Sunday 19 September 2010

Value Theory, The Transformation Problem, & Domestic Labour - Part 1

Value Theory And The Transformation Problem

I was reading a review of “The Value Controversy” by Ian Steedman et al (NLB), and “Value: the Representation of Labour in Capitalism” Diane Elson Ed. CSE Books, recently. The review titled “The Remystification of Value” was by Barbara Bradby in Capital & Class 17 (Summer 1982). The two books essentially deal with the same subject, the debate over Marx's Labour Theory Of Value, and its relevance. Steedman was the champion of those Sraffian economists who argued that the LTV was no longer necessary, because Sraffa had shown how the same results could be achieved using Input-Output tables of physical quantities provided some basic assumptions were made. I want here to deal with one aspect around, which much of that debate centred – the question of the Transformation of Values into prices – but also to take up some of the points that Bradby herself makes in relation to Value Theory from a feminist perspective.

Some years ago I began to look again at the so called “Transformation Problem” myself as part of an ongoing analysis of Theories of Value. The task was made easier – particularly given that I am not an advanced mathematician – by the development of powerful tools as standard within spreadsheet programmes such as Excel. The basic problem is this. Marx throughout Capital argued on the basis that commodities exchanged at their Exchange Value. However, a contradiction arises, that he and other Classical Economists were aware of. That contradiction is that in reality different branches of industry operate with markedly different ratios of Constant (Machinery, Building, Materials) Capital to Variable (Labour-Power) Capital. On the assumption that all Labour-Power is exploited at the same rate, then, if all commodities sold at their exchange values, this would result in large variations in the rate of profit. For example assume two companies producing each 10,000 units:

1) C2000 + V4000 + S4000 = K10,000 = R66.6%; Price per unit = £1
2) C4000 + V2000 + S2000 = K8,000 = R33.3%; Price per unit = £0.80


In short, the higher the organic composition of Capital, the higher C in relation to V, the lower the rate of profit. This contradicts the idea of an average rate of profit, and the observable fact that Capital will move to where the rate of profit is higher so that Supply and Demand will tend to bring about this average rate, as market prices adjust accordingly, and thereby diverge from Exchange Values.

Marx was criticised by Bohm-Bawerk on this basis, and other critics believed that it showed his theory was flawed. In fact, even before he published Volume One of Capital, he had already solved this problem. The solution was quite simple:

Marx argued that the process of the circulation of Capital has to be viewed as a whole. On that basis each individual Capital obtains a share of the total amount of Surplus Value extracted from workers, and does so in proportion to the amount of Capital it throws into that overall procees. This is important theoretically also, because it provides a basis for the solidarity of Capital as a whole as against Labour. If we do that in the above example we get:

C6000 + V6000 + S6000 = K18,000 = R50%. If each Capital then makes this average 50% profit we get:

1) C2000 + V4000 + S3000 = K9,000 = R50%; Price per unit = £0.90
2) C4000 + V2000 + S3000 = K9,000 = R50%; Price per unit = £0.90


Now, Marx realised that this solution was only a partial solution, because these changed prices have only been changed as far as Output Prices, but these outputs, are also inputs. A full resolution requires that the values of C and V also have to be changed to reflect these prices rather than values, and this will in turn change the organic composition of Capital, and so on. It was, in fact, one of Bohm-Bawerk's students – Von Bortkiewicz – who first put forward a mathematical solution to this problem, and later Francis Seton provided a further mathematical solution. But controversy continued over the matter. In the review referred to above an article by Anwar Shaikh in the latter book essentially puts forward the solution that I came to in resolving the equations whilst maintaining the basic requirements of the theory – that total Exchange Value Equals Total Prices, that Total Surplus Value equals Total Profits, that the Rate of Exploitation (Ratio of Surplus Value to Variable Capital) is held constant, and finally that real wages are held constant (achieved by the requirement that Money Wages continue to buy the same quantity of wage goods).

I set up a simple two Department model on this basis, and then used the “Solve” function on Excel to arrive at a set of prices that achieved all these conditions. Methodologically, I prefer this iterative solution to soluitons based on solving simultaneous equivalent, because it reflects what I believe is the way in which the problem, the transformation of Values into prices actually takes place in the economy. I will have to set this up again as the original spreadsheets have disappeared. There was no problem in achieving this objective, which demonstrates that the “problem” is solvable, because I had not set up any specific relations or quantities to achieve the result. The only thing that did not conform to Marx's theory was that the Rate of Profit, calculated on prices, differed from the Rate of Profit calculated on Exchange Values. But, as Shaikh argues, this is no objection, precisely for the reason I have set out previously – the Average Rate of Profit only exists as an abstraction not a reality. At any one time there is no single Rate of Profit that applies even across sectors, let alone across all firms. It is a purely abstract calculated figure to indicate the idea that Capital making profits below this level will tend to move away from it, and into areas where above average rates are being made, and indeed it is this very process that is required to establish any materiality to the abstraction, as changes in the level of Supply that result from such movements bring about changes in market prices, and profits.

Forward To Part 2

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