that the capitalist class advances one sum of money and at the end of the production period has a larger sum of value. There is no disappearance of value. What Marx goes at great lengths, and mind-numbing detail, to explain in that chapter is the specific proportions of investment that would allow the total social product to be purchased, without an expansion of Department 1.

      It’s important to point out that the TSSI argument is not a “solution” to the transformation problem. It is a refutation of Borkewiecz’s original charge of inconsistency. It proves that Marx’s actual transformation procedure contains no internal consistency. This differs from other “solutions” which require that we “fix” Marx’s procedure.

  36. allan says:

    Can I ask you a question about price and value?

    A car sells, on average, for 25K.

    According to Marx a commodity, on average, sells for its real value. And a profit is made from selling a commodity at its real value. “I repeat, therefore, that normal and average profits are made by selling commodities not above, but at their real values.” Value, Price and Profit, Ch. X.

    The real value of the car is 25K; the capitalist makes a profit of, say 5K. The capitalist has paid 20K for the total labor contained in the car, thus his profit. The extra 5K comes from the surplus value added by the labor of the worker(s). Wages-labor + surplus value (profit) = price.

    1. Is this your understanding how profit, price and labor work?

    2. Where does the transformation problem come from this?

    Thank you.

  37. Athos says:

    Hi Brendan,
    Your video are very nice, and is clear the you have been working a lot on them as you are deep into the labor theory of value.
    I wrote an essay on this argument from a point of view slightly different from the marxist one, but chances are that you might have fun reading it.

    Dualistic Monism and Labor Theory of Value

    This essay regards the definition of economic value. The first part shows that since commodities are different from common, non-economic objects, because have a monetary price, and labor is different from leisure because it produces commodities, the exhange of commodities is the material aspect of the exchange of labor, so that in every considered period the sum of the price of all commodities exchanged – the price of the Gross Product – represents the whole time of labor of the economic system, independently from the function of commodities and the way they are distributed.

    The second part shows how the idea of value as incorporated labor and of the transfer of the means of production value into the produced commodities, implies a relation of identity between the totality of labor and the value of the Net Product only, so that the real, or absolute value of the various currencies, in terms of quantities of social labor, remains unknown.

  38. Athos says:

    Part One – Positive

    According to the Principles of Changes of the I Ching – which phylosophy is also known as Dualistic, or Dialectical Monism – every change has a sense that is generated, can be understood and represented by means of couples of opposite and identical – or different but complementary – polar attributes.
    This simple consideration is perfectly fit for the definition of the nature of economic value, where we deal with 6 all intertwined relationships of identity and duality, wich are:

    - Unity of the economic system and Multiplicity of the firms that make it up.
    - Physical Transformation and Social Transformation, also called production and distribution.
    - Labor and Commodity – or Creative Value and Material Value or Use Value – and
    - Production and consumption in physical transformation, and
    - Commodity and Price – or Material Value and Exchange Value – and
    - Buying and Selling in social transformation.

    An economic system is a unit, 1, made up by a multiplicity, k, of firms that produce and exchange commodities, therefore there are two kinds of transformations: physical transformation, resulting from the relationship between humans and the physical world, and social transformation, regarding the distribution of the result of those physical transformations by means of money between the producing firms, making the economic system where the same corrency is used an organic unit.
    Since the two kinds of transformation are different, their characteristics can and must be considered separately, but since one of them cannot exist without the other, they must also be considered together.

    Physical Transformation

    Every physical transformation is one event, and this event is made up of two distinct elements, or values, that are different and identical and cannot exist without each other: labor and commodity. Labor is measured in quantities of time and determines the sense of the transformation according to a plan, a project, and is the essential, or creative value of the event, while the corresponding commodity, measured in quantities of objects with the physical characteristics impressed on them by labor, is the (receptive) material value, or use value of the transformation. Labor determines the beginning and the length in time of the transformation, while the commodity shows the accomplishement in space and the end of the transformation.
    Since the whole economic system is a unit, the Gross Product can be considered as a single commodity which use value is the quantified, material life of the whole system, and its creative value is the totality of labor. Commodities have different physical qualities, so that the use value of a commodity cannot be expressed as a mathematical fraction of the use value of the gross product. Their creative value, instead, certainly is a computable fraction of the whole time of labor of the economic system.
    Physical transformation occurs as a process that is in the same time consumption and production, which, once again, are opposite and identical. The identity-duality relationship consumption-production is generated by the same physical transformation considered in the two opposite – positive and negative – directions, and the identity between labor and product is as well an identity between labor and consumption.
    Regarding physical transformation, these considerations do not depend on distribution and, therefore, do not depend on exchange value, or price of commodities.

