Marx stuck to his guns on the theoretical adequacy of the labor theory of value. Plus he recognized the role of competition in equalizing profit rates. This contradiction was not because he was unaware of the “transformation problem”: he was very aware of it, and in fact slagged Ricardo for not seeing it sufficiently clearly. “Economic theory” is a very strange beast—it has to be wrong, or else your map is the size of the territory, and hence is useless; but it cannot be too wrong, or else it is useless, but in a different way…
My view is that the question “What did Karl Marx think about the transformation problem?” is undefined. It is not just that the position of the entity “Karl Marx” changed as that entity traversed its space-time world line. It is that at every moment in time the entity was somewhat confused and was always finding its mind pulled in different directions. In my view, the quick short thumbnail mostly right things to grasp on this question are these:
(a) Karl Marx was well-aware of the “transformation problem”.
(b) Karl Marx did not think that it was a very important problem—it was second-order corrections because average cost prices seen in the market were “mostly” and were close to socially-necessary average-quality labor-values.
(c) Karl Marx thought the key was that profit originated as surplus value—and the labor theory of value was the right sharp knife to open that oyster.
(d) Karl Marx thought that because profit was “really” surplus value, the way to analyze the category of profit was (i) to look at its origins in labor exploitation, and then (ii) track its transformation into profit, as the market system did not create extra profits or reduce total profits but simply “transformed” a fixed amount of surplus value into that same amount of profit.
I think that is as close as you can get to a full understanding in 150 words or so.
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Back up: All economic models—whether expressed in words, Pearlian directed causal graphs, Cartesian analytic-geometrical diagrams, or systems of equations—are, as Bob Solow wrote back in 1956:
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Robert Solow (1956): A Contribution to the Theory of Economic Growth <https://www.jstor.org/stable/1884513?seq=1>: ‘All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive…. It is important that crucial assumptions be reasonably realistic. When the results… flow specifically from a special crucial assumption, then if the assumption is dubious, the results are suspect…. In the Harrod-Domar model… [the] fundamental opposition of warranted and natural rates turns out in the end to flow from the crucial assumption that produc tion takes place under conditions of fixed proportions…
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Hence my hackles somewhat rise when I encounter things like this:
Vincent Goloso: <https://twitter.com/VincentGeloso/status/2060726172909011367>: ‘Usual Marxist trick — if you criticize Marx, you didnt read. If you read him, you didnt read him right. If you read him right, you are missing some deeper in-between the lines meaning.
Stéphane Surprenant: ‘Just to make sure the Marxists are really angry: Marx could have avoided all those problems by formalizing his intuitions. That is, by writing down models, definitions are clear and testable implications can be derived as theorems. No one is debating what Lucas or Prescott meant.
Vincent Geloso: ‘If he did, the transformation problem would have been seen from the getgo and that would have cut the book to like a half dozen boring chapters…
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Which, I think, gets it wrong.
First of all, as for the “transformation problem”, it was indeed clear from the get-go—indeed, from long before.the get-go, fully five years before the publication of the first volume of Capital. In the summer of 1862, Marx laid it out fully in a letter he wrote to Engels:
Karl Marx (1862): 1862-08-02: To Engels in Manchester <https://marxists.architexturez.net/archive/marx/works/1862/letters/62_08_02.htm>: ‘Ricardo confuses value and [average] cost price…. [This] identification of values of commodities and [average] cost prices of commodities is totally wrong…
Second, there is a great deal of debate about what Lucas and Prescott “meant”. Writing equations does not save you. (If, that is, they meant anything: their incuriosity about what was actually going on with the economy over 2007-2010 was, by my lights, very telling: incredible and bizarre).
For example, Lucas’s “island” model assumes that people see the prices at which they sell but cannot see but only guess at the prices at which they are currently buying. In my experience, however, it is very much the reverse
I very much know very much the prices at which I am buying things. Mideas about how much money I will get for the work that I am right now doing are extremely vague and uncertain.
Thus any “misperception”—any mistaking of merely nominal changes for changes in real incentives—goes the opposite way from what Lucas posits in his island model that it does. And so a positive nominal shock to the money stock that raises prices and confuses economic agents should reduce rather than increase employment and output.
But Lucas never goes there.
In fact, Lucas never presents any evidence whatsoever that knowing the prices at which you sell but not the prices at which you buy might be an interesting theoretical metaphor for a modern post-industrial economy.
With Prescott, it is in some ways even worse: he made it very clear that it was illegitimate to inquire into the technological shocks were: one simply had to take the residuals from a production function and plug them in as the unmoved prime movers of the entire system. And there was also never any defense of why this might be an interesting theoretical metaphor for understanding a modern post-industrial economy.
Back in the day, Paul Romer heaped truly extraordinary—but, in my, view, fully jutified—abuse <https://www.aeaweb.org/articles?id=10.1257/aer.p20151066> <https://paulromer.net/freshwater-feedback-part-1-everybody-does-it/> <https://paulromer.net/feynman-integrity/> on Robert Lucas for the: “this is the way you have to write down a model, and I will not give any good reasons for why”, SOP of his.
