The Marx law of value courted controversy in what has been called the ‘transformation problem’. The debate centres on the procedure in which Marx dealt with the changing of production input values into so-called prices of production. Prices of production are the term that Marx used to describe the necessary prices that would be required in order for separate firms to realise the average amount of surplus value (average profit) from the market (from a
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given capital outlay) that would, in turn, represent an equalisation of profit rates between capitals (Mandel 1987). In such a case, some of the (Marx’s prices of production) prices of firms will be above their produced values and some will be below them. Kliman notes that with varying ratios of constant capital (means of production) to labour (the organic composition) it is not possible for value profit rates to be the same for all firms (Brewer 1984; Kliman 2007: 141-4). Marx proceeded to demonstrate, assuming firms with varying organic compositions in conditions of normal capitalist competition, with his hypothetical tables, that profit equalisation could occur (at least in theory), providing that these prices of production are established. Some of these prices will be above value, some equal and some will be below value (Marx [1894] 1981, chap. 9).116
Critics have claimed that Marx’s description of the relation between input values and prices of production is problematic. Mainstream economists have been critical of Marx’s overall method, since they expect input values to match output values in a simultaneous equilibrium. Marx, in contrast, theorised in terms of sequential production periods (Kliman 2007). In 1907, Bortkiewicz had first promoted the idea that Marx cannot use his output values to determine new input values and thus ‘reproduce’ production, which Bortkiewicz assumed he should be able to do simultaneously (Bortkiewicz 1949). Mandel rejects this as irrelevant and explains that Marx uses two time-frameworks rather than a simultaneous equilibrium (Mandel 1969). Kliman explains that since Marx is sequential he is demonstrating an expansion of capital and accumulation for capitalists, from one period to the next, from the extraction of surplus value. For Marx, input values/prices are not expected to equal output ones although they might equate by chance, since the input values are calculated on currently needed to produce (at the time of use not historic purchase) labour-time/monetary costs, and the outputs are based on their replacement costs during the circulation after production (Kliman 2007: 21).117 The change, during production, in input and output values, is expected because the average social productivity will vary from one production period to the next. Kliman points out that there are two different profit rates for the individual firm (or sector), the produced rate of profit and the realised rate of profit. They are both measured in terms of
116
Market prices, determined by demand and supply, will usually deviate from these prices of production but still fluctuate around them as axes. Marx was perhaps wanting to illustrate that profit equalisation was possible, rather than demonstrate any empirical reality.
117 Marx used the actual prices paid for constant and variable capital inputs, rather than their specific labour
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the total capital advanced, but the first relates to values produced and the second relates to value received when sold, and the surplus value realised. As stated, capital migrates towards the highest return, meaning that, even assuming a constant rate of exploitation and the same level of productivity, there will be different value rates of profit for different capitals with different organic compositions of capital. There can be equal money profit rates realised (called average profit) for all firms, when market prices are the same as the ‘prices of production’ mentioned above. The price convergence to the prices of production itself occurs because, when capital leaves an under-performing branch of production, it will force the market price (of the same branch) up due to the supply effects. The reverse will occur in technologically advanced sectors. Marx believed that these types of processes were laws of competitive capitalism as capital migrates towards the highest returns across periods.
In Marx’s schema, i.e. his input/output tables with prices of production established, he proposes there are three fundamental aggregate equalities, which do not depend on whether the necessary competitive equalisation has taken place where prices of production are established. The first is that the sum total of prices, monies realised in circulation after a given period of production, is equal to the sum total of labour values (Kliman 2007). In the second postulate Marx states that the sum total of surplus value is equal to total profit realised. The third postulate is that the economy-wide value and price (produced and realised) profit rates are equal. Note that if Marx’s own (sequential) theoretical method of analysis is utilised (as found in his tables), then all of the above the postulates can be seen to be consistent.118 This is a significant foundation of Marx’s political economy. There appears to have been several historical efforts to discover inconsistencies in his method, perhaps in order to undermine his political economy and discount any potential influence on policy (Freeman 1996; Freeman 2008). There was likely to have been a substantial effort to demonstrate empirical inconsistencies during the case study period, due to the political expediencies of the capitalist economies. To untangle some of this discourse, I now consider the key approaches to the interpretation of Marx’s methodology that draws heavily on the work of Andrew Kliman in Reclaiming Marx’s Capital (Kliman 2007).
