Library:Marx's Theory of Value and the "Transformation Problem"

Marx's Theory of Value and the "Transformation Problem"
Author	Anwar Shaikh
First published	1977
PDF	https://drive.google.com/drive/folders/1-DuRWVD2ozMQteyJo_cENqZOYalUXJsJ

I. Introduction

It is curious that in the almost eighty years since the publication of Volume III of Marx's Capital, a major theoretical problem, the infamous "transformation problem," has never been satisfactorily resolved. Throughout Volume I, written by Marx after he had already completed the first draft of Volume III, the analysis is based on the assumption that exchanges of commodities take place at prices proportional to their labor values. I will call these prices the "direct prices" of commodities. In Volume III, which was compiled by Engels from the incomplete first draft, after Marx's death, Marx extends his analysis to take into account "prices of production," demonstrating how one can derive these prices from the "direct prices" of Volume I. This derivation, from then on the center of an intense controversy, was the original "transformation procedure."

Opponents of the labor theory of value immediately seized on the apparent incompleteness of Marx's procedure. Bohm-Bawerk, for instance, questioned the tenability of Marx's statement that the sum of prices after the transformation would remain equal to the sum of values; others have pointed out that Marx's procedure contains an "error," because while he transforms the prices of outputs from "direct prices" to "prices of production," he leaves the inputs untransformed. Since commodities appearing as outputs of a productive system are often also inputs into the system, it is argued that Marx's procedure is logically flawed; "direct prices" and "prices of production" are two separate and unrelated phenomena, leading to a "great contradiction" between Volume I and Volume III of Capital, More recently, essentially the same point has been made by Samuelson [17], in which he attacks the very idea of a transformation procedure: "Contemplate two alternative and discordant systems. Write down one. Now transform by taking an eraser and rubbing it out. Then fill in the other one. Voila! You have completed your transformation algorithm."1 As we shall see. this criticism is completely incorrect, it is also somewhat misplaced; if anything, it applies most properly to the neoclassical "transformation procedure" which was the center of the so-called Cambridge Capital Controversies, a procedure in which Samuelson himself was quite prominent.*

On the Marxian side, there have been, of course, many "solutions" to the transformation problem, from Bortkiewicz’s original transformation procedure and its subsequent variants to Francis Seton’s important paper [18]. Unfortunately, as even supporters and sympathetic critics of the labor theory of value admit, these "solutions" all suffer from the same basic defects; they show "the possibility of a consistent derivation of prices from values"2 while apparently severing the crucial links between price and value magnitudes which Marx seemed to emphasize in his own procedure. In most discussions of the issue, these links have appeared in the form of the following equalities: of the "sum of prices" and the "sum of values"; of the magnitude of profits and the magnitude of surplus-value; of the profit-wage ratio and the rate of surplus- value; and of the general rate of profit in price terms and the same rate in value terms. As is well-known by now, in any "correct solution" either the first or the second, but not both, can be always made to hold, while in general the other two cannot. What then are we to make of Marx’s procedure?

It has been suggested that Marx, having published Volume I in full confidence that the labor theory of value was the correct basis, discovered too late, in writing Volume III, that it was not. But that doesn’t work, because we know that Volume I was published well after Volume III had been drafted. Others, perhaps more charitably, have suggested that because the labor theory of value as a theory of relative prices was so much a part of the tradition of classical economics, it was taken over by Marx almost unexamined. A variant of this line of reasoning, which is popular among some Marxists, is that if nowadays we view Marx-as-an- economist as a member of the classical school, it is we who import into Marx’s theory of value, which is only nominally similar to that of Smith and Ricardo, the pre-Marxian question of the quantitative relationship between prices and values. In the variant, therefore, the lack of examination is on our part, not that of Marx. Marx was simply not terribly concerned with the quantitative relationship.3

To anyone who has read Marx’s voluminous comments and critiques of the classical economists, notably in Theory of Surplus-Value and in Capital, it becomes impossible to ascribe to Marx an unthinking take-over of a labor theory of value from anyone at all. Marx spends literally hundreds of pages discussing values and their relationship, both qualitative and quantitative, to wages, profits and prices; no aspect, no issue, is ignored in these incredibly detailed discussions. So the main line of that argument does not hold up. As for the variant, insofar as it argues that there is a vast difference between the "value" of Smith and Ricardo and the "value" of Marx, it is undeniably correct; where it goes wrong is in jumping from this important fact to the conclusion that Marx either does, or even could ignore the quantitative aspects which dominated the pre-Marxian "value theory."

