Original Manuscript

The Transformation Problem: Erroneous

Arguments of Tugan-Baranowsky, Bortkiewicz and
Steedman

Valeriy Kalyuzhnyi 1

Abstract
This paper analyzes erroneous arguments of Tugan-Baranowsky, Bortkiewicz and Steedman
which are still used by the critics of the theory of commodity values transformation into
production prices, described by Marx in Volume III of Capital. The methods of the initial and
final transformation of values into production prices are proposed, which correspond to Marx
theory and confirm validity of his arguments.

Keywords: Marxism, labor theory of value, problem of commodity values transformation into
production prices, postulates invariance, real wages, total social product

JEL Classification: B12, B14, B24, B51, D46, E11

1
See https://www.researchgate.net/publication/315406090

Corresponding Author:
Email: vvk1949vvk@gmail.com
2 The Transformation Problem: Erroneous Arguments…

1. Introduction

People have been trying to solve the transformation problem since 1885, when F. Engels, the
editor of volumes II and III of K. Marx's Capital, in the introduction to volume II, asked the
economists before the publication of volume III,

how an equal average rate of profit can and must come about, not only without a violation
of the law of value but rather on the very basis of it. (Marx 1998 [1894]: 11).

Nine years later, in the introduction to volume III of the “Capital”, Engels was forced to
complain about the economists who had replied to his question (i.e. W. Lexis, J. Wolf, A.
Loria, and G. J. C. Stiebeling), and gave a moderately positive assessment only on some
studies by economists of Marx’s schools—P. Fireman and K. Schmidt—which represented
(to Engels’s opinion) only "a contribution” to solve the problem (Marx 1996 [1867]: 26).
From volume III of the "Capital", it became clear that the solution to the problem presented
by Marx consisted in the fact that, in order to establish a uniform rate of profit in all the
spheres of production, the total amount of surplus value is to be redistributed among these
separate spheres of production in such a way that two macroeconomic identity conditions,
which subsequently received the name of invariance postulates, hold:

… The sum of the profits in all spheres of production must equal the sum of the surplus
values, and the sum of the prices of production of the total social product equal the sum of
its value. (Marx 1998 [1894]: 172).

However, the described transformation procedure is not sufficient, since it leaves without
change the cost of production of goods that actually depend on the production prices through
elements of constant and variable capital. Marx took into account this circumstance, as he
wrote:

The foregoing statements have at any rate modified the original assumption concerning the
determination of the cost price of commodities. We had originally assumed that the cost
price of a commodity equalled the value of the commodities consumed in its production.
But for the buyer the price of production of a specific commodity is its cost price, and may
thus pass as cost price into the prices of other commodities. Since the price of production
may differ from the value of a commodity, it follows that the cost price of a commodity
containing this price of production of another commodity may also stand above or below
that portion of its total value derived from the value of the means of production consumed
by it. It is necessary to remember this modified significance of the cost price, and to bear in
mind that there is always the possibility of an error if the cost price of a commodity in any
particular sphere is identified with the value of the means of production consumed by it. Our
present analysis does not necessitate a closer examination of this point. (Marx 1998 [1894]:
164)

One of the first economists to consider this point in detail was the prominent economist,
mathematician and statistician, representative of the "Russian-German school", L. von
Bortkiewicz (1868-1931). Ironically, his article written in 1907, which is fundamental to set
the problem of the transformation of values into production prices, was published in Russian
for the first time only in 2011, although Bortkiewicz is mentioned by V.I. Lenin, as a critic of
Marx, in his work Karl Marx, printed in 1915 (Lenin 1964 [1914–5]). In particular, in this
article Lenin writes:

In this way, the well-known and indisputable fact of the divergence between prices and
values and of the equalisation of profits is fully explained by Marx on the basis of the law of
Kalyuzhnyi Valeriy 3

value, since the sum total of values of all commodities coincides with the sum total of
prices. However, the equating of (social) value to (individual) prices does not take place
simply and directly, but in a very complex way. It is quite natural that in a society of
separate producers of commodities, who are united only by the market, a conformity to law
can be only an average, social, mass manifestation, with individual deviations in either
direction mutually compensating one another. (Lenin 1964 [1914-5]: 66)

