The Transformation Problem Once More

Over the years, the issue of the transformation of values into prices has caused considerable controversy, including in Marx's time itself. Bohm-Bawerk believed that the divergence of values from prices proved that Marx’s theory was wrong. Some of Bohm's own students, such as Von Borkiewitz demonstrated that it was mathematically possible to use Marx's method, set out in Capital III, Chapter 9, to arrive at a set of prices, including input prices, that were transformed from values. In more recent years, there has been debate between the neo-Ricardians, who believed that the work of Pierro Sraffa made the LTV irrelevant, because it was possible to arrive at a set of prices without it, and Marxists who argued that the LTV remained fundamental. There has been debate amongst Marxists, too, over the interpretation of Marx's theory, and his method of transforming values into prices. A lot of this debate is misplaced because it is based on misconceptions of what Marx actually said.

For example, a large part of the debate has been about the fact that Marx does not, in Chapter 9, transform input prices alongside output prices. Some argue that this failure was due to Marx not recognising the need to do so; some that he did, but didn't get round to it; and others that Marx was right not to transform input prices, simultaneously with output prices. Alongside this is the supposed need to maintain a set of constants. For example, its argued that the amount of surplus value remains constant under a regime of prices of production compared to one where prices are determined directly by exchange values. This last claim is false. Marx directly refutes it. I want here to look at what Marx actually does say, in respect of this, and how it relates to what Marx says in general, which shows that he did recognise the need to transform input prices simultaneously with output prices.

What Marx does say, and what must follow from his theory, is that, at an aggregate level, the sum of values must equal the sum of prices of production. In other words, the sum of c + v + s is the same, whether it is measured by values or prices of production. In fact, c + v + s, is merely a quantity of abstract labour-time, so whether it is measured by value – which is nothing other than labour-time – or prices of production, derived from those values, it is tautologically true that the result must be the same. The only difference is how this labour-time is distributed under one regime as opposed to another. Nor can this be affected, as some claim by the introduction of credit money. The measurement of values and prices of production, using some money token, cannot change the underlying relation. A sum of value of £10, is equal to a sum of prices of production of £10, and if the value of money is halved by the introduction of credit money, this does not change this underlying equality. It simply means that the relation is expressed as a sum of value of £20, and a sum of prices of £20!

But, its precisely because of this equality, and because Marx recognises that transformed output prices also cause transformed input prices that the equation of surplus value under one regime as opposed to the other cannot follow, and Marx sets out precisely why that is. That also means that the rate of surplus value cannot be the same under the two regimes, which in turn means that the rate of profit cannot be the same under the two regimes. But, as Marx demonstrates, none of this undermines his theory one bit, or the conclusions he draws from it.

There are several places where Marx makes clear that he understood perfectly well that input prices must be transformed simultaneously with output prices. But, even were that not the case, its necessity is not only practically obvious, but both Marx and Engels, in their historical analysis of how prices of production come into existence, describe the actual situation in which both exchange values and prices of production exist side by side, because non-capitalist producers exist side by side with capitalist producers, although increasingly the former must become modified by the latter, precisely because non-capitalist producers are forced to accept market prices determined by capitalist producers on the basis of prices of production, and because non-capitalist producers themselves have to buy inputs from capitalist producers at market prices determined by prices of production.

I've set out the process by which Marx arrives at prices of production here - Prices Of Production – so I do not intend to rehash that explanation. But Marx, also specifically sets out that input prices must be simultaneously transformed alongside output prices. So, he writes,

Non-capitalist producers bought inputs from capitalist producers.
The inputs are priced according to Prices of Production, so even
when the peasant producer sells according to exchange value, a
part of their own output price has been determined by an input
price determined by prices of production.

“The foregoing statements have at any rate modified the original assumption concerning the determination of the cost-price of commodities. We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it. Our present analysis does not necessitate a closer examination of this point.”

Capital III, Chapter 9 

Marx insists that a characterising feature of capitalist production
is that its continuous.  Capital exists, he says simultaneously
in each of its different forms, and stages, so that inputs
incorporated into the final product, already simultaneously exist
in their reproduced form at the other end of the process, as well as
in the production process itself.  Taking capital as whole, the total
social capital, outputs exist simultaneously as inputs.

In other words, Marx is saying openly here that a capitalist who buys commodities as inputs, buys them not at their values, but at their price of production, i.e. at the output price of some other capitalist producer, and, because capitalist production is a continuous process, output prices are then simultaneously input prices. Because buyers purchase inputs at prices of production, even if this buyer is a non-capitalist producer, who would base their prices upon exchange values, their own prices are necessarily modified by the fact that they have bought inputs at prices of production not exchange values. This is why, Engels says in his Appendix to Capital III, that from the 15th Century, when capitalist production commences, the determination of prices by exchange values ceases. Exchange values can continue to form a large part of the prices set by non-capitalist producers, but the very fact that they buy inputs from capitalist producers means that their own output prices cannot be pure exchange values.