Consider for a moment the fact that there is a vast difference between Einstein and Newton too, one which stems from different methodologies, different objects of analysis, etc., and extends all the way to differences in concepts and calculations. There is, in other words, what Thomas Kuhn calls a "paradigm break" between the two modes of analysis.4

The notion that Einstein and Newton, for instance, treat what appears to be some autonomously defined subject—"Physics"—is an illusion which is fostered by textbook propagandists whose very aim is to treat science as the glorious and lofty march towards "truth." In reality, however, almost every conception and calculation in Relativity Theory contradicts those of classical physics.

To reduce Einstein to a "tidied up" Newton would therefore be impossible. What is worse, this impossibility would show up in the form of "logical contradictions," "redundancies," and "irrationalities" in Einstein, not in Newton, for the propositions derived from the Theory of Relativity cannot be derived within a Newtonian basis. What can we say, for example, in a Newtonian framework about the fundamental Einsteinian notion that there exists a finite limit, the speed of light, for the velocity of any object? Only that it is clearly wrong, or at best, a notion we (as Newtonians) have no use for in our framework—one which therefore appears "mythical," "metaphysical," "irrelevant."

Insofar as some Marxists have pursued a similar line of argument as to the "reduction’" of Marx to Ricardo, they have been making an absolutely crucial point: namely, that by attempting to "reduce" Marx to Ricardo, or to neoclassical economics, the impossibility of this reduction will manifest itself as a series of "contradictions" and "irrationalities" in Marx! What we think we find, on a Ricardian or neoclassical basis, is that Marx is simply incorrect, or at best gets involved in an "unnecessary muddle."5 What we have in fact demonstrated is that you cannot derive Marx from Ricardo or Samuelson.

Obviously, none of this implies that Marx is above criticism. The point here is that in order to be able to evaluate Marx’s solution to some problem, we must first of all define the problem. We must, in other words, locate the problem in terms of some general analysis, so that we may see which solutions are adequate and which are not. It has often been said that the hardest part of solving a problem is figuring out the question!

Some Marxists, however, jump from the implications of the difference between Marx and Ricardo to the false conclusion that Marx was, or at least that Marxists could be, unconcerned with the quantitative relationships between prices and values (whether he was and whether Marxist analysis could be are in fact two separate issues, but one leads to the other).

To begin with, the statement that Marx did not in fact consider these matters to be important runs headlong into the contrary evidence of the vast amount of attention Marx’s writings give to them; the only way to get around this evidence in turn, is to try and show that the issue itself is irrelevant. In this way the real basis of this line of reasoning turns out to be the argument that Marxist analysis can, and should ignore the quantitative relationship. On the one hand, this argument gets much of its impetus from the persistent, and to some extent, damaging attacks on the "transformation from values to prices"; and on the other, it derives much of its appeal from a reaction against the obvious banality of neoclassical economics, in which relative prices figure so prominently. Nonetheless, the argument is simply untenable, for it is based on an unspoken conception about scientific analysis which when made explicit is quite unsupportable: namely, that as a science, the Marxist analysis of capitalism can simply choose to ignore the quantitative aspects of any phenomena, once it has understood the qualitative aspects. Marx himself had a higher opinion of his work:

Considering what this third book treats, it cannot confine itself to general reflection relative to this synthesis. On the contrary, it must locate and describe the concrete forms... The various forms of capital, as evolved in this book, thus approach step by step the form which they assume on the surface of society, in the action of different capitals upon one another, in competition, and in the ordinary consciousness of the agents of production themselves. (Capital,* Volume III, Part I, Ch. I, p. 25)

Unfortunately not many Marxists today seem willing to accompany Marx all the way in his arduous journey; and of those that do, even fewer appear to be interested in pulling together and extending, where necessary, the sometimes incomplete analysis of Volume III. The labyrinths of the turnover of capital in Volume II, the "petty detail" of the endless tables of differential rent in Volume III, and certainly the unending controversy about the "transformation problem" must all seem so very tedious, perhaps even dangerously confusing, to those who remain content to bask in the brilliance of Volume I.6 But Marx at least did not find in the difficulty of a subject a sufficient reason for avoiding it:

That is a disadvantage I am powerless to overcome, unless it be by forewarning and forearming those readers who zealously seek the truth. There is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits. (Capital, Volume I, "Preface to the French Edition," p. 21)