    Social Transformation

    Every firm sells the produced commodities to any other firm of the system in exchange for a quantity of money used to buy different combinations of commodities produced by them for the same amount of money. Commodities are exchanged because they have different use values that satisfy various common needs, and a relation between different use values cannot be expressed in mathematical terms.
    A commodity, indeed, is not different from a non-economic object for its use value, but because in distribution is in an identity relationship with a price, which expresses the quantitative exchange relationship of every commodity with all the other commodities.

    The relationship of identity between use value and price in distribution, implies the relation of identity-duality of buying and selling – opposite and identical -, as the price for which every single commodity is sold is also the price for which it is bought. This is also true for the whole system, for the Gross Product. But while every commodity can be exchanged with different commodities, with their price of equilibrium changing accordingly, the gross product is always exchanged with itself, so that its price is constant: it is the mathematical one, 1, the unity of the system, to which all prices refer as a fraction of.
    Price expresses the quantitative relationship between unity and multiplicity, between every commodity and the gross product – or every firm and the whole economic system – and, consequently, between every single commodity.
    These considerations about distribution are made without any reference to production.

    The whole system

    In the negotiated exchange a commodity is bought for its use value, while the quantity of labor spent in its production is invisible and, though of primary importance, is only one of the many causes that concour to the magnitude of price, which is the meeting point of demand and supply, and is the actual economic value.
    Creative value and exchange value belong to different transformations, therefore there is no reason for them to coincide, that is, the relation between quantity of labor of a firm and quantity of labor of the system, which is constant, is not equal to the fraction of the gross product represented by its price, which is variable.
    But the commodity belongs perfectly to both physical and social transformation, which imply one another through the whole system, and for the whole system both creative and economic value of the gross product, as well as its material value, are constant for every possible distribution.
    If the economic value is expressed in monetary terms, the whole price, m$, of all the commodities exchanged in a given period of time, or Gross Product, GP, is the representation of the totality of time of labor, nhLt, that produces them:

    m$ ≡ GP ≡ Lt

    and the mathematical relation:

    m$ {GP} = nh {Lt}

    determines the absolute value of the currencies in terms of quantities of social labor, fraction of the time of labor of the economic system.

    1$ = nh/m$

    Prices always represent precise quantities of time of quantified human existence, independently from the material value of the commodities and the way they are distributed, that is, however they are used as means of production or consumer goods, and however the magnitude of prices can vary in order to ensure the condition of balance – buying-selling identity for each firm and for the whole system – in different possible distributions.

    • allan says:

      My question is: Is the transformation problem one of transforming surplus labor value into price? Or how does (socially necessary) labor become price. A commodity has value of, say, $10 materials, interest, rent, etc; and $10 wages. The commodity sells for its true value of $25. The difference (in this one, abstract case) is surplus labor value transformed into the extra $5, which is the profit for the capitalist.

      How does the surplus value become $5?

      • Allan,

        No this is not the transformation problem. The transformation problem has to do with the assertion that marx’s theory of prices of production is internally inconsistent. I think you are asking a different question… but I’m not sure what that question is. Surplus value is turned into money by selling a commodity at a price that is higher than its cost of production.

  39. Athos says:

    Part Two – Negative

    For Marx and the classical economists, though in slightly different terms, the objective value, or simply value, of a commodity is the quantity of labor spent to produce that commodity.
    If a commodity is produced by using freely available natural elements, its value is just the quantity of time of live labor spent to produce that commodity. If, instead, it is produced by using other commodities, or means of production, its value is calculated as the sum of the quantity of live, or new labor, plus the quantity of labor previously spent to produce the used means of production, which value is considered as indirect, or dead, or crystallized, or embodied labor that transfers itself into the produced commodities.
    Following that conception, the representation of the economic activities during the considered period of time comprehends different commodities, produced in different periods of time, that is, the consumed means of production, produced in the previous period of time, and the commodities produced during the considered one.
    In order to keep the distintion between the two kind of commodites, therefore, they should be represented with different letters, but then it would be impossible to study a hypothetical variation of price for different hypothetical distribution of the same commodities, that is, the relation between prices and quantities of labor, and only a linear unchangeable process would be visible.