118 The Temporal Single System Interpretation of Marx (TSSI) advanced by Kliman, Freeman and Potts is such
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Dual-system interpretation theorists, such as Morishima, have their origin in the Bortkiewicz so-called ‘correction’ of Marx’s method (Bortkiewicz 1949).119 In these approaches, the value in labour terms and the price in money of inputs/outputs are determined independently of each other and form two distinct and separate systems: value and price. According to dual- system theorists, when the value and price of inputs/outputs are measured in the same units (e.g. a specific money), it is claimed that they are still determined independently. An example illustrates this. When Marx considered the production cost of a commodity to the capitalist he used the term cost price. This refers to the monies actually paid for constant and variable capital inputs. Yet, dual-system theorists argue that there is two cost prices rather than one, i.e. a labour value (measured in money) and the price paid, both determined differently (Kliman 2007). In addition, since the labour-value of the inputs cannot be expected to equate with outputs, if there has been a change in productivity, and the dual-system thinkers also want to use simultaneous models that equate the values of inputs and outputs (in monetary terms), they therefore need to have two independent systems to make their calculations work. These dual-system thinkers have always maintained that there are two separate value and price variable capitals (Kliman 2007). In the 1980s a dual-system New Interpretation began, with the work of Dumenil and Foley, which claimed the actual wage of the workers was the variable capital of both the price and the value systems (but different for constant capital). The rationale for this was based on the reality of the wage bargaining process, as a determinant of wages, rather than the labour values of the goods and services consumed by workers (Dumenil 1980; Foley 1982), However, as Kliman notes, the acceptance of either of these dual-system approaches requires the rejection of an array of textual evidence from Marx. If either of these approaches were accepted it would result in the existence of two separate sets of cost prices, profit rates, capital advances and aggregates. The three postulates of Marx would, in these circumstances, be found to be inconsistent.
In single-system interpretations the prices and values are determined interdependently, in two important ways. Firstly, the prices of production (and average profit) that can (theoretically) be established during a period of production depend on the general value profit rate, so there is not an independent price system. Secondly, the prices paid for inputs determine the value magnitudes that are considered by Marx, and so there is no distinct value system either
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(Kliman 2007). The constant capital advanced, and the value transferred, depend upon the realised value of inputs purchased last period, not the produced values measured in labour terms (Carchedi 1996). This is a very important point for the thesis since, as Freeman notes, this reclaims the significance of monetary factors in production in direct contrast to both the mainstream and the Keynesian synthesis view (Freeman 1996). The single-system interpretations agree with the notion of the New Interpretation (mentioned above), that variable capital is determined by the money wages paid, not the produced values of the goods they consume. So, prices and values co-determine each other across successive periods of production. Marx, it should be noted, had generally assumed that realised values were the same as produced values for much of his analysis in Capital for simplicity purposes.
Kliman explains, that all of these interpretations outlined so far, with the exception of the TSSI, are simultaneous models. Simultaneous valuation, as mentioned above, assumes that the per-unit value (or price) of the inputs must equal the per-unit value (or price) of the outputs, measured by their prices of production. This has been justified on two grounds. Firstly, since Marx spoke about commodity values of unsold items being determined by the current replacement cost, not the historic cost, then inputs for analysis depend on these current costs. The TSSI advocates, who claim that Marx never implied that the input values must match the output ones because of the separate time periods, dispute this. TSSI proponents argue that it is the prices that currently need to be paid for the inputs, when they enter production, which is a determinant of products’ values. These might differ from their historic cost values, since this was when the ‘means of production’ inputs were made, and be different from the prevailing cost of replacement at the end of the production period. This is important, since if the replacement cost is used as an input value, this leads to the assumption that labour does not add any value to the output and tends to lead to what is termed physicalist thinking.120 Physicalism posits that increased quantities of homogenous entities constitute an expansion of value. Other thinkers, such as Steedman or Sraffa, argued that productivity increases and real wage rates, determined by goods that can be purchased, are what adds or detracts value to or from the physical output (Sraffa 1960; Steedman 1977). In 5.9 there is an illustration of this. Secondly, they argue that Marx implied a simultaneous view since he felt his ‘prices of production’ would be the ones found in the market (Kliman
120 Kliman uses an example of corn (Kliman 2007: 79). If ten bushels (used as seed and to pay workers)
becomes twelve at harvest then there is no increase in aggregate value (since, by definition, productivity does not increase it) because each bushel of corn will have reduced in value during production. In physicalist terms, a profit of 20% is produced because input and output value equate by definition.