II. Value and Price

1. Calculation versus Conception

I have, up to now, confined myself to a discussion of the so-called "transformation problem" and of various attitudes toward it. It is, however, a major purpose of this paper to demonstrate that one can, precisely in the manner set out by Marx, calculate the "correct prices of production" from values. The link between the two, one so obvious that until recently it seems to have been completely overlooked, ** is simply that while Marx’s procedure is a perfectly general one, it is only the first step in an iterative transformation from "direct-prices" to "prices of production." But while this extension of Marx’s procedure does falsify the so-called "impossibility theorems" on it (most recently voiced by Paul Samuelson), it by no means establishes the need for such a transformation in the first place. As has often been pointed out, "prices of production" can instead be calculated directly from the same "‘economic data" as "direct-prices." The difference between the two methods of calculation therefore lies not in the end point but in the beginning; that is, it lies not in the magnitude of "prices of production" but in their meaning, in their conception. To reduce the issue of the transformation to one of merely calculation, is simply to reduce Marx to neoclassical economics. And, as I pointed out earlier, the impossibility of such a reduction can only "show up" as a "redundancy" in Marx: after all, if both methods arrive at the same end point, why bother with Marx’s needless "detour" through values?

The question may be put more precisely: in what way is Marx’s analysis of value different from that of orthodox economics? What sorts of issues, conceptions, and calculations are specific to it alone? What laws does Marx derive from it which cannot be derived from conventional economic analysis? Unless we make an attempt to answer these questions, any discussion of the "transformation" issue is quite irrelevant: without a proper understanding of the concept of value as it appears in Marx, it is pointless to try and analyze the so-called "transformation from values to prices of production." The discussion of the actual transformation algorithm is therefore postponed until Section III. In this section we must establish its raison d’etre.

2. Basic Method

Whatever the social form of production, labourers and means of production always remain elements of it. But in a state of separation from each other either of these factors can be such only potentially. For production to go on they must unite. The specific manner in which this union is accomplished distinguishes the different economic epochs of the structure of society from one another. (Capital, Vol. II, Ch. I, Section I, p. 34.) The specific economic form, in which unpaid surplus-labour is pumped out of direct producers, determines the relationship of rulers and ruled, as it grows out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. It is always the direct relationship of the owners of the conditions of production to the direct producers... which reveals the innermost secret, the hidden basis of the entire social structure and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state. (Capital, Vol. III, Ch. XLVII, Section II, p. 791.)

The preceding quotes present a crucial element of the Marxist approach to history: namely, that the specific manner in which production is organized, and surplus-labor extracted from the direct producers, forms the "hidden basis of the entire social structure." For Marx, it follows from this that the concepts adequate to the analysis of any specific historical epoch, including that of capitalism, must necessarily be based on these aspects of its social practice. The struggle for production is the fundamental social practice in all human society; hence the analysis of production is the beginning point of Marxist analysis. The extraction of surplus-labor is the basis of all class societies; hence its study is the source of the concepts adequate to an analysis of all class societies. Capital is Marx’s application of this approach to the analysis of capitalism.

3. The Production of Commodities

One very important aspect of the social process in which laborers and means of production are united in the capitalist mode of production, as opposed to all others, is that under the capitalist mode the overriding aim of production is not production-for-direct-social-use but production-for-exchange. In the caste system of India, for example, the social regulation of productive activity is made starkly visible by the existence of hereditary castes whose members can, and in fact must, perform only those concrete types of labor which are required of their caste. Production is, in this society, production-for-direct-social-use (whatever we may think of that use); distribution of the products of labor is similarly directly regulated.

But in capitalism, we have commodity production. What turns a product (something which is produced) into a commodity (something which is bought and sold) is a specific set of social structures which organize the productive activities (the labor) of society around production-for-exchange. In commodity production, production necessarily implies exchange; exchange is a necessary step in the process of reproduction. Society is organized in such a way that there is no direct social regulation of productivity activity: during production people act as individuals, relating only to their products; it is in exchange, therefore, that the true social nature of their existence is forcibly demonstrated to them through the relation of their commodities to those of others. Exchange, so to speak, is a "symptom" of commodity production, and its real limits can only be understood by relating exchange to its "hidden basis"—i.e., to production. It follows, therefore, that in a Marxist analysis the derivation of the categories of exchange, such as money and price, as well as their movements, must necessarily be based on the categories of production. Taken by itself, as an eternal category divorced from any particular type of production, exchange appears to be a smooth, static, inherently equilibrating process: witness the parables of neoclassical economics. Circulation is, to all appearances and purposes, the sphere of freedom, equality and equilibrium. But for Marx, circulation is precisely the sphere in which the contradictions inherent in the production of commodities are "both exposed and resolved"’;7 the manner in which these contradictions in production dominate exchange, both qualitatively and quantitatively, is what Marx means by the law of value: "in the midst of all the accidental and ever fluctuating exchange-relations between the products, the labour-time necessary for their production forcibly asserts itself like an overriding law of Nature."8

4. Exchange-Value and Value

In all production, concrete (i.e., specific) types of labor and concrete inputs result in a concrete product. Moreover, since the produced inputs themselves must be the products of past labor, we may say that in all production, including commodity production, concrete products are the results of concrete labors, in a given natural context.9 But commodity production (the production of goods-for-exchange) necessarily implies exchange; and in exchange the distinct qualities which give various commodities their ""concreteness" are abstracted from. In exchange, what matters is not the physical properties of iron but how much wheat, or cloth, or coffee, etc., we can get for the iron; hence in exchange we treat every commodity not as a concrete bundle of distinctive qualities, but as the equivalent of specific quantities of all other commodities.

