Sunday, December 6, 2015

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.

13 comments:

  1. Dear LK, I appreciate your writing but on this issue I think you are too quick to dismiss and do not appear really interested to find out whether there some interesting scientific content beneath the labour theory of value inherited from classical political economy.

    I would argue that it is indeed possible to formulate scientifically testable theory based on some of the insights from vol. 1 while abandoning parts of vol. 3. If we view prices are random variables of each commodity-type, then mathematicians Farjoun and Machover showed in 1983 how these random prices are statistically determined by the labour required to produce the commodities. In 1984 their predictions were also verified independently by economist Anwar Shaikh at the New School.

    A more recent multicountry study has also tested some of their predictions. Cf. http://reality.gn.apc.org/econ/Zachariah_LabourValue.pdf

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    1. This recent paper by economist Robert L. Vienneau is also relevant:
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2519466

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  2. Your title is dead on. As a show of gratitude, I'll try to be brief. Or at least briefer than usual.

    This law of value ceases in the advanced capitalist world where prices of production become the anchors for the price system.

    Close: Rather than ceasing outright, it becomes obscured by other factors. Nevertheless, the same aspect continues to operate, constraining the system in much the same way as before.

    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.

    Properly speaking, he did -- hence why he never mentions (or names) it. It is the provenance of later theorists.

    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.

    Engels didn't invite readers to "solve the transformation problem"; rather, his challenge was to "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 on the very basis of it."

    As with Marx, Engels never frames anything as "the transformation 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.

    Correct!

    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.

    No, that's incorrect.

    Attempting to interpret Marx through the eyes of Hume or Comte is destined to fail. The only way the theory makes sense is through a realist ontology, which among other things necessitates "the epistemological commitment to regard theories as constituting knowledge of both observables and unobservables." (quoted from the Stanford encyclopedia of philosophy article on scientific realism.)

    I can recommend some very good books on the subject, if you wish.

    But the point is, saying the law of value vanishes because it is no longer apparent makes about as much sense as claiming a man actually loses his face during a game of peek-a-boo, or that gravity does not affect airplanes.

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

    Not quite; their demonstrations mistake Marx for a dual-system theorist.

    Here's something that should interest you, since you have commented before on Engels's editing: According to a survey of the original documents via the MEGA, one of the passages he omitted makes the single-system nature of the theory absolutely clear. Alejandro Ramos discusses this in a 1998 paper ("Value and Price of Production: New Evidence on Marx’s Transformation Procedure"), but you can also see it referenced in this document, on page 18.

    The "K" variable (cost-price) is indeed the same for both values and prices of production, which means the single-system theorists were right. And, as we've seen, the transformation problem does not exist for single-system interpretations of the theory.

    So, you're 100% correct to question why anyone was worried about the alleged transformation problem. Indeed, no one was.

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    1. (1) your comment just consists in denying that Marx meant to apply the view that labour values determine individual commodity prices to 19th century capitalism in vol. 1. False.

      (2) Gravity exists with a huge amount of evidence; Marx's law of value does not. It is utterly incoherent.

      (3) "So, you're 100% correct to question why anyone was worried about the alleged transformation problem. Indeed, no one was."

      lol... Did Conrad Schmidt, Landé, Lexis, Skworzoff, Stiebeling, Julius Wolf, Fireman, Lafargue, Soldi, Coletti, Graziadei and Achille Loria slip into the memory hole?

      (4) What is more, the view you were endlessly expressing on this blog was this:

      “>In vol. 1, goods have at
      >least a tendency to exchange at
      >pure labour values

      We've been over this a hundred times. It's a simplification for pedagogical purposes that is explicitly unrealistic.”

      http://socialdemocracy21stcentury.blogspot.com/2015/08/marxs-capital-volume-1-chapter-8.html?showComment=1438715789086#c514791626841157667

      Now -- in the face of the evidence against this view -- you have quietly abandoned it and admitted that Marx and Engels did think it applied to the pre-modern world of commodity exchange. You continue to maintain the view, however, that Marx never mean this to apply to 19th century capitalism in vol. 1 in the face of all the evidence. Laughable.

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    2. (1) How do you mean?

      (2) This assertion is problematic in the face of centuries of evidence supporting Marx's position. Remember back when I tried to share some empirical work with you and you just ignored it for months? Yeah, you've definitely killed your own credibility on this point.

      (3) First off, Lexis actually more or less figured out the OCC thing between volumes II and III and Engels spoke highly of him as a result. But you're right, a lot of other people were misunderstanding the theory early on, and many of them were taken to task for it even back then. I think it's clear from the context of the discussion that I'm talking about Marx and Engels with regard to the TF, contrary to your baseless claims that they "feebly" "scrambled for" ways to solve some intractable problem, etc.

      (4) Yes, it is explicitly unrealistic to suppose that prices of production are equal to values in 19th century (or later) capitalism, as Marx does in volume 1. Because they empirically and plainly do not. I honestly don't know how I could be any clearer on this point. If you have any suggestions, I'm all ears. But I honestly have no idea what kind of argument you'll actually listen to, since you've very inconsiderately ignored many of the questions I've been posing -- this among them.