Marx elaborates on this in Capital III, Chapter 12, and here, not only does Marx set out why input prices must be transformed simultaneously with output prices, but he describes why this means that the surplus value differs in one regime compared to the other. He writes,

“We have seen how a deviation in prices of production from values arises from: 1) adding the average profit instead of the surplus-value contained in a commodity to its cost-price; 2) the price of production, which so deviates from the value of a commodity, entering into the cost-price of other commodities as one of its elements, so that the cost-price of a commodity may already contain a deviation from value in those means of production consumed by it, quite aside from a deviation of its own which may arise through a difference between the average profit and the surplus-value. 

It is therefore possible that even the cost-price of commodities produced by capitals of average composition may differ from the sum of the values of the elements which make up this component of their price of production. Suppose, the average composition is 80 c + 20 v. Now, it is possible that in the actual capitals of this composition 80 c may be greater or smaller than the value of c, i.e., the constant capital, because this c may be made up of commodities whose price of production differs from their value.”

Capital III, Chapter 12 

There can be no clearer statement by Marx than this that he recognised that transformed output prices become simultaneously transformed input prices, and that these transformed input prices, thereby form a part of the cost-price of the commodity in whose production they participate. In fact, as Marx says here, this means that even the commodity/industry that represents the average when measured in terms of prices of production may not be so when measured in terms of value, and vice versa.

But, what Marx then goes on to say, draws out the implications of this in relation to surplus value. Marx writes,

The prices of wage goods might be higher or lower when
 determined by prices of production, compared to if they
 are determined by values, because depending upon the
 composition of capital used in their production they may
 obtain a greater or smaller share of the total surplus value
 produced.  But, if the result is higher prices, workers
must perform more necessary and less surplus labour,
 and vice versa.  That affects the amount of surplus
value itself produced, and thereby affects the rate of profit.

“In the same way, 20 v might diverge from its value if the consumption of the wage includes commodities whose price of production diverges from their value; in which case the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.”

So, if prices become determined by prices of production rather than exchange values, the consequence may be that the price of wage goods rises. If the price of wage goods rises, then as Marx says,

“the labourer would work a longer, or shorter, time to buy them back (to replace them) and would thus perform more, or less, necessary labour than would be required if the price of production of such necessities of life coincided with their value.”

The worker thereby produces less surplus value than would be the case if prices were based upon values. So, the idea that there must be an equality between the sum of surplus value where prices are determined by values, and where they are determined by prices of production is false. Marx here directly refutes it. But, this has further ramifications.

The total of c + v + s remains the same under both regimes. But, v + s, must remain constant, because v +s is nothing other than the new value created by labour. It is equal to the labour-time performed by that labour. In fact, its because of this that, as Marx says above, if v is higher when determined by prices of production as opposed to values, then s must be smaller – the rate of surplus value must also then fall. But, if c + v + s remains constant, and v + s remains constant, then c must also remain constant.

This might seem to contradict what Marx says above in relation to the average capital, but it does not. The, average capital, under a regime of prices of production, is not the same capital as that which is the average capital under a regime of values, precisely because input prices are transformed simultaneously with output prices. The total of c, across all capitals, remains constant, but is differently distributed, across different capitals, as a result of the transformation of input prices.

But, if c remains constant, then any change in v, as a result of the transformation into prices of production, thereby increases or decreases both c/v, the organic composition of capital, and c + v, which means that it changes the rate of profit. If v increases, this will be combined with a fall in s to bring about a fall in the rate of profit, and vice versa.

But, none of this undermines Marx’s theory, or the conclusions drawn from it. As Marx points out these laws do not flow from the measurements of different components of capital by value rather than prices of production. They flow rather from the proportions of these components of capital one to another. It does not matter whether v is measured in value terms or in terms of prices of production. If v rises, s falls and vice versa, given a fixed length and intensity of working day. Whether we use values or prices of production, it remains the case that the rate of profit is determined by the ratio of s to c + v. Moreover, the laws that Marx described in Chapter 11, showing the effects of wage rises and falls on capitals of different compositions remain entirely in force, so that a wage rise for capitals of average composition cause no change in the price of production, whereas they cause the prices of commodities produced under conditions of a lower organic composition to rise, and those produced under conditions of a higher organic composition to fall.

“For instance, in a capital of the given composition 80 c + 20 v, the most important thing in determining surplus-value is not whether these figures are expressions of actual values, but how they are related to one another, i.e., whether v = l/5 of the total capital, and c = 4/5. Whenever this is the case, the surplus-value produced by v is, as was assumed, equal to the average profit.”