Precisely because exchange is a social process which quantitatively compares and equates different products, it is only in those societies which produce for exchange that the product of human labor acquires the property of ""quantitative worth." In addition to being useful, they are now also "valuable": they are commodities.

We have to get a little more exact in our terminology at this point. In conventional usage (and with some classical economists), the term "value" sometimes refers to the notion of a useful object, and at other times to the notion of the "‘quantitative worth" of an object. In order to avoid confusion, therefore, Marx uses the term use-value to mean useful object, and the term exchange- value to mean the quantitative "worth" of an object. In Marx's terminology, therefore, a commodity is both a use-value and an exchange-value.

It is usually not difficult to explain what is meant by a useful object.* But when we say that a commodity is "worth" something just what is implied? Suppose I say that in barter a bushel of corn is "worth" a ton of iron, and also a yard of silk, and an ounce of gold, and so on. At first glance, what I appear to be saying is that there are many different quantitative expressions for the "worth" of a bushel of corn, depending on which other commodity (iron, silk or gold) I choose to measure it by.

But there is a deeper problem here. In order for me to measure the "worth" of corn in terms of gold, for instance, gold must also be "worth" something itself. Otherwise I cannot say how much gold is equivalent to a bushel of corn. It is just like my saying that a stone "weighs" ten grams; what I mean is that on a scale it takes ten pieces of iron called gram-weights to equal the weight of the stone. But clearly, in order for me to carry out this operation, both stone and iron must already possess the property of being "heavy," of having "weight"; the gram-weights don’t make stones ‘"heavy," they only measure the already existing heaviness of stones.

Exactly the same conclusion applies to "quantitative worth." The factors which cause commodities to have "quantitative worth" in the first place must be carefully distinguished from the measurement of this "worth." Measuring the "worth" of corn in iron will give a different result from measuring it in gold; but neither measure causes corn to have "quantitative worth." Rather, each merely expresses the preexisting "worth" of corn in terms of some particular commodity.

The question of exchange-value ("quantitative worth") is therefore really a twofold one: first, what is the cause of "quantitative worth"; and second, how is this "worth" actually expressed, measured, in exchange?

If we look at society as a regularly reproduced set of social relations, it becomes very clear that the production and reproduction of the masses of useful objects which correspond to various social needs requires a definite, quantitative distribution of social labor. Each different useful product requires a concretely different type of labor; reproduction of the material basis of the society consequently requires the existence and reproduction of appropriate amounts of different concrete labors. That is to say, social labor from the point of view of its capacity to produce different use-values is what Marx calls social labor in its role as concrete labor.10

A commodity, however, is more than a mere use-value; it is at the same time an exchange-value, an object possessing "‘quantitative worth." It follows from this that the very same social relations which endow use-values with the property of "quantitative worth," endow the labor which produces these use-values with the capacity to create "‘quantitative worth." From this point of view, all commodity producing labor is qualitatively alike and quantitatively compa- rable: it is what Marx calls "(commodity producing) social labor in its capacity as abstract labor." 11

Therefore, to the question on the cause of exchange-value, Marx’s answer is: abstract labor, i.e., labor actually engaged in commodity production, is the cause of exchange-value.12 Moreover, if we consider the production of a commodity from the point of view of the whole society, it becomes apparent that the commodity’s exchange-value represents the total amount of abstract labor-time socially necessary13 for its production, both directly (in the process of producing the commodity from its material inputs) and indirectly (in the process of producing the material inputs themselves, and the inputs of the inputs, and so on). Marx consequently refers to this total sum of abstract labor-time as the immanent measure of a commodity’s exchange-value, what he calls its "Value."14

The discerning reader will have noticed that I have capitalized the term Value. This is done in order to emphasize the distinctiveness of Marx’s use of the term, and especially to avoid confusing it with the term "value" in orthodox economics (where it generally refers to a price of some sort).