The first attempt to consider the modification of the value for the production costs can be
considered the works of Wolfgang Mühlpfordt, relative to 1893 and 1895 and remained
unknown until 1987, when the researchers M. Howard and J. King made them public (1987:
265–8). According to their statement, Mühlpfordt proposed a solution similar to the one that
was given several years later by Bortkiewicz. However, it is now known that Mühlpfordt
instead of postulating that: However, the German economist Friedrun Quaas writes:

Strictly speaking, Mühlpfordt is using neither the Marxian principle that total value equals
total price nor that of the equality of total surplus-value and total profit. He has created
another new invariance postulate: the sum of new-values equals the sum of their
prices.”(Quaas, 1994: 324).2

Currently, most well-known economists believe that the problem transformation does not
have a rigorous mathematical solution. The insolvability of the transformational problem, in
the development of which many well-known economists took part, is considered the main
proof of the impossibility of transforming values into the production prices, and is the
evidence of the allegedly theoretical errors of Marx, which affect the logic of the Capital.
Moreover, on the basis of the works of the neo-Ricardian Ian Steedman (Steedman 1977),
which showed that the relative production prices and the general rate of profit can be
determined without using labor costs, it is concluded that the effort of the Marx’s value theory
can be generally discarded without compromising the results of the economic analysis.
In this article we show that such a conclusion is wrong, since the problem of
transformation is solved not only without the destruction of the categories of "value" and
"surplus value", but just on their basis.

2. The formation of neo-Ricardian erroneous criticism of Marx's theory

L. von Bortkiewicz proposed his method of solving the problem using the scheme of general
reproduction by M. I. Tugan-Baranovsky (Tugan 1905), who, in turn, modified the scheme of
simple reproduction by Marx from volume II of the Capital. These changes slightly affected
the differentiation of the organic composition of capital, but caused a radical change in the
composition of the departments of subdivision II of the annual production of goods. In Marx,
this subdivision is divided into two large departments:

a) Articles of consumption, which enter into the consumption of the working class, and, to
the extent that they are necessities of life — even if frequently different in quality and value
from those of the labourers — also form a portion of the consumption of the capitalist class.
For our purposes we may call this entire sub-division consumer necessities, regardless of
whether such a product as tobacco is really a consumer necessity from the physiological
point of view. It suffices that it is habitually such.

2
I analyzed the text of Mühlpfordt’s article and determined that Mühlpfordt only postulates the equality "the
sum of new-values equals the sum of their prices". The Mühlpfordt transformation method includes the
equality of "total surplus value=total profit”.
4 The Transformation Problem: Erroneous Arguments…

b) Articles of luxury, which enter into the consumption of only the capitalist class and can
therefore be exchanged only for spent surplus value, which never falls to the share of the
labourer. (Marx 1997 [1885]: 402)
Therefore, the scheme of simple reproduction in Marx takes the following form:

Marx’s reproduction scheme (Marx 1997 [1885])

(1)

As we can see, Marx’s scheme (1) satisfies the inequalities and

, respecting the general equality . In Tugan-Baranovsky,
department II-a produces only the necessary means of consumption for the workers, and the
necessary means of consumption for the capitalists are found, obviously, in department II-b,
where luxury goods are mainly produced.

Tugan-Baranovsky’s reproduction scheme in values (Tugan 1905)

(2)

In scheme (2), instead of the aforementioned inequalities, the equalities

and are satisfied, always respecting the general equality .
It was scheme (2), expressed in values, that L. von Bortkiewicz used as the basis for
illustrating the mechanism for transforming values into production prices, replacing the
previous natural units for measuring the product values (i.e. thousands of working years) with
monetary units. Note that in scheme (2) the newly created value is proportional to the cost of
living labor in all sectors, since = 1.667. In addition, we will show that in
this case the value prices (i.e. prices taken equal to values) are directly proportional to the
total labor costs. Therefore, scheme (2) is really represented in values, expressed in monetary
units.
In scheme (2), the following equations are satisfied, which determine the conditions for the
realization of simple reproduction:

(3)
Bortkiewicz is affected by a simplistic understanding of Marx’s procedure for the
transformation concerning the three-product scheme (2). He understands this procedure in
such a way that at the first stage the general profit rate ρ = M/(C+V )= 0.29630 is determined,
Kalyuzhnyi Valeriy 5

and then the total surplus value M is elementarily redistributed in the departments of the
general production:

