The Transformation Problem

The Transformation Problem in Classical Political Economy

The value of a commodity, according to the classical economists, is determined by the amount of labour, on average, necessary to produce it.
This value determines its ‘natural price’* around which market prices fluctuate.
These fluctuations regulate the distribution of capital across the branches of production.
Competition should mean that capitals of equal size earn equal profits in equal periods of time.
However, this contradicts the classical labour theory of value, e.g. fine wines aged in oak chests have a long turnover of capital time & therefore charge a higher price than their labour values to earn the market rate of profit.
There is a seeming contradiction between the labour theory of value & the tendency for profits to equalise.

* Adam Smith used the term ‘natural price’ & Ricardo used the terms ‘cost of production’ & ‘price of production’

Marx: Value & Exchange Value

Marx distinguished between concrete labour & abstract labour.
‘Socially necessary labour’ is social, not a physical substance.
How much of this abstract labour value a commodity commands can only be known in exchange (in the market).
The classical economists failed to distinguish between value & the form value takes, that is its exchange-value.
Value is measured in terms of abstract labour time.
Exchange value measures the value of a commodity in terms of the use value of another commodity, e.g. weights of gold.
The exchange value of a particular commodity (the relative form of the commodity) must always be measured in terms of the use value of another commodity (the equivalent form).
Gold takes on the role as the universal equivalent as it functions well as money (as a measure & store of value).
Gold doesn’t have to go to market to confirm its value.

‘Direct Prices’

Anwar Shaikh uses the term ‘direct prices’ for when market prices equal their labour values.
The direct price is the price at which the amount of abstract labour embodied in gold represented by that price is exactly equal to the amount of abstract labour embodied in that commodity.
In practice commodities almost never sell at their direct price; it is just a powerful method of abstraction.

‘Prices of Production’

Because of the tendency for profits to equalise, capitals of the same size, regardless of their different compositions of constant & variable capital, will tend to earn the same amount of profit over the same amount of time.
This gives the appearance of the whole of capital returning a profit, not just the value production of labour (variable capital).
The price of production is the quantity of gold that a commodity would exchange for if profits were equalised across the whole economy.

Wages of Labour Power

Labour power does not have a price of production because it is not capitalistically produced.
The wage is largely determined by the price of commodities necessary to reproduce labour.

Gold & Prices of Production

Gold has no price & therefore no price of production.
Gold will exchange with other commodities at a different rate if its composition of capital, or turnover time, differ from the average for the economy.
The gold industry may also settle for a lower than average rate of profit because gold is directly social & doesn’t have to prove its value in exchange.
There is also the complication of ground rent of gold-bearing lands.
If gold exchanges with commodities at a rate below the rate that would prevail if commodities sold for their direct prices, the sum total of commodity prices in terms of gold will be greater than the sum total of prices in terms of gold bullion would be if prices actually corresponded to direct prices.
If the converse is the case, the sum of commodity prices in terms of gold would be somewhat lower than would be the case if commodities sold at their direct prices.

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