The Transformation and the Allocation Mechanism

D. The Transformation and the Allocation Mechanism

The mechanism of transition from the value to the price-of-production scheme is outlined in Capital 3, Chapter 10, “Equalisation of the General Rate of Profit through Competition.” Recall now Marx’s use of an appropriately selected money unit – one produced by constant productivity and mean-factor technology. What

he had in mind by the transition to prices of production is a changed distribution of capital and labor between industries to assure that commodities sell at money prices covering costs plus the average profit rate rather than at money prices covering costs plus the surplus value generated in the respective industries. The following passage to this effect specifies our second condition for the monetary commodity: “In these spheres [with mean or average composition] the price of production of the produced commodity is exactly or almost the same as their value expressed in money. . . . Competition so distributes the social capital among the various spheres of production that the prices of production in each sphere take shape according to the model of the prices of production in these spheres of average composition, i.e., they = k + kp ′ (cost-price plus the average rate of profit multiplied by the cost- price)” (MECW 37: 171–2; emphasis added). And a summary statement regarding the process whereby “competition levels the rates of profit of the different spheres of production into an average rate of profit and thereby turns the values of the products of these different spheres into prices of production” makes it equally clear that “[t]his occurs through the continual transfer of capital from one sphere to another, in which, for the moment, the profit happens to lie above average” (205). In addition, “[t]he fluctuations of profit caused by the cycle of fat and lean years succeeding one another in any given branch of industry within given periods must . . . receive due consideration” (205–6).

To be more precise regarding what is entailed, we must revert to the initial set of exchange rates reflecting relative labor inputs. The “degree of exploitation” – defined either as the surplus over wages relative to wages (the profit-wage ratio) or as the rate of surplus value (the proportion of surplus labour to necessary labour) –

is assumed to be everywhere the same; 14 accordingly, the surplus over wages expressed as a proportion of capital, or the rate of profit, will differ between sectors, since Marx did not suppose uniform factor proportions. The initial proportionality between prices and values presumed throughout Capital 1 (and the first part of Capital

3) were thus not equilibrium prices. Marx, to put it bluntly, did not maintain a labor theory of value. 15 Rather, the proportionality of prices to values in Capital 1 requires

14 Provided we assume that prices are proportional to labor inputs, we may talk interchangeably of the rate of surplus value and the profit-wage ratio. This is no longer true when prices diverge

from values, for then it is possible to have uniform rates of surplus value in all sections, but differing profit-wage ratios (see below, note 26). 15 Cf. Schumpeter 1954: 597: “Marx had recognized from an early stage of his thought – certainly before he published the first volume of Das Kapital (1867) – that exchange ratios do not, not

24 Value and Distribution

constraints on the supplies of commodities – some outputs exceeding and some falling short of their equilibrium values – to assure prices which reflect relative labor

inputs rather than prices which yield profit-rate equality throughout the system. 16 It follows that to allow free “competition” – as Marx does in his Capital 3, Chapter 10 – is effectively to relax those constraints such that the outputs of commodities yield- ing above-average rates of profit (those with above-average labor-capital ratios) expand; whereas outputs of commodities yielding below-average rates (those with below-average labor-capital ratios) contract as capital flows between sectors in response to the initial profit-rate differentials. Prices of the former – as expressed in terms of the medium produced by capital of “average” organic composition – will fall below their original level, and prices of the latter will rise, the process of capital movement and price variation ending when the average profit rate is yielded in all sectors:

Now, if the commodities are sold at their values, then . . . very different rates of profit arise in the various spheres of production, depending on the different organic compo- sition of the masses of capital invested in them. But capital withdraws from a sphere with

a low rate of profit and invades others, which yield a higher profit. Through this incessant outflow and influx, or, briefly, through its distribution among the various spheres, which depends on how the rate of profit falls here and rises there, it creates such a ratio of supply to demand that the average profit in the various spheres of production becomes the same, and values are, therefore, converted into prices of production (194; emphasis added).