    For this reason, the economists incorrectly suppose that commodities of two different periods that maintain the same function can be represented with the same letters. But since the two kinds of commodities must also be kept conceptually distinct, it becomes necessary to suppose that production takes place during the whole considered period, and that distribution, instead, occurs in an instant only at the end of that period and before the beginning of the next one.
    Since commodities are of different periods, though, even if they have the same use value and are represented with the same letters, there is no reason to believe that the price of the consumed means of production is equal to those of the produced ones, as they might be distributed in different ways.
    In order to study the variation of the characteristics of the system for a variation of distribution, therefore, it is also necessary to suppose that the economic system is static – retroactively static one should say -, namely, that in every period all commodities are produced and exchanged in the same way, so that, as well as their material value, even the price of the consumed commodities can be equal to the price of the produced ones.

    In reality, the economic activities are a constant flow where the production of commodities, their distribution and consumption take place contemporaneously. The commodities represented are only and all of those produced and exchanged during the considered period, so that, necessarily, the commodities produced in that period are the same commodities consumed in the same period, and the price for which they are sold is the same for which they are bought, without the need to consider the system as “static”. The static system hypothesis forces upon an incorrect framework the conditions that are always true for the correct one.
    In that conception, physical transformation and social transformation are overlapped and confused. The quantity of labor embodied into the commodities, indeed, cannot be “calculated” by considerations regarding only production because it depends on how the means of production are distributed, so that the same representation must be used to calculate both embodied labor and prices.
    In order to calculate the objective value of commodities, the classical theory establishes that the quantity of labor incorporated coincides – or is precisely indicated – by the prices calculated in the representation of the socialistic distribution – not deformed by the existence of profit -, that is, a distribution where the net product – for the hypothesis of static state composed only of final consumer goods – is distributed only in proportion to the quantities of labor.
    In this case, since the quantity of labor embodied in the means of production produced and the quantity of labor embodied into the means of production consumed coincide, the value of the net product corresponds to the totality of live labor, so that, as in a system where means of production do not exist, everyone receives from society a quantity of commodities embodying a quantity of social labor equal to the quantity of labor given to society by producing only one kind of commodity.
    The identity between totality of live labor and the value of the net product is justified by the fact that consumer goods are or should be the real end of all economic activity, and therefore, directly or indirectly, of all labor.
    However, at this regard, one can notice that since in every period all commodities – consumer goods and means of production – are in any case consumed and reproduced, if this was true the quantity of labor embodied in the consumed commodities would be constantly greater than the quantity of labor that produces them all.
    Although this absurdity is not recognized as such, other contradictions appear when considering a variation of distribution.
    The variation of prices, indeed, is explained as the effect of a redistribution of the value embodied into the commodities that takes place with the redistribution of the commodities themselves, requiring therefore prices different from values, though without changing the quantity of labor they objectively embody. But if the price of the net product is constant and coincides with the totality of live labor, a variation of distribution, which implies a variation of all prices, also implies a variation of the price of the gross product, which becomes larger or smaller than its price calculated without profit, namely, than the quantity of labor it “objectively” embodies.
    The economists finally recognize this as an unacceptable contradiction, known as the transformation problem, which conceals the absolute value of currencies.

    It must be noticed that the conception of the transfer of the value of the means of production into the produced commodities is shared by not only the classical economists but by all the economists, as long as they refer to the value of the net product as value added, that is to say, added to the value of the means of production.

    In reality, in the physical transformation the relation of identity between labor and commodity, or creative value (which is not embodied labor) and use value, is simple and direct, and does not depend on the means of production used, nor on distribution.
    Moreover, in the representation of distribution, the sum consists of the price of the final consumer goods and price of the means of production, or income and capital, where income is proportional to the quantity of labor, which, as capital, is social value, not creative value.
    In every period of time, in order to exist, labor must use and consume, though in different ways and moment, means of production and consumer goods, and it is employed contemporaneously in part in the production of means of production and in part in the production of consumer goods, therefore salary – the quantity of social labor indicated by the consumer goods’ price -, even in a socialistic distribution is inferior than the quantity of labor given to the system.

  40. allan says:

    “The total amount of value in society is equal to the total amount of prices.”

    This seems to correspond to the use of Gross Domestic Product for total value as well as the use of monetarism theory to explain value as price.

    I would think that once something has a “value” in a capitalist system of production then the market would immediately place a price on it. Marxists say that the value and price are placed on a commodity at the time of its production; the capitalists say that the value (?) and price are placed on the commodity after production when the product enters the market.

