The Transformation Problem Was Not Something Karl Marx Overlooked! & Other Topics: HISTORY OF ECONOMIC THOUGHT (& Metholodology, & Philosophy
Marx stuck to his guns on the theoretical adequacy of the labor theory of value. Plus he recognized the role of competition in equalizing profit rates. This contradiction was not because he was...
Marx stuck to his guns on the theoretical adequacy of the labor theory of value. Plus he recognized the role of competition in equalizing profit rates. This contradiction was not because he was unaware of the “transformation problem”: he was very aware of it, and in fact slagged Ricardo for not seeing it sufficiently clearly. “Economic theory” is a very strange beast—it has to be wrong, or else your map is the size of the territory, and hence is useless; but it cannot be too wrong, or else it is useless, but in a different way…
My view is that the question “What did Karl Marx think about the transformation problem?” is undefined. It is not just that the position of the entity “Karl Marx” changed as that entity traversed its space-time world line. It is that at every moment in time the entity was somewhat confused and was always finding its mind pulled in different directions. In my view, the quick short thumbnail mostly right things to grasp on this question are these:
(a) Karl Marx was well-aware of the “transformation problem”.
(b) Karl Marx did not think that it was a very important problem—it was second-order corrections because average cost prices seen in the market were “mostly” and were close to socially-necessary average-quality labor-values.
(c) Karl Marx thought the key was that profit originated as surplus value—and the labor theory of value was the right sharp knife to open that oyster.
(d) Karl Marx thought that because profit was “really” surplus value, the way to analyze the category of profit was (i) to look at its origins in labor exploitation, and then (ii) track its transformation into profit, as the market system did not create extra profits or reduce total profits but simply “transformed” a fixed amount of surplus value into that same amount of profit.
I think that is as close as you can get to a full understanding in 150 words or so.
Back up: All economic models—whether expressed in words, Pearlian directed causal graphs, Cartesian analytic-geometrical diagrams, or systems of equations—are, as Bob Solow wrote back in 1956:
Robert Solow (1956): A Contribution to the Theory of Economic Growth <https://www.jstor.org/stable/1884513?seq=1>: ‘All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive…. It is important that crucial assumptions be reasonably realistic. When the results… flow specifically from a special crucial assumption, then if the assumption is dubious, the results are suspect…. In the Harrod-Domar model… [the] fundamental opposition of warranted and natural rates turns out in the end to flow from the crucial assumption that produc tion takes place under conditions of fixed proportions…
Hence my hackles somewhat rise when I encounter things like this:
Vincent Goloso: <https://twitter.com/VincentGeloso/status/2060726172909011367>: ‘Usual Marxist trick — if you criticize Marx, you didnt read. If you read him, you didnt read him right. If you read him right, you are missing some deeper in-between the lines meaning.
Stéphane Surprenant: ‘Just to make sure the Marxists are really angry: Marx could have avoided all those problems by formalizing his intuitions. That is, by writing down models, definitions are clear and testable implications can be derived as theorems. No one is debating what Lucas or Prescott meant.
Vincent Geloso: ‘If he did, the transformation problem would have been seen from the getgo and that would have cut the book to like a half dozen boring chapters…
Which, I think, gets it wrong.
First of all, as for the “transformation problem”, it was indeed clear from the get-go—indeed, from long before.the get-go, fully five years before the publication of the first volume of Capital. In the summer of 1862, Marx laid it out fully in a letter he wrote to Engels:
Karl Marx (1862): 1862-08-02: To Engels in Manchester <https://marxists.architexturez.net/archive/marx/works/1862/letters/62_08_02.htm>: ‘Ricardo confuses value and [average] cost price…. [This] identification of values of commodities and [average] cost prices of commodities is totally wrong…
Second, there is a great deal of debate about what Lucas and Prescott “meant”. Writing equations does not save you. (If, that is, they meant anything: their incuriosity about what was actually going on with the economy over 2007-2010 was, by my lights, very telling: incredible and bizarre).
For example, Lucas’s “island” model assumes that people see the prices at which they sell but cannot see but only guess at the prices at which they are currently buying. In my experience, however, it is very much the reverse