There will be no change in the supply of the monetary or any other commodity produced by mean factor proportions which yielded the average rate from the outset. We may for convenience suppose two commodities, A and M, each produced by a technique requiring the mean factor proportions, one of which (M) is chosen as medium. After the relaxation of our artificial constraint, all commodities will vary in supply in the manner described above except these two. The price of A in terms of M thus remains unchanged at its original level. This is all that Marx means by statements to the effect that the price of the commodity produced by capital of mean organic composition remains unchanged at its existing value when we transfer from the value to the price scheme: “In these spheres the price of

even as a tendency, conform to Ricardo’s equilibrium theorem on values, which accordingly forms no part of Marx’s teaching.” 16 But for a view to the contrary, see Sweezy 1942: 70: “it is perfectly legitimate to postulate a capitalist system in which organic compositions of capital are everywhere equal and hence the law of value does hold, and to examine the functioning of such a system” and then investigate the deviations from the rule required in practice. Also Dobb 1973: 149–50, 155. And Morishima and Catephores 1975: 327: “we know that the assumption of equal organic composition of capital makes prices of production strictly proportional to values. Therefore, in spite of Marx having explicitly stated in various places of Volume I that sectors may differ from each other in composition of capital, we may consider that Marx tacitly assumed equal organic composition throughout the economy in those places where he did not distinguish prices from values.”

25 production of the produced commodity is exactly or almost the same as their value

D. The Transformation and the Allocation Mechanism

expressed in money” (171).

To recapitulate our main proposition: It is not, as is usually implied in the literature, simply money prices which alter in the transition from the value to the prices-of-production scheme. Money prices alter in consequence of variations in the supplies of all the commodities in the system, except those which happen to

be produced by mean factor proportions, as capital flows from low-yielding to high-yielding sectors. At the same time, I do not dispute that Marx at times had in mind a sort of “historical” transformation: “The exchange of commodities at their values, or approximately at their values . . . requires a much lower stage than their exchange at their prices of production, which requires a definite level of capitalist development. . . . Apart from the domination of prices and price movement by the law of value, it is quite appropriate to regard the values of commodities as not only theoretically but also historically prius to the prices of production” (MECW 37: 175–6, 883). Engels admitted that how “this process of equalisation really come[s] about . . . is a very interesting point about which Marx himself has little to say” (11 March 1895; MECW 50: 461). By this he without question intended the historical, not the theoretical, transformation process: “A genuinely historical exposition of

this process . . . would be a most valuable pendant to Capital” (462). 17 We shall return to this issue in the next section.

A serious objection has been raised against according the value and prices-of- production schemes and the transition between them “a definite historical mean- ing,” or even to give them “distinct ‘operational’ contents” as proposed by Mor- ishima and Catephores (1975), or to proceed in the manner I propose of viewing the value scheme of Capital 1 as reflecting constraints on commodity supplies which are removed in Capital 3 (Pokorni 1985: 113). For Marx’s stadial approach is said by Pokorni to be purely “noetical” – “originating or existing in the mind or intellect” is one Oxford English Dictionary definition – imposing on the value stage “a conceptual frame of reference which does not allow us even to stipulate the operational ‘constraint’ mentioned” (113–14; see also Indart 1990). In brief, so runs this contention, the proportionality of relative prices to relative labor inputs

17 For a discussion of the “logic” of the historical transformation problem, see Samuelson 1991a.

Morishima and Catephores reject the association of the stages with historical periods but do argue for an “operational” interpretation that is quite attractive:

[T]he relationship between Volumes I, II and III can be seen as a progression from the one- department model of the later part of Volume I, where Marx often confused values and prices, to the two-department model of Volume II, where proportionality between values and prices is required departmentalwise for exact aggregation into two departments, and on to the general multi-sector model of Volume III, where no proportionality is needed any longer. Obviously the last volume creates the need to discuss the problem implicit in disproportionality; in other words, the transformation problem. Viewing the issue in this way, we may say that there is no contradiction among the volumes of Capital; their relationship is rather that of the special case to the general one (1975: 327).

26 Value and Distribution

in Capital 1 is simply a theorem reflecting Marx’s “abstract-to-concrete method of exposition” (109). As for the citation given above (p. 24) which does (it is allowed) refer to capital movements between sectors and corresponding output changes, that “again refers to just one level of explanatory framework, and the meaning of the quotation can therefore be established only by identifying its place and role in the argument as a whole” (115). On this view, output flows are precluded in the Transformation context, the amounts of capital invested in the various sec- tors, and thus physical output, supposedly remaining unchanged between schemes (115–16).