    Also, the capitalist denies that labor can create anything beyond the value of its wages. Prof. Mankiew specifically addresses this on his blog, and, I assume, in his books. However, statistics from the Bureau of Economic Analysis and the Bureau of Labor Statistics show that worker productivity per hour is higher than wages paid per hour. (OECD statistics also show this.)

    Thus, a worker may, on average, get paid $20 per hour, yet produce $40 per hour, which is exactly what Marx showed happened in capitalist production.

    Do you know of any economic research which investigates whether there is actual proof that a real value is created by labor over and above its wages?

    • allan says:

      also, the average wage would be the median wage to cancel out any effect of extremely high and low wages.

    • I think the existence of profit is proof that workers create more value than they are paid in wages. If we accept that only labor can create value than this can be the only explanation for the phenomenon of aggregate profit.

      • allan says:

        But bourgeois economists simply respond by saying that profit comes from exchange in the market (marginal utility, monetarism, etc.). If there were objective, real proof that workers create more value than their wages, I would think that would settle the argument. The only question then would be how can a worker produce more value than, on average, they are paid in wages.

  41. Athos says:

    The value of the means of production, MP, consumed during production cannot transfer into the correspondingly produced commodities because that would imply, for the whole economic system, that the value of the Net Product, NP, coincides with the total time of labor, NP=Lt.

    But if this were true, since in every considered period of time both NP and MP are consumed and re-produced, the quantity of labor incorporated into the consumed commodities would always be greater than the quantity of labor that has produced them all, and this is absurd.

    Commodities are different from common objects not for their use value or the way they are used or if they are used at all, but because they have a price, an economic value, indicated by a sum of money, and labor is different for free time not for the skills it requires, or because is pleasant or boring, or whatever, but because it produces commodities.
    The exchange of commodities is the material aspect of the exchange of labor that takes place by means of money, therefore the sum of the price of all the commodities exchanged in a given period of time – the price of the GDP – represents the total time of labor that has produced them, independently from their use value, their function, if they are consumed during the leisure time or while working, namely, if they are MP or PN -, and independently from the way and the reason they are distributed, namely, from the way correspondently change the prices of equilibrium – those for which the price of the commodities sold is equal to the sum of the prices of the commodities bought -, for every firm and for the whole system.

    The solution of the Transformation Problem is that the MP do not transfer their value, and that prices always and directly represent a fraction of the total social labor in every kind of distribution, socialist or capitalist or whatever.

    Since the price of the economic value, the monetary price, of the GDP and the correspondent quantity of time labor are known, the absolute value of the various currencies can be easily calculated:

    m${GDP} = nh {Lt} and 1$ = nh/m {Lt/GDP}

    In conclusion (for now), the fact that the currencies don’t indicate the quantity of social labor that they really represent, means that money represents and its use maintains social unity in substitution of the direct, spiritual awareness of that unity.
    Ultimately, it means that society is not aware that there is only the material reality that we create.

    You should read the essay I sent you the other day

    • to Athos,

      working thru your comment and essay bit by bit:

      The main argument, that the value of the MP are not transfered to commodities, makes no sense to me. Without this value transfer there is no way to recoup the cost of investments in MP. I can’t imagine a capitalist society in which the capitalist class invests billions in MP every period and doesn’t pass this cost onto the consumer, instead ‘taking one for the team’ and writing off this investment as a loss. Is this really what you are arguing or am I misunderstanding you?

      The statement that if the value of MP are passed onto commodities then the net product would equal total labor time: I assume by this you don’t mean the total labor added this production period but the total labor incorporated in the product. This, of course, is obvious if we agree that labor produces value. But if this is the case then why would you argue in the next paragraph that this implies some contradiction where “the quantity of labor incorporated into the consumed commodities would always be greater than the quantity of labor that has produced them all, and this is absurd.” It seems obvious that the total quantity of labor incorporated in the product is greater than the value added since the value of both subsistence goods and MP come from a previous production period. It is not the case, in simple reproduction, that means of subsistence and means of production have to be produced in the same period they are consumed. That would be absurd. MP and subsistence goods are clearly the output of the production process, they are exchanged against each other at the end of the production period when they enter the market and take the form of prices, they then become the substance of the next production period. MP are consumed productively in the production process and form the commodity value at the end of the production period. If one is to sell MP then they must have a price. If they have a price then they must for the cost-price at the input of the next production period. If they enter production as an input cost they must leave production as an output cost.

      If interpreted through the TSSI there is no transformation problem and thus no reason to revisit this problem.

