# [Marxism] The "transformation problem" and the Marxian law of value, part 10

Jurriaan Bendien bendien at tomaatnet.nl
Tue Mar 30 19:11:54 MST 2004

```I thought I would post the final sections of the draft of my article "The
"transformation problem" and the Marxian law of value". Maybe it is a bit
turgid and sketchy but I haven't had the time to write up the article
properly yet - JB).

16. System of values and system of prices

Mathematics offers us a way of discovering, step by step, facts and
implications inherent in the statement of a problem which are not
immediately obvious. Typically, one imports some experiential evidence, and
then verifies it by means of logical proofs showing the quantitative
relationships which are necessarily involved. But a mathematical theory
aiming to explain and predict events in the world about us, typically deals
with a simplified model of the world, a mathematical model, in which only
those factors thought to be relevant to the behaviour under consideration
enter. The selection of those factors requires assumptions which go beyond
the mathematical operations performed on them.

A mathematical statistician (like Von Bortciewicz) would be likely to say,
"give me some observations, some counting units, some definitions, some
concepts, and I will crunch the numbers and compute likelihoods for accurate
estimates, in order to show how the different variables must necessarily
relate". But a research statistician would raise the question of what
exactly the mathematical statistician is counting anyway, and why he is
doing it, i.e. what are the measurement units used, how are they defined,
and what is the theory behind them in terms of which they are defined.

An aggregate in accounting or statistics must be meaningful, and in order to
be meaningful, discrete, measurable counting units with an invariant meaning
must be specified, in terms of a theory that defines  distinctions
explaining why those counting units are meaningful, significant and
relevant. Because this question was never addressed correctly, what came to
be known as the "transformation problem" could never be solved from the
start, by definition; it had, at best, the status of a pseudo-problem, which
evaded the real problem that Marx was concerned with.

That is to say, Von Bortciewicz just didn't really understand that Marx's
problem concerned the dynamics of the share-out of surplus-values under
competitive conditions. Consequently he accepts as an ontological principle
that total values must equal total prices (effectively a Dobbsian theory of
value), seeing the deviation of prices from values only as a statistical
aggregation problem. Yet that identity is assumed by Marx only in a
simplified model, in order to explain the distribution of realised
surplus-values, and the tendency towards the equalisation of the rate of
profit, which occurs through the removal of barriers to competition and
trade, locally, nationally and internationally, in a way which expands the
market.

In fact, Marx's simplified model assumed perfect competition, free trade and
a general rate of profit. But there is no perfect competition or free trade,
and the general profit rate exists only as an average share-holder's return
related to the rate of interest. Hence, the equalisation of the rate of
profit (the reduction of unequal exchange) remains only a tendency,
consequent on the removal of barriers to competition. Competition in trade
inherently involves attempts to block competitors in various ways for the
purpose of obtaining competitive advantage and reap surplus-profits, a fact
of decisive importance in understanding the nature and dynamics of modern
imperialism. That is why the free-trade versus protectionism debate is as
old as the existence of commercial trade.

Because of his ontological assumption about the nature of the problem, Von
Bortciewicz assumed that a cost-price in the "system of values" is different
from the cost-price in the "system of prices", and that prices merely
redistribute values. But as soon as we admit that there is a temporal
sequence whereby goods must be produced before they are exchanged, and which
involves

- the acquisition of priced inputs,
- the production of a new output value, using inputs withdrawn from the
market and consumed in production, the price of which can only be
probabilistically estimated prior to payment for output upon final sale,
- and the final sale of a new output produced using the inputs,

then total values and total prices cannot logically be equal, since such an
aggregation abstracts from the temporal sequence involved. Another way of
putting it is that the total values/total prices identity assumes that all
exchange is either equal exchange or that prices just redistribute values.

But in reality, nothing in the trading process remains constant beyond the
human necessity to produce and consume in definite magnitudes, and
consequently the necessity to work in order to trade in products. That is to
say, the necessary deviation of price from value which Marx proves, cannot
be cancelled out in the calculation of an aggregate of total prices, such
that total prices less total values equal zero, because (1) that deviation
occurs in the medium to time, and (2) at the level of the whole economy,
which doesn't simply consist of production, the deviation is not simply an
"arithmetic deviation from the average". Rather, the deviation of prices
from values stems from the basic economic reality of competing private
producers for market shares, and Marx's theory can only explain the
movements and changes in relative prices over time. Social accounts could at
best provide indicators of the trend in basic relationships, but not provide
any mathematically exact consolidation of values and prices. I will try to
give some arguments to show why this is so.

