Marx’s theory of value and the ‘transformation problem’
4 Aug, 2025 at 22:21 | Posted in Economics | Leave a comment
Few thinkers have had as profound an impact on the world as Karl Marx. Despite the century and a half since his death, his ideas remain highly relevant.
A topic that often surfaces when discussing Marx’s seminal economic work — Capital — is the so-called ‘transformation problem.’ An online debate has recently emerged regarding how to interpret this ‘problem,’ so yours truly, a former member of the ‘Capital-Logic School’, thought to share his perspective on the matter.
In the first volume of Capital, Marx develops his labour theory of value. It describes the general conditions of commodity production and, in particular, the production relations between different commodity producers.
In the third volume of Capital, Marx transforms commodity values into production prices. His theory of production prices primarily aims to describe capitalist commodity production and encompasses production relations between commodity producers, between capitalists and workers, and between different capital groups. The transformation presupposes a general rate of profit applicable to all industries and sectors. Free competition between capitals in different industries leads to an equalised return on invested capital across all sectors. In equilibrium, the created surplus value is distributed in such a way that the profit rate becomes equal across industries. Thus, production prices result from the existence of a general rate of profit, which allocates profit among different capitals. The “equalisation” of profit rates occurs through the transfer of capital, not through the transfer of surplus value from one sphere to another. Competition distributes the total surplus value but does not redistribute it. Production prices express a tendency that is never fully realised in an unorganised capitalist economy. They describe an equilibrium state where capital transfers from one industry to another no longer occur. They are theoretical centres of gravity around which market prices fluctuate. The rate of surplus value is transformed into an average rate of profit, and only those capitals with a composition identical to the social average exhibit an equivalence between value and price.
Production prices do not generally coincide with values. Equivalence exists only if — as Marx assumed in the first volume of Capital — the organic composition of capital is the same across all branches of production. Industries with relatively large constant capital compared to variable capital (high organic composition of capital) have commodity prices that exceed their values relative to those with a large number of workers compared to means of production (low organic composition of capital). Marx was the first to acknowledge this. Does this mean the labour theory of value is superfluous, and that economic analysis can be confined to the level of prices? Marx argues that this is not the case. If we start only from prices, we explain prices with other prices. Such circular reasoning is insufficient for Marx, who seeks to identify the factors governing changes in production prices and the average rate of profit. He finds these primarily in changes in labour productivity — and consequently, in changes in labour values. And to determine the absolute level of the profit rate — why it is 10% and not 20% — we must go beyond prices, which can only indicate hypothetical relative levels of the profit rate. The average rate of profit is determined by the relation between the total amount of surplus value and capital in society — and consequently, changes in the profit rate are also determined by changes in labour productivity and the labour values of certain commodities.
From values, a specific set of relative prices is derived. However, this transformation does not generally allow one to conclude that the sum of production prices equals the sum of values, or that the sum of profits equals the sum of surplus values. No quantitative equivalences exist, nor was it Marx’s intention to demonstrate any.
Despite this, ever since Capital was published, Marx has been accused of failing to solve the logically impossible ‘transformation problem.’ Critics claim that Marx cannot logically derive capitalism’s price structure from values in general. Why, then, even speak of values? Couldn’t one just as well settle for the exchange values manifested in the market or purely physical, material production relations? What the transformation problem is really about, then, is the status of the labour theory of value.
Those who have sought to find a contradiction between the first and third volumes of Capital have generally taken a narrow reading of Marx’s theory as their starting point. They have interpreted him as a latter-day Ricardo, preoccupied with refining his predecessor’s quantitative statements on distribution and exchange. This interpretation, however, gives a misleading picture of Marx’s project. Marx was not searching for an immutable standard of value. Unlike Ricardo, he was not content to assume the existence of a general rate of profit. On the contrary, he sought to explain its origin. The quantitative formulations are only part of a broader qualitative analysis in which Marx attempts to understand the social form and content of the economy. In this analysis, value and production prices operate at different levels of abstraction. But both aim to provide a conceptual picture of the historically developed form of commodity production that constitutes capitalism. In this analysis, values are necessary to explain why the material data of production appear as they do and why exchange values in the market are at the level they are. The fact that both values and prices can be calculated from physical production data does not mean that the former cannot determine the latter. That value and production prices do not coincide does not imply an inconsistency in Marx’s value theory. It constitutes, according to Marx, a necessary manifestation of capitalism’s innermost essence.