It should also be noted here that the Value of a commodity is the average amount of abstract labor-time required for its production. The total output of a particular commodity represents* the expenditure of a certain amount of abstract labor-time which under existing conditions is required for its production. In exchange, however, all commodities of a given type are treated alike; each commodity is merely "an average sample of its class,"15 and as such represents the average expenditure of abstract labor-time.16

In order to avoid confusion later on, I will distinguish between the sum of Values (the abstract labor-time required to produce the total social product**), the total Value of a given branch of production (the Value of its total output),’" and the unit Value of a single commodity (the average Value in the sense defined above). All terms are defined over a given period of time.

5. Money and Price

We turn now to the second aspect of exchange-value: how is "quantitative worth" actually expressed in exchange? To this Marx answers: in exchange, the "quantitative worth" of a commodity must take the form of money-price. Since exchange is the interchange of two commadities, at first glance it seems obvious that there are as many measures of a commodity’s worth as there are other commodities to measure it by. And historically, where exchange is sporadic or irregular, this is in fact true. But as exchange spreads and develops, this variety of different possible measures increasingly becomes a barrier to the smooth functioning of the process; without a point of reference, the direct comparison of every commodity with every other becomes impossibly complex. Consequently it becomes increasingly necessary to socially recognize a given commodity out of those available as the one commodity in which all others are to express their "worth"; this special commodity therefore becomes the universal equivalent, the money-commodity. We will henceforth assume it is gold.*

Notice that money does not by itself cause commodities to have "worth," any more than gram-weights cause stones to have weight. On the contrary, it is only because both gold and the other commodities have "quantitative worth" (exchange-value) in the first place that we can express their worth of commodities in terms of gold. The money-price of a commodity is the "golden" reflection, the external measure, of its exchange-value. It is what Marx calls the form taken by Value during exchange.18

6. Production and Circulation

The foregoing analysis has focussed on the difference between Value and money-price. Implicit in this distinction, however, is another equally important one: the Marxian distinction between the production of commodities and their circulation.

Production, Marx notes, is the creation or transformation of a use-value.19 Insofar as the product is a commodity, it belongs to some individual; it enters circulation, therefore, as private property.

Consider the case of two commodity producers, a fisherman and a hunter. They bring definite quantities of fish and game, respectively, to the market for the purpose of exchange; commodities with definite Values representing definite quantities of abstract labor-time thus enter the market-place.

Now what happens in exchange? In the exchange process the two commodity producers negotiate terms under which they will transfer the titles to their respective commodity property.20 But note: the time they spend bargaining over these terms of trade will in no way increase the total amount of fish or game to be had; it will determine only the final pattern of distribution.21 In fact, insofar as they need to subsist during the actual process of exchange itself, their

costs of circulation, costs of exchange, could appear only as a deduction from the total production and value-creation of both of them. If they commissioned a third [person to perform] these exchanges, and thus lost no labour time directly, then each of them would have to cede a proportional share of his product to [that third person]... Circulation costs as such, i.e. consumption of labour time or of objectified labour time, of values, in connection with the operation of exchange..., are therefore a deduction either from the time employed on production, or from the values posited by production. They can never increase the value. They belong among... the inherent costs of production resting on capital. (Marx, Grundrisse, Notebook VI, pp. 632-633. Empbhasis added)

This is a very important point in Marx’s analysis. The circulation process is the process whereby commodities change hands, where their titles of ownership are transferred. As such, no commodities and hence no Value is created in the circulation process.22 If anything, part of the previously produced mass of commodities (and hence the Value previously created in production) may be used up just in the struggle over its distribution. One immediate implication of this is that the categories of circulation are thereby limited by those of production.* Value is created in production, materialized in commodities; regardless of the actual money prices at which these commodities are sold, only the same mass of commodities (and hence the same amount of Value) exists after the sales as before. Different price relations will therefore give rise to different distributions of the total commodity-product, and of the total sum of Values, but they cannot by themselves change these totals. It is on this basis that Marx argues:

If commodities are sold at their values, then the magnitude of value in the hands of the buyer and seller remains unchanged. Only the form of existence of value is changed. If the commodities are not sold at their values, then the sum of converted values remains unchanged; the plus on one side is a minus on the other. (Marx, Capital, Volume II, Ch. VI, Section 1.1, p. 129)

7. The Importance of Prices

In commodity producing societies the object of production is not direct use, but personal gain through exchange. Individuals produce without any apparent social regulation. Nonetheless, they too exist within a social structure. For each individual to be able to specialize in producing for exchange, others must do so too; for exchange to proceed without rupture, the various products must correspond to the various social needs. Since under this form of social organization the correspondence between the various social needs and the distribution of social labor required to satisfy these needs cannot be brought about directly, it must be done indirectly. What in other societies is a direct evaluation of the importance of a particular type of labor in terms of its concrete product, becomes in commodity producing societies the indirect evaluation of this labor—through the "quantitative worth" of its product. It is only in exchange that the true social nature of commodity production is made apparent; and precisely because commodity production is undertaken for personal gain, for the money which is to be made, it is the money-prices of commodities that serve as the immediate regulating mechanism of the system. Far from being a "‘veil," money constitutes a very important feedback mechanism.