The ideal in capitalist chrematistic activity as applied to production, is
as we saw, to produce the maximum output value with the lowest input costs,
using the maximum surplus-labour within the shortest possible production
period, to realise the maximum net income. Already in Capital Volume 1, Marx
wrote: "The exceptionally productive work operates as intensified work; it
creates in equal intervals of time higher values than the socially average
output of the same kind. (...) Hence the capitalist who applies the improved
method of production, appropriates a larger part of work days as
surplus-labour than the other capitalists in the same branch of production."
(p. 302, translation corrected). That is exactly how the law of value
asserts itself under capitalist conditions: the production of an output
below the average socially necessary labour-time, in order to maximise the
positive differential between output prices realised and input prices paid.
The producers have no control over the cost structure of production, nor
over the average market prices for output. All they can do is to make the
production process more efficient and effective.

Marx makes this point perfectly explicit:  "The law of the determination
(Bestimmung) of value by work-time, a law which brings under its sway the
individual capitalist who applies the new method of production, by
compelling him to sell his goods under their social value, this same law,
acting as a coercive law of competition, forces his competitors to adopt the
new method. (...) The value of commodities is in inverse ratio to the
productiveness of work. And so too, is the value of the commodity
labour-power, because it is determined by the values of commodities.
Relative surplus-value is, on the contrary, directly proportional to the
productive power of work" (Progress edition, p. 302, translation corrected).

This is just to say that the "pooling metaphor" used by the Marxists
confused by the transformation problem, however attractive it may sound,
fails to correctly describe the real economic dynamic of the law of value.
Hans Dieter Meier commented on this passage by Marx long ago: "This
[statement] explains unambiguously, that the extra-surplus-value [realized]
is produced by capitalists operating with superior productive capacity
themselves; it does not somehow originate through a "transfer" of volumes of
surplus-value produced by other capitalists. The work time, which the least
productive private producers in [a] branch [of production] perform in excess
of the economically necessary worktime, does not count as economic,
therefore does not form value which in other branches (really to other
capitalists in the same branch) can be siphoned off." This contrasts with
Von Bortciewicz's implicit idea that prices redistribute values.

Marx's argument is, that at any point in time, the unit labour-costs of some
producers in producing a given output reflect labour expenditures below the
average socially necessary labour-time, resulting in the realisation of a
larger surplus-value as profit, while the unit labour-costs of some
producers reflect labour expenditures above the average socially necessary
labour-time, resulting in the realisation of a lower surplus-value as
profit. The whole point however is, that the Marxian "value" of that output,
refers only and exclusively to the "average" socially necessary labour-time
required to match a given demand, i.e. an average unit labour-cost, which
some producers will fall below, and others will exceed. It does not refer to
the total socially necessary labour-time required to match a given demand.

In that case, any simultaneous equation starting out from the assumption
that total prices equals total values, is really irrelevant to the
theoretical problem, since at any particular time, market sales will not
recognise a fraction of production values at all, and that discrepancy will
exist continuously, because of the dissynchrony between valorisation and
realisation, i.e. (1) the temporal lag between the production of new output
and the final sales of that output in an uncertain market, and (2) competing
private producers who operate at different levels of productivity to create
outputs for the same  market.

In the Grundrisse, Marx notes explicitly that "This locational moment -- the
bringing of the product to market, which is a necessary condition of its
circulation, except when the point of production is itself a market - could
more precisely be regarded as the transformation of the product into a
commodity. Only on the market is it a commodity." He adds though that
"Whether or not this forms a particular moment is a matter of chance. If
capital produces to order, then neither this moment, nor the transformation
into money, exists as a particular moment for it. Work done to order, i.e.
supply corresponding to a prior demand, as a general or predominant
situation, is however not characteristic of large-scale industry, and in no
way arises from the nature of capital as a condition." If that wasn't the
case, there would exist no futures and derivatives market; and work done to
order prevails only in a socialist-type economy. The production of consumer
staples in monopolised markets may, of course, create the appearance of
"work done to order", but consumer staples are only a small portion of total
consumption, and even then the results of competition in the capitalist
system as a whole may suddenly change the growth rate of demand.

Moreover, if the number of transactions in the sphere of circulation is a
multiple of the number of transactions in the sphere of production, a
multiple which increases enormously in the attempt to reduce the
turnover-time with respect to production time and circulation time, then the
very ability of money-prices to represent any value-price identity of the
gross output, even with an accounting year, is rendered improbable for that
very reason. If deregulated international money and capital markets exist,
paid labour expenditures and productive assets indeed can be devalued and
revalued simply though fluctuations in the currency exchange rates.