      And yes, I'm sure you actually do find all this "laughable." I do enjoy making people laugh, and apparently you've been holding your sides for nearly a whole year, now. This is very gratifying to me in one sense, but in another I really do wish you'd get serious about this discussion.

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    3. (4) "Yes, it is explicitly unrealistic to suppose that prices of production are equal to values in 19th century (or later) capitalism, as Marx does in volume 1."

      So, wait, you now ADMIT this??

      That in vol. 1 Marx did think that individual commodity prices in the 19th century are governed by SNLT with the later anchors for the price system? And so he MUST have realised that thee was a transformation problem between labour values and individual commodity prices of production?

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    4. No. I've been very clear about this, and I'm not sure how to be clearer.

      Tell you what: How about you just tell me, in your own words, exactly what claims you think I'm making about Marx's theory *in sum*, and I'll tell you where you're right and/or wrong. Bullet points are fine; let's keep it terse.

      Explanations that originate from me never seem to get absorbed or retained, so perhaps if we start with expressions native to your own thoughts, we can actually have a productive exchange where we're not just talking past one another. That's all I've ever sought, really.

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  3. LK I have some rage-inducing news for you. At Goldsmith University secularalist and feminist leftist Maryam Namazie came by to speak against Islamic fundamentalism only for the Goldsmiths Islamic Society to try to shut her down in their "safe space". But the craziest part? The student LGBT and Feminist societies came out in support of the Islamic Society and against Namazie!

    What alternate universe am I in?!!!

    http://freethoughtblogs.com/maryamnamazie/

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    1. Yep, an outrage. Though Ken B also brought this up:

      http://socialdemocracy21stcentury.blogspot.com/2015/12/chomsky-defends-enlightenment-from.html?showComment=1449178931843#c2776892919549471030

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    2. What alternate universe? The answer, and neither you nor LK will like it, is a world where the Left holds sway. Tell me these tools aren't proud leftists. Here's another example of a left-wing dominated group in that "alternate universe" http://nypost.com/2015/12/06/womens-studies-is-betraying-women-under-sharia-law/

      I recommend looking for some older links on Wafa Sultan, a wonderful woman who receved a similar treatment. She had a great great quote about freedom of religion, "You can worship stones, as long as you don't throw them at me."
      (She said this on TV debate in a muslim country too.)

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    3. It's a part of the left, not the whole left. And we've been through this, Ken B. This type of PCness also infects the mainstream right too -- at least to some extent.

      There are also vocal liberals/leftists who reject this, e.g., Sam Harris, Richard Dawkins, Dave Rubin, Bill Maher, the late Christopher Hitchens, etc. There are more if you bother to look. Also, I imagine there are many more ordinary leftist people who strongly agree.

      I do agree, however, that what some idiot leftists have done to, e.g., Ayaan Hirsi Ali is disgraceful.

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    4. My comment doesn't imply it's the whole left. I said where the left holds sway. And that seems to be true. These are all left dominated places and groups we're talking about.

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  4. Since you seem to be veering back towards discussions of Marxism, LK, I was wondering whether you had ever perused the exchange between Marxist economists/commentators here:

    https://thenextrecession.wordpress.com/2011/12/08/andrew-kliman-and-the-failure-of-capitalist-production/

    The way I see it is that Kliman's TSSI is the latest and most formidable defense of Marxian orthodoxy, and if you're going to refute Marxian orthodoxy you need ought take Kliman's TSSI head on.

    To my knowledge, you have at least two posts about the TSSI, and both criticize it for its circularity--i.e., labor creates value *by definition* in the TSSI's theoretical formulations. (which is really a symptom of the larger problem--that Marx's theory of value is deduced from what it is supposed to explain)

    I think there's some validity to that critique, but I also think the critique(s) forwarded by Bill Jefferies' and other Marxists in that exchange on the blog is incisive and interesting in its own equally compelling way. If you read the exchange, you can see that Kliman is at war with 'physicalist' and 'simultaneist' readings of Marx, because he wants to preserve the validity 'Law of the Tendential Fall in the Rate of Profit'. However, the 'physicalists' on that blog (who apparently don't like that name) end up poking holes in both his interpetation of Marx and his statistical/accounting methodology in 'The Failure of Capitalist Production', which uses the TSSI to analyze the Lesser Depression/Great Recession.

    However, Kliman tries to defend his interpretation of Marx by pointing out that if you follow the Physicalist interpretation, "Marx’s law of the tendential fall in the rate of profit is logically invalid."

    So it seems to me the whole exchange provides the material for a more comprehensive refutation of *both* the TSSI *and* The Law of the Tendential Fall in the Rate of Profit. (which, again, the TSSI was more or less constructed to salvage) It seems no one refutes Marx better than rival Marxist scholars. I'm currently in the process of trying to organize it in my head--maybe you could take a crack at it. At the very least it's an interesting exchange on the most current and theoretically robust (but, IMO, no less wrong) defense of Marxian orthodoxy. Maybe there's at least fodder for a future post in there.

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