Reply to LK: Notes on the historical and monetary implications of the transformation problem

by Jehu

One of the big problems with a discussion of Marx’s formula for transformation of labor values into capitalistic prices of production is that no one, not Marxists nor bourgeois simpleton economists, seem to understand what he was doing. Now, I will admit this argument is pretty arrogant, because it implies that I, somehow, have figured out what everyone else didn’t, but bear with me and decide for yourself. If my argument doesn’t make sense at the end, please correct me.

As I stated in my last post, the transformation problem expresses an irreconcilable contradiction within the capitalist mode of production. Marxists will not be surprised at this assertion; digital_money_764bourgeois economists, on the other hand, deny the existence of this contradiction and have an ahistorical conception of capital. In their view, the bourgeoisie has invented the ideal state of man which, having been invented, can continue indefinitely unless interrupted by an exogenous event. So, when they look at the transformation formula, they see in it a contradiction and assume Marx has failed to make his case.


Simple. If you cannot explain how labor values are transformed into prices, you cannot explain how prices form in a capitalistic economy based on the idea commodities have values that are expressed in their prices. Labor values, even if they exist, have no mechanism for generating prices of production that conform to the labor values of commodities. We can’t explain prices by reference to labor values, because we cannot explain how labor values generate prices.

Marxists, on the other hand, argue Marx indeed described the process, but did not have the math required to show this mathematically, or did not finish his discussion — or they just make some awful shit up to explain the contradiction away. It does not matter what excuse Marxists give in any case, because they agree with the bourgeois simpleton that Marx was trying to explain how prices are formed on the basis of labor values.

It never occurs to the bourgeois simpleton nor the Marxist that Marx never intended to show how labor values generate prices of production. Instead, Marx was trying to show why the prices of production of capitalistic commodity production are irreconcilable with labor values. And this is critical because the transformation formula is not just math or economics; it is a prediction unlike any that came before it or after.

To return to the formula, v = v+s, we can see that this formula can only be true if s = 0. If s = 0, then v+s = v+0 = v. This can occur either because s = 0 or v = 0, since v (labor power) is itself the only source of surplus value. Thus, when v = 0, v+s = 0.

The historical implications of the transformation problem

Mathematically, Marx is describing two condition that must lead to the collapse of capitalism itself: either production for profit ends, or living labor no longer plays any role in production. Either condition would lead to the collapse of the capitalistic mode of production. The irreconcilability of v to v+s is not just a formula for prices, it is a mathematical proof for a well-known thesis of Marx: At a certain point in the development of the productive forces, production for profit can only continue if labor power is sold below its value. If the rate of profit falls to zero, capitalists can still produce at a profit only if wages no longer reflected the value of labor power.

Marx formula predicts a social disturbance, a class conflict, in which the proletariat would have to seize power or watch its wages collapse. At that point, there would be no alternative: production for profit can only continue if wages were forcibly reduced all at once; to simply defend its physical existence, the proletariat would have to seize power. This point occurs once the rate of profit falls to zero as is described in the transformation formula; however, it was also explicitly stated in Henryk Grossman’s 1929 paper: Law of the Accumulation and Breakdown. Moreover, it is this idea that led Rosa Luxemburg to coin her famous phrase: Socialism or Barbarism.

In Marx’s theory, society was moving inevitably to a point where production for profit would be incompatible with the value of labor power. So far as I know, no one else has ever given mathematical proof for a historical event before Marx or after him. Mind you, Marx’s formula does not predict which side will emerge victorious in this conflict; it only predicts the conflict must occur. Henryk Grossman believed the prediction could be so precise as to indicate the actual year it would erupt.

“I have shown that even if all conditions of proportionality are maintained and accumulation occurs within the limits imposed by population, the further preservation of these limits is objectively impossible. The system of production described in Bauer’s own scheme has to breakdown or the conditions specified for the system have to be violated. Beyond a definite point of time the system cannot survive at the postulated rate of surplus value of 100 per cent. There is a growing shortage of surplus value and, under the given conditions, a continuous overaccumulation. the only alternative is to violate the conditions postulated. Wages have to be cut in order to push the rate of surplus value even higher. This cut in wages would not be a purely temporary phenomenon that vanishes once equilibrium is re-established; it will have to be continuous. After year 36 either wages have to be cut continually and periodically or a reserve army must come into being.

This would not be one of those periodic crises within the system that Bauer refers to, for a crisis of this sort could always be surmounted by adjusting the scale of the productive apparatus to the available population. Here there is no more room for adjustments. The proportionality conditions required by Bauer have been preserved throughout and still after year 35 a crisis, a tendency towards breakdown, sets in. The real dynamic of the capitalist system is quite different from what Bauer supposes. He maintains that capitalism is characterised by a ‘tendency for the accumulation of capital to adjust to the growth of population’. I have shown the opposite — there is a tendency towards an absolute overaccumulation of capital that outstrips the limits imposed by population.”