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In this letter of his, Marx says:
best thanks for sending me £10
I hope to make more money myself in the future.
if we assume the rate of surplus-value is fixed across industries
then different K/L ratios lead to different rates of surplus-value extraction per unit of capital across different industries.
but “capitalists are brothers”, and so competition equalizes the rate of profit,
which is cost price minus depreciation minus materials minus the cost of labor power divided by the capital-labor ratio,
which could not be the case were average cost price equal to labor
value,
and that is why Ricardo’s identification of values of commodities with average cost-prices of commodities “is totally wrong”.
This thing is complicated!
I want you to write me a “detailed military critique” of “Lassalle-Rüstow’s liberation nonsense”. (I.e., Garibaldi gos to Sicily, raises an army there, marches north to Naples, Rome, then Padua, picking up allies and reinforcements along the way, and then to Venice and on to Vienna!)
Regards to “the ladies” (i.e., Mary and Lizzie Burns, sequentially[?] Engels’s long-time mistresses.
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Here’s the whole thing:
Marx-Engels Correspondence 1862Marx To Engels in ManchesterSource: MECW Volume 41, p. 394;
First published: in Der Briefwechsel zwischen F. Engels und K. Marx, Stuttgart, 1913.
[London,] 2 August 1862Dear Frederick,
Best thanks for the £10.
I very much dislike your being in financial difficulties on my account, but que faire? Who is capable of withstanding such a crisis as the American one? Not to mention my peculiar bad luck in having a rotten rag like the Vienna Presse to deal with. Otherwise, the fellows might, at least, have been able to make up for the loss of the Tribune to some extent. Do you suppose, perhaps, that the time has now come for me to approach, say, the Evening Post (the Abolitionist paper in New York) about my contributing to it?
All things considered, it’s a real miracle that I have been able to get on with my theoretical writing to such an extent. I now propose after all to include in this volume an extra chapter on the theory of rent, i.e., by way of ‘illustration’ to an earlier thesis of mine. Let me say a word or two about what will, in the text, be a lengthy and complex affair, so that you may let me have your opinion on it.
As you know, I distinguish 2 parts in capital: constant capital (raw material, matières instrumentales, machinery, etc.),whose value only reappears in the value of the product, and secondly variable capital, i.e., the capital laid out in wages, which contains less materialised labour than is given by the worker in return for it. E.g. if the daily wage = 10 hours and the worker works 12, he replaces the variable capital + 1/5 of the same (2 hours). This latter surplus I call surplus value.
Let us assume that the rate of surplus value (that is the length of the working day and the surplus labour in excess of the necessary labour performed by the worker to reproduce his pay) is given, e.g. = 50 p.c. In this case, in a 12 hour working day the worker would work e.g. 8 hours for himself, and 4 hours (1/2) for the employer. And indeed, let us assume this to apply to all trades so that any variations there may be in the average working time simply allow for the greater or lesser difficulty of the work, etc.
In these circumstances, given equal exploitation of the worker in different trades, different capitals in different spheres of production will, given equal size, yield very different amounts of surplus value and hence very different rates of profit, since profit is nothing but ‘the proportion of the surplus value to the total capital advanced’. This will depend on the organic composition of the capital, i.e., on its division into constant and variable capital.
Let us assume, as above, that the surplus labour = 50 p.c. If, therefore, e.g. £1 = 1 working day (no matter whether you think in terms of a day or a week, etc.), the working day = 12 hours, and the necessary labour (i.e. reproductive of the pay) = 8 hours, then the wage of 30 workers (or working days) = £20 and the value of their labour = £30, the variable capital per worker (daily or weekly) =£2/3 and the value he creates = £1. The amount of surplus value produced by a capital of £100 in different trades will vary greatly according to the proportion in which the capital of £100 is divided into constant and variable capital. Let us call constant capital, C, and variable capital, V. If, e.g. in the cotton industry, the composition was C 80, V 20, the value of the product would = 110 (given 50 p.c. surplus value or surplus labour). The amount of the surplus value = 10 and the profit rate = 10 p.c., since the profit = the proportion of 10 (the surplus value) : 100 (the total value of the capital expended). Let us suppose that, in a large tailoring shop, the composition is C 50, V 50, so that the product = 125, the surplus value (at a rate of 50 p.c. as above) = 25 and the profit rate = 25 p.c. Let us take another industry where the proportion is C 70, V 30, hence the product = 115, the profit rate = 15 p.c. Finally, an industry where the composition = C 90, V 10, hence the product = 105 and the profit rate = 5 p.c.
Here, given equal exploitation of labour, we have in different trades very different amounts of Surplus Value and hence very different rates of profit for capitals of equal size.
If, however, the above 4 capitals are taken together, we get:
#### Value of the product
(rate of surplus value in all cases = 50 p.c.
C 80 V 20110 profit rate =10 p.c.
C 50 V 50125profit rate =25 p.c.
C 70 V 30115profit rate =15 p.c.
C 90 V 10105profit rate =5 p.c.Capital400Profit = 55
Rate of surplus value in all cases = 50 p.c.