      It seems like Part two of your essay immediately veers off in the wrong direction. First, it is not just means of production that are embodied dead labor entering the calculation of the value of newly produced commodities. Wages paid to workers are also the equivalent of the means of subsistence. All production materials are also previously produced, ‘dead labor’. In Marx’s terms, constant and variable capital form the cost-price of commodities and these are formed by the value of previous production periods. Would you have us throw out wage goods and all constant capital as well so that there is no cost of production?

      I don’t see why you think it is problematic to add the value of this past labor to the newly created value. It is a fact of capitalism that the price of a commodity must incorporate the cost of production. You say this makes it impossible to study a hypothetical variation in the distribution of prices. I don’t see why this is the case, especially since you have posted this essay to my description of the TSSI take on the ‘transformation problem’ which clearly is proof that you can talk about the redistribution of surplus value/ prices of production without any theoretical problem.

      You then go on to propose a static equilibrium approach in which input prices and output prices have to be the same. This is of course impossible if we are performing labor which adds value to the social product. Even if all commodities are consumed each period they still add their value to the cost of production. As I’ve explained in the above and in the Math Supplement to this post, such an approach forces us to make ridiculous unrealistic assumptions (like assuming away the cost of MP), when there is no theoretical need to do so. You say “The static system hypothesis forces upon an incorrect framework the conditions that are always true for the correct one.” But it is not true that we travel back in time and sell commodities to ourselves after we have made them. You haven’t given us a more realistic picture of reality. Rather you have created an arbitrary model that explains nothing about the real distribution of labor and capital.

      It is not true that prices only distribute labor. They distribute capital which involves investment in labor, raw materials, partially finished commodities, and MP. The redistribution of capital in search of profit can’t be understood via your proposal.

      It seems lately that people have been posting their own takes on the transformation to this post without taking the time to read and respond to what I’ve actually written on the subject, which seems to me like this post is getting used as a platform for other people’s theories and not for a real engagement and discussion of the TSSI approach. Do you have any thoughts about the TSSI?

      • Athos says:

        to kapitalism101

        Use value and economic value are different concepts.

        Regarding use value, there is a distinction between the aggregate of the means of production – commodities used and consumed by labor for production – and the aggregate of final goods of consumption – used and consumed for personal pleasure, for the satisfaction of needs and desires.
        Both aggregates, though, are indispensable for the continuity of the productive process, and both are consumed during the considered period, within or without production.
        Regarding economic value, to the distinction between means of production and consumer goods corresponds the distinction between capital and income, where, in every firm, incomes are made up of wages – proportional to the time of labor – and profit – proportional to the magnitude of capital.
        Profit is the difference between the revenue obtained from the sale of the produced commodities minus the totality of expenditures for their production.
        Wage, therefore, is considered, at the same time – and really is – income by the workers and capital by the owner of the firm, and the commodities that realize them are final consumer goods for the workers and means of production for the entrepreneur. Sraffa, indeed, correctly says that, for the owner of the firms, the commodities bought with the wages are exactly like the food for animals and the fuel for machinery. Marx calls constant capital the price of the means of production and variable capital the monetary amount of wages. Smith and Ricardo call gross income the sum of wages and profits, and net income the profit.
        The question that arises then is: are the commodities bought with the wages means of production or consumer goods? And so, how can we decide whether those commodities transfer or not their “embodied labor”?

        But beside that, on which we can agree that the final consumer goods don’t transfer their value, lets consider, for instance, the clothing used by the workers during production. They are consumer goods if they were paid with the wages, and means of production if the owner of the firm pays for them. In the first case they wouldn’t transfer their value, ad in the second they would.
        So, depending on what we decide, the quantity of labor incorporated into the GDP would be different, even if composed by the same commodities and produced by the same total amount of time of labor.
        This consideration, alone, should convince you that the idea of the transfer of “labor crystallized” into the means of production is erroneous, and that the economic value of the GDP is always equal to the correspondent total time of labor (creative value), independently from the function of the commodities (use value, MP or CG) and the way they are distributed (their prices, or economic value).
        Because even though those values are inseparably intertwined, they are different, and they cannot be summed up.

        I saw a few of your video on YT and read the TSSI approach. I think that you are pretty much coherent with the Marxian point of view, and I thought that my observations are a response to it. But the blog is yours and I absolutely don’t want to bother you with my own ideas, and if you don’t like them I will quit immediately. Otherwise I could tell you more.
        However, for what I saw and read, I think that you are a nice and intelligent and open person, and I wish you a happy new year with all my heart.

      • wages are not determined by labor time but by the value of the means of subsistence. This is what allows surplus value to be produced.