It follows from the above that the laws which determine money magnitudes such as prices, profits, and wages, are of the utmost importance in understanding the laws of motion in capitalism.*

Now of course it was known well before Marx’s time that supply and demand were the immediate determinants of actual market phenomena. But even classical political economy was aware that over the course of time the ceaselessly fluctuating interplay of supply and demand was itself regulated by a much more fundamental principle: the Law of Equal Profitability.

For instance, if as a result of market conditions a particular sector’s rate of profit rose above the average rate, then the flow of capital would tend to be biased towards that sector, causing it to grow more rapidly than demand, and driving down its market price to a level consistent with average profitability. Conversely, the sectors with low profitability would tend to grow less rapidly than demand, causing their prices and profitability to rise.

The classical economists were thus able to demonstrate that behind the continuously varying constellation of market prices there lay another set of prices, acting as "centers of gravity" of market prices and embodying more or less equal rates of profit. The name given to these regulating prices in classical political economy was natural prices; Marx calls them prices of production. Their discovery was the first great law of prices.

By David Ricardo's time, the problem had moved on to a higher level. What Ricardo sought to do, for instance, was to go one step further and look behind prices of production themselves, to discover their "centers of gravity." That is, just as the market price of a commodity was shown to be regulated by its price of production, Ricardo sought to show that this regulating price was itself subject to a hidden regulator—the total quantity of labor time required to produce the commodity, both in its direct production and in the production of its means of production.

In speaking... of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which... is natural price. (D. Ricardo, 1962, p.92) The great cause of the variation in the relative value of commodities is the increase or diminution in the quantity of labour required to produce them. (Ibid., p. 36)

There we have it: the great cause of the variations in the (relative) price of production of a commodity is the variations in the total labor time that goes, directly or indirectly, into its production. The total quantity of labor time was the center of gravity of the commodity’s price of production, just as this price of production was itself the center of gravity of its market price. This was Ricardo’s attempt to formulate a second great law of prices.

What Ricardo perceived was that there was an intrinsic connection between the "quantitative worth," the exchange-value, of commodities, and the total labor-time required for their production.24 This, according to Marx, was Ricardo’s great scientific merit.25 But at the same time Ricardo was trapped by the conceptual framework of bourgeois political cconomy, which saw all production as being alike. He was consequently unable to distinguish concrete labor, an aspect of all social production, from abstract labor, an aspect which only commodity producing labor takes on. Ricardo therefore misses the difference between Value and the form of Value. Instead of recognizing price as the manner in which the exchange process reflects Value, and developing the various intermediary links between the two, he atrempts instead to fuse them together through his law of prices. His failure to adequately distinguish between Value and price is, according to Marx, the first great source of error in his analysis.26

In addition to that, however, there is another problem. How can Ricardo attempt to analyze the effects of a uniform rate of profit on prices, asks Marx, when he nowhere discusses what determines the level of this rate of profit? And this in turn leads to an even more basic question. A uniform rate of profit is simply a way of saying that profits on different capitals are proportional to the size of these capitals: that is, each capital gets a share of total profit in proportion to its own size. But Ricardo nowhere discusses what determines aggregate profit in the first place. How then can he attempt to isolate the factors which regulate the movements of prices of production when he is missing a crucial ingredient—profit?

It is therefore apparent to Marx that even given the relation between Value and money price which he himself derives,27 the specific manner in which Value regulates price cannot be developed without first showing how profit arises. And this, as we shall see next, leads Marx to the concept of surplus-Value.

III. Surplus-Value and Profit

1. The Circulation of Money and the Circulation of Capital

We have up to now focused on the relationship of the circulation of commodities to their production; on the basis of this we were able to derive the categories of Value, money, and price, and discuss their mutual interrelationship. But the very existence of the circulation of commodities within a capitalist mode of production immediately implies that, for those who function as capitalists, the process of circulation is itself a means to realizing a profit: where then does the profit of the capitalist class as a whole come from?