On 1 00, this makes a profit rate of 13 3/4 p.c.
If the total capital (400) of the class be considered, the profit rate would = 13 3/4 p.c. And capitalists are brothers. As a result of competition (transfer of capital or withdrawal of capital from one trade to the other), capitals of equal size in different trades, despite their different organic compositions, yield the same average rate of profit. In other words, the average profit, which F.I. a capital of £100 yields in a certain trade, it yields, not as a capital specifically applied to the same nor, therefore, in the proportion in which it of itself produces surplus value, but as an aliquot part of the total capital of the capitalist class. It is a share of the dividend on which will be paid in proportion to its size out of the total amount of the surplus value (or unpaid labour) produced by the total variable (laid out in wages) capital of the class.
If then 1, 2, 3, 4 in the above illustration are to make the same average profit, each category must sell its goods at £ 113 1/3. 1 and 4 will sell them at more than their value, 2 and 3 at less.
The price so regulated = the expenses of capital, + the average profit (F.I. 10 p.c.), is what Smith called the natural price, cost price, etc. It is the average price to which competition between different trades (by transfer of capital or withdrawal of capital) reduces the prices in different trades. Hence, competition reduces commodities not to their value, but to the cost price, which, depending on the organic composition of the respective capitals, is either above, below or = to their values.
Ricardo confuses value and cost price. He therefore believes that, if there were such a thing as absolute rent (i.e., rent independent of variations in the fertility of the soil), agricultural produce, etc., would be constantly sold for more than its value, because at more than cost price (the advanced capital + the average profit). That would demolish the fundamental law. Hence he denies absolute rent and assumes only differential rent.
But his identification of values of commodities and cost prices of commodities is totally wrong and has traditionally been taken over from A. Smith.
The facts are as follows:
If we assume that the average composition of all not agricultural capital is C 80, V 20, then the product (assuming that the rate of surplus value is 50 p.c.) = 110 and the profit rate = 10 p.c.
If we further assume that the average composition of agricultural capital is C 60, V 40 (in England, this figure is statistically fairly correct; rent for pasture, etc., has no bearing on this question, being determined not by itself, but by the corn rent), then the product, given equal exploitation of labour as above = 120 and profit rate = 20 p.c. Hence, if the farmer sells his agricultural product, for what it is worth, he is selling it at 120 and not at 110, its cost price. But landed property prevents the farmer, like his brother capitalists, from equalising the value of the product to the cost price. Competition between capitals cannot enforce this. The landowner intervenes and pockets the difference between value and cost price. A low proportion of constant to variable capital is in general an expression of the poor (or relatively poor) development of the productive power of labour in a particular sphere of production. Hence, if the average composition of agricultural capital is e.g. C 60, V 40, while that of not agricultural capital is C 80, V 20, this proves that agriculture has not yet reached the same stage of development as industry. (Which is easily explicable since, apart from anything else, a prerequisite for industry is the older science of mechanics, while the prerequisites for agriculture are the completely new sciences of chemistry, geology and physiology.) If the proportion in agriculture becomes C 80, V 20 (in the above premise), then absolute rent disappears. All that remains is differential rent, which I shall also expound in such a way as to make Ricardo’s assumption of the constant deterioration of agriculture appear most ridiculous and arbitrary.
Having regard to the foregoing definition of cost price as distinct from value, it should further be noted that, besides the distinction between constant capital and variable capital, which arises out of the immediate production process of capital, there is the further distinction between fixed and circulating capital, which arises out of the circulation process of capital. However, the formula would become too involved if I were to seek to incorporate this in the above as well.
There you have — roughly, for the thing’s fairly complicated — the critique of Ricardo’s theory. This much you will admit — that by taking into account the organic composition of capital, one disposes of a mass of what have so far seemed to be contradictions and problems.
Apropos. There are certain reasons, of which I shall inform you in my next letter, why I should be very glad if you would write me a detailed military critique (I shall deal with the political aspect) of Lassalle-Rüstow’s liberation nonsense.
Your
K. M.
Regards to the ladies.
Imandt has announced himself. Izzy leaves on Monday.
It will be evident to you that, given my view of ‘absolute rent’, landed property (under certain historical circumstances) does indeed put up the prices of raw materials. Very important, communistically speaking.
Assuming the correctness of the above view, it is by no means essential for absolute rent to be paid under all circumstances or in respect of every type of soil (even if the composition of agricultural capital is as assumed above). It is not paid when landed property does not exist, either factually or legally. In such a case, agriculture offers no peculiar resistance to the application of capital, which then moves as easily in this element as in the other. The agricultural produce is then sold, as masses of industrial products always are, at cost price for less than its value. In practice, landed property may disappear, even when capitalist and landowner are one and the same person, etc.
But it would be otiose to go into these details here.
Differential rent as such — which does not arise from the circumstance that capital is employed on land instead of any other field of employment — presents no difficulty in theory. It is nothing other than surplus profit which also exists in every sphere of industrial production wherever capital operates under better than average conditions. It is firmly ensconced in agriculture only because founded on a basis as solid and (relatively) stable as the different degrees of natural fertility of various types of soil.
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