Grossman’s argument is clear: At some definite point, “full employment” could only be maintained by slashing the wages of the working class.

In my last post I asked: “How can the law of value operate if prices do not have any relation to values or the socially necessary labor time required for production of commodities?” My answer reveals why this question is itself a distraction: You get rid of commodity money if you do not want the labor values of commodities to be expressed. This is only really true for the labor value of one particular commodity: labor power. To depress wages below the value of labor power, some means had to be found to suppress the expression of the value of labor power. Since money can only express the value of labor power, it was absolutely necessary for the state to abolish commodity money.

Money versus currency in Marx’s theory

In my post, Reply to LK, I showed that the writer is completely correct to state fiat currency is not a commodity money. LK mistakenly believes Marx held that fiat currency is money and, on this basis, has argued Marx is proven wrong. In fact, Marx never held that fiat currency was money and never held that any currency has to be a commodity. In Marx’s view, money itself had to be a commodity, however, currency could be a slip of paper having no or negligible value of its own. Currency is a token of money that serves as placeholder of money and a symbol of value in circulation. Money, argued Marx, was much more than a mere symbol, it was the incarnation of value.

Now, it is obvious that, in labor theory, the function of money cannot be filled by a valueless piece of paper or dancing electrons. As LK argues, refuting the MELT Marxists:

“[Money] must by necessity be a produced commodity with a labour value in order to even function as money, because, in Marx’s view, all commodity exchange is founded on the fact that commodities (including money) are made commensurable by having quantitative labour values.”

However, as we have seen, in circulation the thing serving as money in a transaction may not even have any appreciable value at all. If money must itself have value, but can be represented by things having no value in actual circulation, why must money be a commodity? Certainly the thing serving as the symbolic representative of money can easily fill this role in circulation without actually having value.

However, money becomes money in its full sense not in circulation, but when it is at rest in a hoard. It is no surprise to anyone that a pile of gold bullion has value, while a pile of dollars– no matter how large — has no value of its own. Money as the incarnation of value becomes money in its full sense when it is at rest, but in circulation it is simply a symbol of itself. This is an aspect of Marx’s theory of money that it is easy to overlook. So long as money is actually in circulation it can simply be a symbol of itself without any value. But once it falls out of circulation, money must be money in the complete sense of that word — it must be a commodity.

But, even in circulation, a symbol of money is only a token of money itself to the extent it is a representative of money in its full sense. This relationship can be validated only when currency is actually exchanged for a commodity money. The currency may symbolically represent the universally recognized incarnation of value in circulation, but the actual magnitude of the value represented can only be determined by redeeming the paper for actual commodity money. What LK points out is that, by law, this validation no longer takes place today anywhere but in specialized gold bullion markets. This constitutes a world historical shift that, on its face, seems to invalidate Marx’s theory of money and thus the labor theory of value.

Did the end of the gold standard refute Marx or confirm his theory?

Now, I don’t see how anyone can argue with LK’s conclusion on this point, since we all are sharing the same social space and the evidence for his position is irrefutable. There is only one reply that can be made to LK regarding the validity labor theory of value: If it can be shown that Marx’s labor theory of value already predicts this outcome, Marx’s theory still survives.

Marx’s theory holds that a contradiction between money and its token always exist as a possibility that is already latent in the division between money and currency itself. To give two common enough examples:

In a financial crisis a very large mass of symbols of commodity money — debts — are called in by the lenders. When the lenders attempt to redeem their symbols for real commodity money all at once, the insufficiency of commodity money is revealed. The symbols are not validated, they cannot become money, and the pyramid of debt is suddenly devalued all at once.

In a war, the state issues symbols of money to finance its operations; it buys munitions and pays wages with its fiat. The growing imbalance between the quantity of currency in circulation and the values of commodities denominated in this currency, for which this currency is paid out, leads to the depreciation of the currency against commodity money. Where one price structure existed, now two take its place: the currency prices of commodities and the money prices of the same commodities.

These are each examples of how the relation between money and its symbol, its token, can and have broken down in the past. The possibility of a breakdown in this relation is already given in the fact that money is represented by a token of itself in circulation. According to Marx’s labor theory, the possibility of a break down is converted into an inevitability by the capitalistic mode of production. The operation of the law of value produces a situation where currency no longer can no longer serve as the ideal or symbolic representative of money in circulation. It therefore predicts a condition where the values of commodities are no longer expressed in their prices.