        “are the commodities bought with the wages means of production or consumer goods?” Why is this a question. It is obvious that wages can only buy consumer goods.

        “And so, how can we decide whether those commodities transfer or not their “embodied labor”?” Inputs into the production process have to transfer their value to the final product or else the capitalist can’t recoup their investment and they go out of business… end of capitalism.

        “They are consumer goods if they were paid with the wages, and means of production if the owner of the firm pays for them. In the first case they wouldn’t transfer their value, ad in the second they would.” In the first case the capitalist pays out wages in the second case the capitalist buys constant capital. In either case it is an expense that has to be recouped. The only difference is that the shirt on the worker’s back was bought with wages from a previous production period. But this does nothing to prove your argument that the total price level has no relation to the cost of production.

        How can capitalism survive a single day without the cost of production effecting prices?

        Do you have a critique of the TSSI approach?

    • allan says:

      You begin your post with this statement: “The value of the means of production, MP, consumed during production cannot transfer into the correspondingly produced commodities because that would imply, for the whole economic system, that the value of the Net Product, NP, coincides with the total time of labor, NP=Lt.

      Marx says in Capital, Vol I, Chap 15: “Machinery, like every other component of constant capital, creates no new value, but yields up its own value to the product that it serves to beget. In so far as the machine has value, and, in consequence, parts with value to the product, it forms an element in the value of that product.”

      The cost or value transferred to a product by a machine is generally described as “depreciation” of the machine. Thus, part of the price of a machine-made commodity is formed by part of the value of the machine, or the machine “yields up” a part of its value to the commodity.

      Did you mean to say that a machine cannot transform part of its value to a commodity?

  42. Athos says:

    Ok,
    forget it

  43. Athos says:

    To resume synthetically:

    If you represent production, in every firm and the whole economic system the quantity of time of labor is always equal to the correspondent quantity of produced commodities. For the whole system, it is GDP=Lt, for whatever distribution and, therefore, for whatever variation of prices.

    When you study a variation of prices caused by a variation of distribution, it is distribution that you consider and represent, not production.
    Then, for every firm and the whole economic system, on one side of the equations you have the sum of money spent by income and the capital, and on the other side the quantity of money obtained by selling the produced commodities.
    Incomes are made up by wages and profits.
    Wages are proportional to the quantities of the time of labor, and profits are proportional to capital. For the owner of the firm, capital is made up by the price of the means of production plus the price of the commodities bought with the wages.
    The commodities bought with the incomes, NP, are mostly final consumer goods for the satisfaction of personal wants, and the commodities bought with the capital are means of production for the continuity of the productive process.

    If, like the classical economists, in the representation you want to make a sum of live labor plus labor incorporated into the used means of production, then you have at least three big problems:

    One is that on the two sides of the equation you have commodities of two different periods, that is, commodities that by definition are different. They are different even if they have the same function and the same prices, and mathematically and logically you cannot put a sign of equal between different things.

    Second, if the value of the used MP transfers into the produced commodities, then the value of the Net Product coincides with the total time of live labor, NP=Lt, and if this remains constant for a variation of distribution, then a variation of prices also implies a variation of the value of the GDP, which instead we know to be constant for whatever distribution because determined in and by production. This is specifically the substance of the transformation problem.

    Finally, last but not least, both aggregates of final consumer goods and means of production are indispensable for the continuity of the productive process, and, no matter whether they are consumed during leisure time or while producing, they must be re-produced in every period. Therefore, if this were true, the quantities of time of labor incorporated into the consumed commodities would be, in every considered period of time, larger than the quantities of labor that produces them. This is the classical case of the elephant in the living room!

    If you get this, then I can give you the complete mathematical representation of the reasoning.

    Happy New Year

    • First, wages are not equal to labor time but to the cost of means of subsistence. I already stated this but you’ve just repeated the error without responding to my comment. If wages were equal to the amount of labor performed then there would be no surplus value and no profit and capitalism would have no purpose.

      Onto your three “big problems”:

      1. You have mentioned this before but not given a logical reason why this is a problem. It may be a problem for your particular algebraic system but anyone who has ever owned a business knows that they must recoup their investments in capital when they sell their products. It’s basic common sense. You still have not answered my question, which I’ve repeated multiple times, as to how an economy can survive without firms recouping their costs. Furthermore, both quantities you mention are just abstract labor, a homogenous substance which is equated everyday with the phenomenon of prices. Anything that has a price can be added up. There is no logical leap. There is no algebraic difficulty. If your mathematical system cannot handle this elementary simplicity than that is a defect in your system.