In this context, it is very important to understand that Marx's theory of
value refers not only to the source of new value, but also to the necessity
of the conservation of value, and that, in an economy where productivity has
risen so high that a relatively small fraction of total labour expenditure
can produce all consumption requirements, the resultant large increase in
the services sector is to a large extent concerned precisely with the
conservation of value, as an activity occurring separately from production
of tangible net additions to material wealth. Ultimately however, the value
of previous outputs of production is regulated, in Marx's theory, by
replacement costs at current market values.

Von Bortciewicz's dualistic interpretation, as Alejandro Ramos emphasised in
a careful philological examination of Marx's own text, formed the basis for
the idea that input values must be transformed into input prices, and
consequently that production prices must be found for inputs, just as they
are established for outputs. But Von Bortciewicz's  interpretation ignores:

- that cost-price and production-price apply to the valuation of the new
output of "production", i.e. to the valuation of that new output by the
market in which it is sold, and not to inputs;
- that a new output value exists, as a fraction of total labour-hours
resulting in the new output, before that output attains its final selling
price and is paid for,
- that the "values" Marx is concerned with here, apply to only the sphere of
production, regarded as the source
of net new additions to material wealth, for use or consumption
(surplus-values are realised in exchange, but have their ultimate source in
production)
- that Marx aims to show that what happens in production, continuously
constrains and determines what can happen in circulation, and not the other
way round, since in the final instance, all exchange transactions involving
money presuppose something tangible which can be exchanged, i.e. a producer
or consumer good or service.

As we have saw, Marx offered an explanation of how the production process of
a whole economic community becomes subordinated to a chrematistic operation,
and what consequences that has, for the direct producers and for the future
of socio-economic development in its totality. In great detail, he provided
an exposition of the sheer human complexity of the meaning of the exchange
which occurs between capital and labour, and between
the owning class and the producing class. That exchange involves two
separate types of transactions: M-C (the exchange of money for inputs such
as labour-power, raw materials, fixed equipment and ancillary services) and
C'-M' (the exchange of a new and different output, produced by those
inputs). Marx then notes, that M' is systematically larger than M, and
explains that this is what motivates the investor, who (i)obtains more money
from investing in production, than he started out with, and (ii) is required
to keep realising an increment of a given magnitude if he doesn't want to be

The question then arose, how this is possible, and Marx was quite clear that
it is not an accident, a stroke of luck, a moral vindication, or just a
gambling success. It required gaining, maintaining and enforcing the command
over a workforce. Once command is gained over a workforce, this workforce is
able to create a new value in production, which is potentially greater than
the initial outlay of capital that had to be invested, such that the
invested capital is, if everything goes well, recouped through sale of
products with the addition of an incremental value, i.e. profit.

The conservation and expansion of value therefore rests in the last instance
on a power relationship between social classes and nations, and if the
incremental value is not there, the investor withdraws his capital, sooner
or later, or fires the worker. The source of the incremental value is
surplus-labour, an amount of labour performed which has a value exceeding
the wage or salary paid to employees. It is this labour which conserves the
value of productive assets held, and creates a new additional value, a
profit, to which the private enterprise owner has a legal entitlement in
virtue of his asset ownership. All this is perfectly obvious as soon as
workers go on strike, and the valorisation process stops.

That already showed that the real "dualism" is different from what Von
Bortciewicz thinks it is; in the real world, the acquisition of inputs
through purchase (M-C) is separated in time, from the finalisation of actual
cost-prices,
subsequent to sale of output (C'-M'), and the whole chrematistic process
involves a double appropriation: first an appropriation of output values
created by employees, and secondly an appropriation of income through the
exchange (sale) of those outputs in the market, for a sum of money. As a
corollary, the accumulation of capital involves both (1) the valorisation of
capital in production, (2) the realisation of surplus-values in circulation,
and (3) the reinvestment of realised additional capital into production or
other assets.

When workers go on strike or stage a "go-slow", command over labour is lost,
therefore value is no longer conserved and created, and investors complain,
because they are losing money. But why are they losing money ? Because the
first act of appropriation can no longer occur. At most, they could trade
the stock of
output created before the strike started, and thus appropriate income
through exchange, but after a while, unless the workers get back to work,
there's nothing more to exchange, except the plant & equipment, plus
remaining inventories.

The double appropriation which objectively happens, from a economic point of
view, is just hidden by the accounting process itself, since operating costs
are deducted from gross income
receipts by the enterprise, such that the separate sets of transactions M-C
and C'-M' appear as one unitary and ongoing process, in which the management
is constantly trying to juggle costs and revenues relating to
various aspects of production, to improve their future business position in
response to market fluctuations.

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