In the Grundrisse, Marx called this event “the collapse of production on the basis of exchange value”.

The monetary implication of Marx’s so-called transformation problem

As I have shown, theoretically, capitalistic commodity production contains at its heart a contradiction between the labor values of commodities and their capitalist prices of production. This contradiction is mathematically expressed in the fact that these two measures of the exchange value of the commodity, v and v+s, cannot be equal. The contradiction mathematically expressed in the so-called transformation problem, that v cannot equal v+s, means that, in the final analysis, within the capitalist mode of production the prices of commodities cannot equal their values.

However the monetary expression of this contradiction is not merely a divergence of prices of production from labor values. Money is exchange value, the phenomenal form of the appearance of the values of commodities themselves. Thus, the growing divergence between prices and values of commodities must sooner or later be expressed in the sudden and violent separation of commodity money from its token. Commodity money expresses and can only express the values of commodities, to the extent prices of production diverge from the labor values contained in the commodities, money is incapable of expressing these production prices. The incompatibility of values and production prices of commodities ultimately takes the form of prices, denominated in some fiat currency, that are incompatible with their values, denominated in some commodity money. If production for profit is to continue beyond this point, the values of commodities can no longer be expressed in circulation.

For LK, the collapse of the gold standard decisively refutes Marx’s labor theory of value; however, the reality is otherwise: when the gold standard collapsed Marx’s theory was decisively confirmed. Marx’s labor theory of value itself predicts the eventual collapse of the gold standard, i.e., the collapse of production on the basis of exchange value, in the very formula bourgeois simpleton economists point to as a refutation of Marx’s theory of value.

How capital itself ‘solves’ the transformation problem

As I stated in the first part of this post, the transformation problem suggests the labor values of commodities can only be equal to their capitalistic prices of production if the surplus value produced by capitals equaled zero. This condition, however, is just what Marx’s labor theory of value points to in chapter 15 of volume 3 of Capital. As Henryk Grossman confirms, Marx calls this condition, absolute overaccumulation of capital and he defines it this way:

“There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further … at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC. In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

Absolute overaccumulation of capital occurs when no additional investment by capitals adds to the mass of profits. At this point in the development of the mode of production, the profit rate falls to zero and the condition of Marx’s transformation problem is fulfilled: v = v+s, because s = 0; which is to say, the prices of production of commodities must be equal to their labor values and no more.

The transformation problem can be solved, therefore, only if the mode of production experiences absolute overaccumulation of capital. But this point also signals the collapse of production on the basis of exchange value and is expressed in a collapse of the gold standard. Thus, the collapse of production on the basis of exchange value and the collapse of the gold standard, are simply expressions of one and the same event: absolute overaccumulation of capital.

Conclusion: When commodity money becomes “non-neutral”

This argument points to the Great Depression as the historical onset of absolute overaccumulation. Former Federal Reserve Bank Chairman Ben Bernanke, in a 1991 paper titled, The Gold Standard, Deflation, and Financial Crisis in the Great Depression, argued that during the Great Depression money became “non-neutral” because, in his words, the gold standard “malfunctioned”.

“The gold standard-based explanation of the Depression … is in most respects compelling. The length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and the close correspondence (across both space and time) between deflation and nations’ adherence to the gold standard shows the power of that system to transmit contractionary monetary shocks. There is also a high correlation in the data between deflation (falling prices) and depression (falling output), as the previous authors have noted and as we will demonstrate again below.”

Bernanke is trying to explain why state issued currency could not be devalued in the Great Depression. What his colleagues found out at the time is that the gold standard, the link of the currency to a definite quantity weight of commodity money, prevented devaluation. Since commodity money has value tied  to the labor time expended during its production, and since this value is independent of any measures designed to reduce its purchasing power, attempt to devalue currency amounted to an attempt to devalue money itself Since gold expresses only the values of commodities in any exchange, to combat the collapse of profits (deflation), the state was forced to exit the gold standard.

What Bernanke meant by the phrase “nonneutrality of money” is that commodity money became incompatible with production for profit. But commodity money is only exchange value, and exchange value is only the phenomenal form of appearance of the values of commodities. Thus, to say commodity money became incompatible with production for profit, means value became incompatible with production for profit.

To be honest, this must seem like a pretty bizarre argument to make: Capital is a form of commodity production and thus a form a value production. How can value become incompatible with a mode of production that produces value? Marx has a very simple explanation for this: Additional capital investment only reduces the rate of profit still further. At the point of absolute overaccumulation, the measures capital takes to restore the rate of profit no longer boost profits, but reduce them.