      2. In Marx’s transformation procedure the redistribution of surplus value between firms doesn’t change the total amount of commodity value. I don’t understand why you claim it would. Three aggregate equalities hold for Marx: total value=total price, total profit=total surplus value, and aggregate money rate of profit equals aggregate surplus value rate of profit. The TSSI procedure allows for all three equalities to hold. I don’t follow your logic on this one.

      3. Again, if you care to actually read the math supplement to my transformation problem post you can see specifically how the entire social product is produced and consumed each production period without anything being left over. I’ve provided a clear illustration there how the TSSI transformation procedure accounts for the meeting of supply and demand under conditions of average profits. Your point here is not a valid point since I’ve already shown, quite clearly, how it is possible for the social product to be produced and consumed each period. The total price of means of subsistence is c+v+s (constant capital+wages+surplus value) for Department 2 and, in simple reproduction, this is equal to the total amount of wages of workers in all 3 departments. Thus the means of subsistence are produced and sold each period. No problem. No elephants.

  44. allan says:

    “…but anyone who has ever owned a business knows that they must recoup their investments in capital when they sell their products. It’s basic common sense.”

    After Marx, we know that a business does not “recoup” its investment or costs. The business does not pay the full costs of the workers’ production. Only wages (in the form of living labor or accumulated labor) are paid; the value created by the worker is not paid, although that value is included in the cost or selling price of the product.

    • Allan, I think you miss my point. I am saying that businesses advance a sum of money for wages and materials and that this sum forms part of the final cost of the commodities. Yes, the additional value is the surplus labor of the workers. At issue in the above debate is whether the cost of production has any relation to the prices of commodities. I am arguing that if you can’t make back the cost of your investment then there is no point in investing in the first place. The total price of all commodities is total cost price plus surplus value. Athos (who claims that prices are merely the result of surplus value) hasn’t been able to explain how a capitalist society could function if investments were not recouped through the sale of commodities which is why I think his so-called solution to the transformation problem doesn’t make any sense.

      BC

  45. allan says:

    “At issue in the above debate is whether the cost of production has any relation to the prices of commodities

    I would think the cost of production is the price of the commodity: thus, wages and material, interest, etc., make up part of the cost of production; the part added by labor is also a cost of production, but it is a cost not paid by the capitalist. Capital only pays for wages (and past wages), but not for surplus value. If the price of a commodity is, say, (on average) $10, then wages make up only a part of the price; the rest is surplus value, for which the capitalist pays nothing but pockets as profit.

    “The total price of all commodities is total cost price plus surplus value.”

    This, I think, is a fundamental mistake.

    It seems to me the total price of all commodities is the total cost price. But the total cost price, itself, includes surplus value. I think this is proved by GDP figures which show that total price = wages + non-labor costs + profit. Table 1.15 (BEA.) Marx and the classical economists agreed that profit and value were created in the product at the time of production, thus value is determined at the time of production (although expressed later monetarily as price.) It is only the neo-classists, monetarists, and mariginal types who try to find value, price and profit in the magic of the market.

    It is certainly true that the capitalist invests to make a profit. She (?) must draw more out of the system than she puts in. She does this by appropriating the product and the surplus value of the worker.

    It also is true that each individual capitalist does not realize her profit at the time of sale of each individual product. Marx showed that profit and necessary labor time are social concepts and can only be realized socially (although not necessarily equitably.)

    • Allan,

      forgive me for not defining my terms. When Marx uses the term “cost price” in Vol. 3 of Kapital he is referring to the cost of production- the cost to the capitalist, specifically constant capital plus variable capital. Surplus labor is not a cost to the capitalist. By definition it is not something the capitalist pays for. That’s why Marx says that total price equals total cost price plus total surplus value.

  46. allan says:

    Certainly surplus value is not a cost to the capitalist, yet it is a cost to the worker. It is a cost not paid by the capitalist.

    From Vol III, Chapter 1: “What the commodity costs the capitalist and its actual production cost are two quite different magnitudes. That portion of the commodity-value making up the surplus-value does not cost the capitalist anything simply because it costs the labourer unpaid labour.”

    The capitalist spends $20 for the product (wages, material, etc.) Therefore the value of the product appears to the capitalist as $20. The real value, and therefore, its market price is $20 + the surplus value added by the worker.

    “By definition it is not something the capitalist pays for. ” That is true, but the capitalist receives money for it.

