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.

Marx’s Solution to the Transformation problem

In his partial solution to the transformation problem, Marx assumed that the inputs sell at direct prices but the outputs sell at prices of production. Marx showed using this partial transformation that the transition from direct prices to prices of production redistributes the surplus value from branches that have a lower than average organic composition of capital to branches that have a higher than average organic composition of capital. The branches of industry with a higher than average organic composition sell their commodities at prices above the direct prices of their commodities, while those with a lower than average organic composition sell their commodities at prices below their direct prices.

In Marx’s example, the mass of & rate of profit in terms of direct prices is identical to the rate of and mass of profit in his partially transformed system of prices of production.

This has implications for shift in production from the advanced economies of the West to the cheap labour economies of the East. So that, even excluding the whole question of monopoly prices, less & less of the  surplus value is being produced in the imperialist countries & more & more is being produced in the historically oppressed countries.

The Cambridge Capital Controversy

Piero Sraffa in his book “The Production of Commodities by Means of Commodities” showed using simple mathematics that marginalism breaks down in terms of its own assumptions. The point where marginalism breaks down mathematically involves the shift from labour-intensive techniques of production, where labour is assumed to be plentiful relative to capital, to capital-intensive techniques, where capital is plentiful relative to labour. Sraffa showed that under certain conditions as capital becomes more plentiful relative to scarce labour, causing wages to rise & “interest rates”(really profits rates) to fall, there occurs a “re-switching” from capital-intensive techniques back to labour-intensive techniques.

Paul Samuelson, a professor of economics at the Massachusetts Institute of Technology, was the acknowledged leader of American marginalism. He came to the defence of marginalist theory against the attack that had been launched against it by Sraffa. This became known as the “Cambridge capital controversy,” because it involved a dispute between the economists of Cambridge in England led by Sraffa and economists of Cambridge, Massachusetts, led by Samuelson.

Neo-classical marginalism now had its own “transformation problem.” It was shown to be mathematically inconsistent. To this day, the marginalists have not been able to plug the holes punched in it by Sraffa.

“Marx After Sraffa”

In 1977 Ian Steedman published “Marx After Sraffa” pointing out that once luxury and military commodities were taken into account the absolute equality of the mass and rate of profit in terms of direct prices and in terms of prices of production prices breaks down. And from this concluded that Marx’s method of transforming direct prices into prices of production was incorrect, & that Marx’s theory of value should be abandoned by socialists.

Anwar Shaikh’s Solution to the Transformation Problem

Suppose the luxury commodities that the industrial capitalists produce are sold back to the collective class of capitalists at production prices that happen to be on average above the direct prices of these same luxury commodities. The capitalists will in terms of money realize an extra profit above the profit that they would realize in terms of money if they sold the luxury goods at their direct prices. It seems as if the capitalists are realizing a profit, a part of which at least, is being produced by something other than the unpaid labour of the working class. But what the capitalist class gains in terms of profit when they sell the luxury commodities in production prices above their direct prices they will lose in terms of revenue when they buy back these same luxury items at “inflated” prices. The extra profit that the capitalists realized in terms of money that did not reflect any actual unpaid labour performed by the working class is pure money illusion.

Steedman’s error what his failure to understand the relationship between value & the form of value, or what comes to exactly the same thing, the Marxist theory of prices & money.

Even as prices of production deviate from direct prices they continue to be ruled by the law of labour value. And to the extent that prices of production deviate from direct prices in luxury and weapons industries, the rate and mass of profit in terms of direct prices will be somewhat transformed as a result of the transition to prices of production. In the real world, it is highly probable that some of the production prices in some of the industries engaged in luxury and/or weapons production will have prices of production in excess of their direct prices and some will have production prices that are below their direct prices. Therefore, the rate & mass of profit in the system of prices of production should be seen as a slightly displaced image of the mass & the rate of profit that exist in the system of direct prices. This no more changes the fact that prices are in the final analysis ruled by labour values than the deviation of production prices from direct prices or for that matter the fact that market prices deviate from direct prices do. It is the relationship between value and the form of value.

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