Now one may readily agree that the value set-up indeed reflects a noetical exercise, in the sense that in the real world of advanced capitalism only a price-of-production scheme is “visible,” whereas the value scheme is “the invisible and unknown essence that wants investigation” (MECW 37: 47). But Marx is quite clear that were we to imagine a value scheme, it would – supposing of course non-uniform organic com- position – necessarily entail a set of disequilibrium prices and outputs which may

be transformed back into prices by relaxation of the conceptual output constraints. It is also true enough that neither the tables of Marx’s Chapter 9 representing the Transformation nor the verbal account in that same chapter illuminate the manner in which competition assures the (hypothetical) transition between schemes. Marx was satisfied with a mechanical exposition designed to convey the alleged identity of total profit and surplus value and the formation of a general rate of profit, leaving it to the companion chapter to expound the precise process entailed. The numerical illustrations of the Transformation chapter do not provide the entire picture. Accordingly, various analogies formulated to describe the Transformation that may give an impression of given capitals invested – for example the likening of capitalists to “stock holders in a stock company” with given shares (156) – should not be taken too literally. All in all, it seems illegitimate to expunge, by reference to a methodological compartmentalization, the hypothetical transition process expounded in loving detail between disequilibrium values and equilibrium prices-of-production.

One particular feature of the Transformation chapter is, for all that, troubling.

I allude to the qualification regarding the necessity to weigh the individual profit rates by the quantitative significance of the sectors to obtain the general pro- fit rate (above, p. 19). That the general rate of profit turns on the different profit rates in the “individual spheres” weighed by the “relative magnitude” of capital invested in each sphere may be said to imply that industry size is a datum of the entire Transformation analysis (Pokorni 1985: 116). We must, however, be cautious. Even in the simplest case of (initially) equal-sized industries such as are assumed for convenience in the formal tables, this output structure is presumed to be one which assures that prices are proportional to labor values; and similarly in the more complex case, the output levels (multiples of units of capital in each industry) are those assumed to assure that labor values pertain. The question at issue is: in either case does the output structure alter upon transition to prices-of-production. And

D. The Transformation and the Allocation Mechanism

I am aware of a passage appearing in Capital 2 (the context is “Simple Reproduc- tion” on which see below Chapter 2) where Marx assumes prices proportionate to values rather than prices-of-production, and asserts that there are “on the whole” no output implications: “The fact that prices diverge from values cannot, how- ever, exert any influence on the movements of the social capital. On the whole, there is the same exchange of the same quantities of products, although the indi- vidual capitalists are involved in value relations no longer proportional to their respective advances and to the quantities of surplus value produced singly by every one of them” (MECW 36: 392). We are then faced with the standard interpretive problem engendered by conflicting texts. Nonetheless, I maintain that precedence must be accorded the logic so elaborately expounded in the extended discussion of “competition,” entailing supply variation in response to the profit-rate differ- entials emerging in the disequilibrium value scheme. And I would point also to

a ringing declaration to this very effect near the close of Capital 3, in the course of a major discussion of “Distribution Relations and Production Relations”: “The entire process of capitalist production is . . . regulated by the prices of the prod- ucts. But the regulating prices of production are themselves in turn regulated by the equalisation of the rate of profit and its corresponding distribution of cap- ital among the various social spheres of production. Profit, then, appears here as the main factor, not of the distribution of products, but of their production itself, as a factor in the distribution of capitals and labour itself among the various spheres of production” (MECW 37: 868–9). To deny an allocative discussion to the Transformation is to fly in the face of Marx’s own analysis, and I suspect that Marx in Capital 2 took the easy way out in order to simplify his departmental analysis.

The very specific elaboration of the output modifications entailed by the transi- tion from the value to the price-of-production scheme also leads me to question a possible argument whereby the output levels supposed to exist in the first scheme are those defined by the equilibrium outputs of the second. In this case the output structure would not change between schemes simply because it is frozen at its final destination, Marx imposing his “values” on those particular outputs. Were this indeed the case, his elaborations of the competitive adjustment between schemes would be incomprehensible.

A number of analytical problems have emerged in addition to those commonly encountered in the Transformation literature. It was Marx’s claim that starting in the value scheme with given outputs it is possible to “forecast” the uniform or general profit rate when equilibrium prices-of-production rule. But will this in fact hold good when the changes in output engendered by the transitions are allowed for, or will the changes in industry weights in the process of “circulation” in fact alter the average profit rate, thereby threatening the entire exercise? (The problem is the same whether we start off with industries of equal or different sizes.) From the same perspective the very concept of a “mean industry” – selected as the money commodity – becomes suspect considering that the average must

28 Value and Distribution

conundrum – which applies equally to the Ricardian system – is aggravated in the analysis of the inverse wage-profit relation (see note 24).