  47. allan says:

    I think there are a lot of studies of labor productivity which show that workers consistently are paid less than the value of what they produce. For instance, a worker might get a wage of $20 and yet consistently produce a value of $40 per hour. Any worker will tell you that is the case. Worker never get paid their real value.

    This, I think, proves conclusively (not that I have collected these studies) that Marx was right when he said that workers produce value for which they are not paid.

    By the way, I used to work for a huge company and they would hand out annual reports of how many hrs you worked, etc. One of the entries was “dollar production per hour.” It was always about 4-5 times the hourly wage. I never gave it much thought. Now I know that it was the SURPLUS VALUE I WAS CREATING!!

    • Room says:

      The LTV has its classical expression in Smith and later in Ricardo. In the words of Ricardo: ‘the value of every commodity is proportional to the quantity of labour embodied in it, providing that this labour is used in accord with existing standards of productive efficiency.’

      After Ricardo, radical economists and trade unionists started to promote the idea that the working class *should* receive the whole or at least a much larger share of the product its labour because it was labour that supplied the value of products. This interpretation came to mean: ‘if labour produces all, then why not receive all’?

      To say this, however, is to mix demonstrable facts with ethics or politics. Marx and Engels cautioned against such reasoning and conclusions, arguing that the scientific analysis of a system should not be mixed with such ethical or moral sentiments. In short, it *does not* follow from the LTV that the whole product of labour ought or should accrue to the producers (workers)!

      In other words, the value of labour power, is the value of reproducing labour-power or the value of the means of subsistence. It is therefore *not* the appropriation of surplus-value which is the difference between the value of labour-power and the value that labour-power valorizes in the time-period for which it is employed that breaks the law of equivalent exchange.

      The law of equivalent exchange is only broken or there is injustice only when the wage/salary is too low to allow for the reproduction of the worker. This is the source of injustice and not the appropriation of surplus-value. In the words of Marx, if the value of labour-power (i.e. minimum wage) allows for the sufficient reproduction of his/her labour-power, then all exchanges have been made at their value: ‘equivalent has been exchanged for equivalent’ (p.301). In other words, the raw materials, equipment, and labour-power have all been bought at their value according to Marx’s LTV.

      I think this point is extremely important when studying Marx because his theory does not rely or depend upon a moral or ethical argument as some people would believe. This is not in Marx. It was a major misinterpretation on the part of the left, trade unionists, and activists who have distorted his argument.

  48. Pingback: John Quiggin, ‘Marxism without revolution’ and Left strategy: A response. (Part 1) | | Left FlankLeft Flank

  49. Oliver C says:

    Hey Brendan,
    Summer seems to be a slow time for Marxist theory! I had a quick question – roughly related to the transformation problem -so called. It actually refers to Anders Kliman’s book “Reclaiming Marx’s Capital” (I wasn’t really sure where else to post the question).

    Anyone can feel free to respond but:

    Throughout the book, Kliman states that ‘simultaneous valuation’ and ‘physcialism’ or the determination of value etc. by physical quantities (technology and real wages) are basically inextricable – particularly pp. 35-6 and 76-7.

    “Physicalist conclusions depend crucially upon…simultaneous valuation….and simultaneous valuation leads neciessarily and inevitably, to physicalist conclusions.”(76)

    Why? This is stated several ties, but never argued or explicated, unless I am missing something in the definitions themselves (e.g. is it implied that the physical nature of the determinants of value in physicalism mean they cannot change?).

    Can you/anyone enlighten?

    Cheers, O

  50. Oliver C says:

    *Andrew

  51. Ed George says:

    Because, in modelling the reproduction of capital, if you constrain that the input price of a commodity be the same as its output price (or vice versa), your comparative measurement unit effectively becomes the commodity itself as a physical unit, i.e. you count the quantity of the commodity as a use-value, not the social labour of which it is composed. If the commodity is x, and its price/value is, say, 10, with input and output prices constrained to be equal, 10x=10x, and hence x=x. By the same token, if you take as your unit the physical commodity, you abstract away from social labour expended in production, and treat the commodity as if, from the point of view of social labour expended in production, this were always the same. The end result is, de facto, the same.

    http://readingmarx.wordpress.com/

  52. Oliver C says:

    Thanks Ed! Appreciate the help here; that is what I thought Kliman was getting at, but was not quite sure.

    And appreciate the blog too – helped a lot in getting through Capital Vol. II.

  53. Casstafiore says:

    I’m confused about the concept that value is only created through human labor. As a consumer, wouldn’t a bar of soap made by a machine be worth as much to me as one made by a person?

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