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2007). This notion of Marx’s thinking is inconsistent with the attention to detail Marx gives to the circuit of capital and production periods (Marx [1867] 1976; Marx [1885] 1978). TSSI advocates, like Freeman, Carchedi, Kliman and Potts, deny this proposition on mathematical grounds (Kliman 2007). TSSI advocates reject physicalism since an hour of labour-time, following Marx, always yields the same value even if there has been an increase of productivity and an hour of abstract labour produces more. All that happens is that the same commodities are reduced in labour value terms (Kliman 2007).
There is also the value-form interpretation of Marx’s that claims this exchange makes labour count as Mohun describes it (Mohun 1984). These thinkers, such as Arthur or Reuten, do not claim to be consistent with Marx but they do not feel that they need to be (Reuten 1993, Arthur 2001). They argue that work only becomes labour (and measured as Marx intended), when produced commodities are actually exchanged for money. This idea is based on the notion that a product with no use-value is a waste of work. Kliman notes that if value is created when the product is sold (rather than when it is produced) there is not any meaningful sense in which labour creates value and this is unlikely to be what Marx meant (Kliman 2007: 37). The value-form idea instigates an interesting debate, since there is logic in the method, but it is argued in the thesis that it is not Marx’s approach.
The TSSI work of Freeman, Carchedi, Kliman and Potts has contributed much to understanding of Marx’s own solution to the debated transformation problem, which is notably consistent with Marx’s overall postulates (Freeman 1996; Kliman 2007). A simpler version of Marx’s solution is illustrated in Table 5.2, without Marx’s use of five branches of production and with fixed capital that is used up in each period.
Table 5.2. The Transformation Solution (Compiled by author).
Firm c v s w Π p s/c+v π/c+v
A $45 $10 $10 $65 $9.7 $64.7 18.2% 17.6%
B $25 $5 $5 $35 $5.3 $35.3 16.7% 17.6%
Total $70 $15 $15 $100 $15 $100 17.6% 17.6%
In the table c, v, and s stand for constant capital, variable capital and surplus value, w = c+v+s is the value of the output, πis average profit, and p = c+v+πis the output’s price of
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production. s/(c+v) and π/(c+v) are the value and price rates of profit. It is not specified in the table whether the value and price sums are expressed in units of money or labour-time. In the table c + v are data inputs that depend on the ‘prices’ paid, in keeping with the TSSI (and Marx), and derived magnitudes are the prices, profits and prices of production. If the output at the end of the period were sold at value, there would not be an equalisation of profit rates. When the prices of production are established (p), then this becomes possible. Marx’s solution, albeit subject to criticism, leads on to the successful and consistent (theoretical) establishment of his three aggregate equalities.
The TSSI approach begins with a criticism of the mainstream view of the economic system as a large market place that is experiences a simultaneous equilibrium, as products are produced and traded. Equilibrium consists of a set of relative prices that assumes an equalisation of profit rates across the economy. Money (see 3.7) is considered to be neutral, that is it exists merely to transform these relative prices in to nominal prices. Mainstream economists then focus on modelling disturbances from an established equilibrium to another, which they attribute to exogenous factors such as trade unions or government policies, rather than the mechanics of the market itself. Since these ideas assume a simultaneous equilibrium, input values equalled output ones, in order for simultaneous reproduction to take place. In the TSSI, it is the prices actually paid for inputs (or outputs used as inputs for the next period of production), formed at the end of production, that determine the values used in TSSI modelling (Kliman 2007). In these cases inputs are usually not expected to be the same values as outputs. In reality, as Carchedi noted, market prices are established first and then the tendential prices of production may gradually emerge (see 7.5), providing there are no counter-tendencies, over successive periods (Carchedi 1996). The TSSI, it is argued here, thus better reflects the reality.