The Absurdity of the Transformation Problem

It follows clearly if you accept the interpretation of Marx’s law of value (as he expressed it in volume 1 of Capital) by Engels in his “Supplement and Addendum” to Volume 3 of Capital (see my discussion of it here).

According to this interpretation, the view that labour values are anchors for individual prices and that prices tend to correspond to labour values can only be held to be true for the pre-modern modern of commodity exchange before about the 15th century. This law of value ceases in the advanced capitalist world where prices of production become the anchors for the price system.

In such a world of simple craft-based, peasant-based or early wage-labour-based commodity production, Marx thought that the ratio of variable to constant capital was relatively high:

“The class of wage-labourers, which arose in the latter half of the 14th century, formed then and in the following century only a very small part of the population, well protected in its position by the independent peasant proprietary in the country and the guild-organization in the town. In country and town master and workman stood close together socially. The subordination of labour to capital was only formal—i.e., the mode of production itself had as yet no specific capitalistic character. Variable capital preponderated greatly over constant.” (Marx 1906: 809–810).

This latter phenomenon was, according to Marx, predominant.

Moreover, in this pre-modern world competition was severely restricted:

“The exchange of commodities at their values, or approximately at their values, requires, therefore, a much lower stage than their exchange at their prices of production, which requires a relatively high development of capitalist production.

Whatever may be the way in which the prices of the various commodities are first fixed or mutually regulated, the law of value always dominates their movements. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.

Aside from the fact that prices and their movements are dominated by the law of value, it is quite appropriate, under these circumstances, to regard the value of commodities not only theoretically, but also historically, as existing prior to the prices of production. This applies to conditions, in which the laborer owns his means of production, and this is the condition of the land-owning farmer and of the craftsman in the old world as well as the new. This agrees also with the view formerly expressed by me that the development of product into commodities arises through the exchange between different communes, not through that between the members of the same commune. It applies not only to this primitive condition, but also to subsequent conditions based on slavery or serfdom, and to the guild organisation of handicrafts, so long as the means of production installed in one line of production cannot be transferred to another line except under difficulties, so that the various lines of production maintain, to a certain degree, the same mutual relations as foreign countries or communistic groups.” (Marx 1909: 208–210).

But the whole transformation problem depends on assuming that we are dealing with an advanced capitalist economy where the organic composition of capital is highly variable in many different industries and where competition can drive the rate of profit to an average level.

But if we were to accept Engels’ solution as offered in the “Supplement and Addendum” and taken from comments by Marx in Chapter 10 of volume 3 of Capital as quoted above, then it follows that the whole transformation problem as applied to modern advanced capitalism was utterly irrelevant and unnecessary, because there is no need to derive prices of production from individual labour values of commodities in the modern world.

The very fact that modern capitalism has highly variable organic compositions of capital and strong competition means that Marx should have seen from the beginning that there was no transformation problem. Marx could easily have stated this in volume 1. There was no need to defer a non-existent pseudo-problem to volume 3. There was no need for Engels to announce a competition in his preface to volume 2 of Capital asking readers to try and solve the transformation problem, because there was no such problem.

Of course, the reality is that Marx, when he wrote volume 1 of Capital, did actually think his theory of value there was meant to apply to 19th century capitalism. That is exactly why he and Engels did take the transformation problem seriously.

Eventually, however, Marx realised that he was unable to come to any convincing solution that he wished to publish, except the ridiculous attempt to defend the law of value in an aggregate sense, which was indeed derided by his critics.

His feeble attempts were later published by Engels after Marx’s death and Engels desperately looked to the passage of Marx in Chapter 10 in volume 3 of Capital I have quoted above. The new solution was then to claim that Marx’s law of value in volume 1 had never been meant to apply to 19th century capitalism in the first place and that it was only ever valid for the pre-modern modern of commodity exchange before the 15th century.

Engels himself admitted this in a letter he wrote to Werner Sombart (1863–1941) on March 11, 1895 about the labour theory of value:

“When commodity exchange began, when products gradually turned into commodities, they were exchanged approximately according to their value. It was the amount of labour expended on two objects which provided the only standard for their quantitative comparison. Thus value had a direct and real existence at that time. We know that this direct realisation of value in exchange ceased and that now it no longer happens.”
Letter, Engels to W. Sombart, from London, March 11, 1895
https://www.marxists.org/archive/marx/works/1895/letters/95_03_11.htm

If this was what Marx thought in 1867, why, then, did anyone need to worry about the transformation problem?

Addendum
I find it interesting that Eugen von Böhm-Bawerk was fully aware of Marx’s attempt to salvage the law of value in volume 1 by applying it only to an earlier, less developed period of capitalist production.

Böhm-Bawerk listed Marx’s various feeble attempts to salvage the law of value in volume 3 of Capital as follows:

First argument: even if the separate commodities are being sold either above or below their values, these reciprocal fluctuations cancel each other, and in the community itself—taking into account all the branches of production—the total of the prices of production of the commodities produced still remains equal to the sum of their values (III, 188).

Second argument: the law of value governs the movement of Prices, since the diminution or increase of the requisite working time makes the prices of production rise or fall (III, 208, 211).

Third argument: the law of value, Marx affirms, governs with undiminished authority the exchange of commodities in certain ‘primary’ stages, in which the change of values into prices of production has not yet been accomplished.

Fourth argument: in a complicated economic system the law of value regulates the prices of production at least indirectly and in the last resort, since the total value of the commodities, determined by the law of value, determines the total surplus value. The latter, however, regulates the amount of the average profit, and therefore the general rate of profit (III, 212).” (Böhm-Bawerk 1949: 32).

With respect to the third argument – what Engels seized on and made the centrepoint of his defence of Marx in the “Supplement and Addendum” – Böhm-Bawerk, to his credit, was not fooled by this argument. Quite simply, Böhm-Bawerk rightly noted that Marx provided no good empirical evidence for it (Bawerk 1949: 43).

Furthermore, Bortkiewicz, Dimitriev and Tugan-Baranovsky showed that Marx’s first argument was untenable.

The second argument simply reduces to saying that labour costs strongly influence price movements. This is a trivial observation and does not vindicate Marx’s labour theory of value. Non-labour factor input costs also strongly influence price movements even when labour prices stay the same.

Even worse, this second argument is flawed by the way in which Marx held that certain types of factor inputs only have “imaginary” money prices with no true labour values (such as land, metals in situ, and timber in virgin forests, etc.). But many such goods are used in production processes that and still from part of the monetary costs of production for capitalists and are used to calculate cost-based mark-up prices, and so changes in, for example, land prices when land is a costs of production could also drive price movements.

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949. “Karl Marx and the Close of His System,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1909. Capital. A Critique of Political Economy (vol. 3; trans. Ernst Untermann from 1st German edn.). Charles H. Kerr & Co., Chicago.