“The Ricardian school failed about the year 1830, being unable to solve the riddle of surplus-value. And what was impossible for this school, remained still more insoluble for its successor, vulgar economy. The two points which caused its failure were these:By the phrase the “law of value” Engels means the assumption underlying this problem: that commodities tend to exchange at their true labour values.
1. Labor: is the measure of value. However, actual labor in its exchange with capital has a lower value than labor embodied in the commodities for which actual labor is exchanged. Wages, the value of a definite quantity of actual labor, are always lower than the value of the commodity produced by this same quantity of labor and in which it is embodied. The question is indeed insoluble, if put in this form. It has been correctly formulated by Marx and then answered. It is not labor which has any value. As an activity which creates values it can no more have any special value in itself than gravity can have any special weight, heat any special temperature, electricity any special strength of current. It is not labor which is bought and sold as a commodity, but labor-power. As soon as labor-power becomes a commodity, its value is determined by the labor embodied in this commodity as a social product. This value is equal to the social labor required for the production and reproduction of this commodity. Hence the purchase and sale of labor-power on the basis of this value does not contradict the economic law of value.
2. According to the Ricardian law of value, two capitals employing the same and equally paid labor, all other conditions being equal, produce the same value and surplus value, or profit, in the same time. But if they employ unequal quantities of actual labor, they cannot produce equal surplus-values, or, as the Ricardians say, equal profits. Now in reality, the exact opposite takes place. As a matter of fact, equal capitals, regardless of the quantity of actual labor employed by them, produce equal average profits in equal times. Here we have, therefore, a clash with the law of value, which had been noticed by Ricardo himself, but which his school was unable to reconcile. Rodbertus likewise could not but note this contradiction. But instead of solving it, he made it a starting point of his Utopia (Zur Erkenntniss, etc.). Marx had solved this contradiction even in his manuscript for his ‘CRITIQUE OF POLITICAL ECOMONY.’ According to the plan of ‘CAPITAL,’ this solution will be made public in Volume III. Several months will pass before this can be published. Hence those economists, who claim to have discovered that Rodbertus is the secret source and the superior predecessor of Marx, have now an opportunity to demonstrate what the economics of Rodbertus can accomplish. If they can show in which way an equal average rate of profit can and must come about, not only without a violation of the law of value, but by means of it, I am willing to discuss the matter further with them. In the meantime, they had better make haste. The brilliant analyses of this Volume II and its entirely new conclusions on an almost untilled ground are but the initial statements preparing the way for the contents of Volume III, which develops the final conclusions of Marx's analysis of the social process of reproduction on a capitalist basis.” (Engels 1907 : 27–29).
The problem can be sketched as follows:
(1) in volume 1 of Capital it is assumed that commodities tend to have prices at their true labour values, so that these prices also reflect the surplus value embodied in the commodities.Assumption (1) is crucial.
(2) in turn surplus value determines profits, and it should follow that in such a system different profit rates prevail reflecting the different surplus values, e.g., an industry with much more constant capital and very little variable capital should have a lower profit rate than a labour-intensive industry with a great proportion of variable capital.
(3) yet, under capitalism, competition supposedly tends to create a uniform average rate of profit and so neither (1) or (2) can be true.
It was later phrased by Marx in volume 3 in this way:
“The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).By volume 3, Marx tried to argue that this assumption was only an empirical reality in the pre-modern world of commodity exchange, and not in 19th century capitalism where prices of production were the anchors for the price system.
But if it were really the case that Marx in volume 1 of Capital thought that the assumption quoted above only applied to the pre-modern world of commodity exchange, then the whole challenge Engels made to the world in the preface to volume 2 of Capital becomes utterly stupid and makes no sense. For then there simply was no transformation problem. No great problem to solve.
In reality – and this is the crux – Marx left everyone with the impression that volume 1 of Capital was asserting that commodities tended to exchange at their true labour values, and that this was a “law of value” in 19th century capitalism. That is why the transformation problem was raised as a challenge for Marxist theory in the first place.
Engels edited and published volume 2 of Capital in July 1885 (Wheen 2001: 385), but volume 3 of Capital did not appear until November 1894 (Wheen 2001: 385) – nearly ten years later. One wonders whether Engels – as he read the catastrophe that was Marx’s draft of volume 3 – delayed publication when he realised that when it was published it would cause derision and prove that Marx’s law of value in volume 1 was bankrupt. Engels also vehemently refused to relate Marx’s solution to the transformation problem to any private correspondents (even Marxists) or to have it printed separately before the publication of volume 3 (Howard and King 1989: 24–25).
At any rate, when volume 3 was published that is essentially what happened, as reviewers like Achille Loria, Werner Sombart, Conrad Schmidt and Eugen von Böhm-Bawerk pointed to the terrible contradictions.
In his Supplement to volume 3, Engels’ last ditch defence of the “law of value” in volume 1 was to retreat into the idea that commodities only ever tended to exchange for their true labour values in the pre-modern world of commodity exchange and that this had ended between about the 15th and early 19th centuries. But, then, why, if that had been his and Marx’s view all along, had there been any need to make such a big deal of the transformation problem in the first place?
Why did Marx never give a clear and explicit statement in volume 1 of Capital to the effect that the law of value there was not meant to apply to 19th century capitalism? Why did he give example after example implying that 19th century capitalism was subject to the law of value?
Engels, Friedrich. 1907 . “Preface,” in Karl Marx, Capital. A Critique of Political Economy. The Process of the Circulation of Capital (vol. 2; trans. by Ernst Untermann from 2nd German edn.). Charles H. Kerr & Co., Chicago, and Swan Sonnenschein & Co., London. 7–29.
Howard, Michael Charles and John E. King. 1989. A History of Marxian Economics. Volume I, 1883–1929. Princeton University Press, Princeton, NJ.
Wheen, Francis. 2001. Karl Marx: A Life. W. W. Norton & Company, New York and London.