Marx begins by noting that once we consider commodity production within the context of capitalist production, the overall process of circulation is in reality two different processes with different functions and hence different laws. In the first process, the owners of commodities (CC) exchange them for money (M) in order to be able to use this money to buy other commodities (CC) for the purpose of consumption.* This circuit in the overall circulation process therefore has the form CC → M → CC, and is the aggregate of the exchanges of one set of commodities for what is, under the existing conditions of exchange, an equivalent set. In this process money is an intermediary between two sets of commodities; once acquired it is spent, and for the individuals involved in it, the process terminates in consumption. Marx calls this "selling in order to buy";28 in it, money functions as money only.

In the second circuit, however, the owners of money (M) exchange it for commodities (CC) in order to get more money (M' = M + ΔM), i.e., in order to make a profit ΔM. Money here is not spent, it is merely advanced in order to make more money, through the intervention of commodities. The process of M → CC → M', tends to be self-perpetuating, since it can always lead into M'→ CC → M'', etc. The initiators of this process function as capitalists: M → CC → M' "is therefore in reality the general formula of capital as it appears prima facie within the sphere of circulation."29 Marx calls this second process "buying in order to sell";30 in it, money functions as capital. It makes a profit. But how is it possible to make money by merely advancing money?

2. Surplus-Value

The first step in the solution to the problem of profit is to recognize that it is not simply a question of money. Money, after all, represents a command over actual commodities, and hence over the actual labor-time materialized in them. If therefore in the circuit M → CC → M + ΔM, the profit of the capitalist class (ΔM) is to be something more than a monetary illusion, if it is to represent a potential increment in their real wealth, then their money profit ΔM must itself be matched by an actual increment in the commodities available, and hence in materialized labor-time. That is, ΔM must be matched by an increment in the total Value of the commodities represented by CC. This increment in Value necessary for any real profit, Marx calls surplus-Value.

3. Constant Capital

Ostensibly, the process of the formation of capital, as represented by M → CC → M', is a process occurring wholly within circulation. But Value is itself a result of production; it cannot be created in circulation, and hence neither can the necessary increment in Value, surplus-Value. Surplus-Value, if it is possible at all, can only arise from production. And indeed, if we examine M → CC → M' more carefully, we find that the first stage involves the purchase of human and nonhuman inputs required for production, whereas the final stage involves the sale of the outputs of production. The commodities purchased as inputs and the commodities sold as outputs are in fact not the same, and it is the intervention of production which distinguishes them. The formation of capital, which appears to exist solely within circulation, in reality encompasses a process of production; properly speaking, it should be represented by M → CC ... P ... CC' → M', with the stage CC ... P ... CC' representing the effect of production. Not just production or even just commodity production but, as we shall see, capitalist commodity production.

Means of production and laborers combine in all production. But in commodity production, the means of production are themselves commodities, and as such represent, in their total Value, the quantity of abstract labor-time that was socially necessary for their own production. If we examine the process of production over a period of time sufficiently long so that even the most durable means of production are entirely used up, then it becomes clear that the Value of the means of production must become incorporated into the commodities produced over this period. The bodily forms of the means of production either wear out (as with machines) or are physically incorporated into the product (as with raw materials); but precisely because these means of production are socially necessary under existing conditions, the abstract labor-time represented by them is also (indirectly) socially necessary for the production of the commodities. It is a necessary component of the total Value of the product. From the point of view of Value, therefore, the means of production only contribute as much Value as they actually contain. As such they cannot be the source of the increment in Value upon which any nonillusory aggregate profit must be based; Marx therefore calls the capital advanced in the form of the means of production "constant capital."

4. The Value of Labor-Power

The formation of capital, the process represented by M → CC ... P ... CC' → M', presupposes not just commodity production but capitalist commodity production. And under capitalist commodity production, not only are the products of labor bought and sold as commodities, but so too is the very capacity-to-labor itself.

This capacity-to-labor, which Marx calls labor-power, is "the aggregate of those mental and physical capabilities existing in a human being, which he exercises whenever he produces a use-value of any description."31 In all societies, it is the basis of the productive activities of human beings; but for this fundamental human property to become a thing to be bought and sold, a commodity, it must exist within a specific social context. Not only must the laborer have the legal title to his labor-power, he must also be obliged to sell it and not other commodities. He must be free not only to dispose of his own labor-power as a commodity, but also "free" of the means of production which might enable him to be a producer of other commodities. He must be a wage-laborer.

The Value of the commodity labor-power, like that of every other commodity, is determined by the abstract labor-time socially necessary for its production under existing conditions. Since labor-power is a capacity of living beings, its production implies their continued maintenance and reproduction; hence it implies a given quantity of commodities as means of subsistence, sufficient not only to maintain laborers in their normal state as laborers but also sufficient to support their families so that they may as a class continue to perpetuate themselves.* The Value of the means of subsistence of the total workforce is therefore the abstract labor-time socially necessary for their maintenance and reproduction, and hence is the measure of the Value of their labor-power (V).

When a capitalist purchases the commodity labor-power, he purchases the capacity-to-labor of workers, and in order to utilize this commodity he must extract as much labor-time from these workers as he can. The concrete functions that workers perform in their productive activities involves the transformation of the means of production into specific commodities; as such, the time spent by workers in these activities is itself a quantity of socially necessary abstract labor-time (L), which is in effect incorporated into the commodities. From the social perspective of Value, therefore, workers add a quantity of Value (L) to the Value (C) contained in the means of production they use up.

5. Surplus Labor-Time

Capitalist production begins with the commodities CC, means of production and labor-power; as commodities they represent a definite quantity of Value, C+V. In a period of time sufficiently long, the entire Value C of the means of production will be transferred to the product. On the other hand, the Value V of labor-power employed in this period is replaced with the Value added to L by workers in the form of the amount of labor-time they actually spend in production. Thus while the Value of the initial commodities is C + V, the Value of the final product is C + L. The formation of capital, which we have represented as M → CC ... P ... CC' → M + ΔM, can therefore also be represented by M → (C+V) ... P ... (C+L) → M + ΔM. Clearly, surplus-Value, the Value increment S =(C+L)=(C+V)=L-V which is necessary to match the money increment ΔM can arise if and only if the labor-time (L) put in by workers is greater than the labor-time (V) socially necessary for their reproduction.

The same result can be derived differently. Imagine for a moment that at any given level of technology, workers in all branches of production work just long enough to produce the commodities necessary for the needs of the working class as a whole and to replace the means of production they use up in this process. Under these circumstances, no matter how "advanced" the technology, there can exist no social surplus, and hence no basis for capitalist profit. If, and only if, workers can and actually do work longer than the time necessary to maintain themselves and the means of production, will there arise a continuing social surplus; the time spent by workers in producing this surplus, their surplus labor-time, is therefore the real basis of capitalist profit. And of course since the necessary labor-time described above is none other than the aggregate value of labor-power V, the surplus labor-time is none other than aggregate surplus-Value S.32 Once again we see that surplus-Value is the "hidden basis" of any real capitalist profit.

None of this, by the way, implies that Marx intended the labor theory of value as a theory of property rights, à la Locke or even Proudhon. Marx’s goal was a scientific analysis of capitalism, not a mere moral critique.33

IV. The Transformation from Direct Prices to Prices of Production

1. Exchange at Values: Direct Prices

In the Marxist conception of exchange-as-the-circulation-of-commodities, the total labor-time materialized in commodities during their production is the basis for their exchange-value and money-price, while the surplus labor-time materialized in them is the basis of the capitalist profit to be realized from their sale. Without a proper understanding of the quantitative and qualitative relationships between the sphere of production and the sphere of circulation, of the limits imposed on circulation by production, the laws of circulation must remain a mystery. Neoclassical economics is a testament to this.

For Marx, it was absolutely critical that the dominance of production over circulation be properly understood. It is in production that capitalist wealth is created and expanded, and Value and surplus-Value are materialized in commodities. Circulation, as we have seen, is the process whereby the previously created use-values are transferred from one hand to another, by means of money-prices.

Two things follow from this. First of all, it is in circulation that the Value magnitudes take their money-forms: Value takes the form of money-price, surplus-Value the form of money-profit; and secondly, neither Value nor surplus-Value are created in circulation, precisely because in this process commodities are merely exchanged, not created. This means that regardless of the actual money-prices involved, there can be no real increase in capitalist wealth through circulation.

It is obvious that the most direct way to explore the production and expansion of capitalist wealth is to assume that exchange takes place in proportion to the Values of commoditics, so that the money-price of every commodity is equal to its Value relative to the Value of the unit of money (say one ounce of gold). I will henceforth call prices so determined "direct prices."

When indeed the analysis is begun this way, as Marx does in Volumes I and II of Capital, it becomes clear that none of the basic categories of capitalist circulation, the categories of capital and labor, money and price, and wages and profits, owe their existence to any deviations of relative prices from relative Values.

The conversion of money into capital has to be explained on the basis of the laws that regulate the exchange of commodities, in such a way that the starting-point is the exchange of equivalents... the formation of capital must be possible even though the price and value of a commodity be the same; for its formation cannot be attributed to any deviation of the one from the other. If prices actually differ from values, we must, first of all, reduce the former to the latter, in other words, treat the difference as accidental in order that the phenomena may be observed in their purity, and our observations not be interfered with by disturbing circumstances that have nothing to do with the process in question. (Capital, Vol. I, Ch. V, p. 166, text and footnote 1.)