. (4)
As a result, one gets:

Bortkiewicz-calculated production prices “according to Marx”

(5)
The analysis of scheme (5) shows that after the transformation “according to Marx” there
is a mismatch in the balance of the simple reproduction: the price of production of the means
of production ( u1 ) is greater than the effective demand for them ( C ) by 8.9%, the price of
production of consumer goods for workers ( u2 ) is lower than the effective demand for them
u
by 4.9%, and the price production of commodities for capitalists ( 3 ) is lower than the
effective demand for them ( P ) by 9.3%.
Marx, as indicated, planned to remove the initial premise that “the cost of producing a
good is equal to the value of the goods consumed during its production”, but he did not
consider necessary “to enter into this issue in detail”. Therefore it is logical that Bortkiewicz
constructs his own system of equations of the following kind:

(6)
The construction of system of equations (6) is based on the fact that during the
transformation of the values into the production prices, the establishment of a general rate of
profit ( ρ ) must be accompanied by a change in the value of constant production costs from
(c i ) to (c i x ) , and in the value of the variable production costs from (v i ) to (v i y) . Thus, we
obtain three equations with four unknowns (x, y, z, ρ). In order to solve the system of
equations (6), we must add either a missing fourth equation, or take one of the unknown equal
to unity.
Note that Bortkiewicz defended the invariance of the unit cost for luxury goods, produced in
industry III. Therefore, he assumed that z=1.

Bortkiewicz claimed invariance for the unit value of luxury goods, the products of
Department III in the traditional three-sector breakdown of the economy; that is, he set z=1.
Taking a leaf out of Ricardo's book, Bortkiewicz identified luxury goods with gold and thus
ensured that money prices are expressed in terms of the labour value of gold. On applying
Bortkiewicz's solutions to the given value system, it appears that total surplus values are
equal to total profits but that 'total values' necessarily diverge from 'total prices'. This is a
consequence of the fact that q3 < q0. If Bortkiewicz had followed Ricardo the whole way,
 6 The Transformation Problem: Erroneous Arguments…

he would have made wage goods the 'invariable measure of value' by setting y=1 and
assuming q2 = q0. And, indeed, this is one of the strong assumptions required to make the
sum of values come out equal to the sum of prices. (Blaug 1985 [1962]: 233) 3

For z=1, Bortkiewicz obtained the solution x=1.28; y=1.0667 and ρ=0.25, and then the
result of the transformation, presented in Table 1.

Table 1. Bortkiewicz-calculated production prices (at z=1)

Industr Constant Variable Profi Pric Rate of surplus Rate of
y Capital Capital t e value profit
I 288 96 96 480 1.00000 0.250
II 128 128 64 320 0.50000 0.250
III 64 96 40 200 0.41667 0.250
Total 480 320 200 1000 0.62500 0.250

It should be noted that for y=1, a solution x=1.2; z=0.9375 and ρ=0.25 would have been
obtained. If the system (6) is supplemented with the second Marx's postulate of invariance,
C+V+M=Cx+Vy+Mz, then one obtains x=1.12; y=0.9333; z=0.875 and ρ=0.25. In this case
one arrives at the production prices presented in Table 2.

Table 2. Calculation of production prices on the basis of the Bortkiewicz system of equations,
provided that the sum of the values of all goods coincides with the sum of their production prices
Industr Constant Variable Profi Pric Rate of surplus Rate of
y Capital Capital t e value profit
I 252 84 84 420 1.0000000 0.250
II 112 112 56 280 0.5000000 0.250
III 56 84 35 175 0.4166667 0.250
Total 420 280 175 875 0.6250000 0.250

A comparison between the solutions presented in Table 1 and Table 2 shows that they are
linearly dependent, since the ratio of any absolute parameter in one system to the analogous
parameter in another system is expressed by the same proportionality coefficient: k=0.875.
But when the second postulate of Marx is fulfilled, the first postulate is not fulfilled, since the
sum of the surplus values (M=200) is not equal to the sum of the profits (Mz=175). On this
basis, Bortkiewicz said:

Without paying the slightest regard to the conditions of production of the good serving to
measure values and prices, Marx simply asserts in general terms that total price equals total
value. This assertion is not only unproven, it is false. (Bortkiewicz 1952 [1907]: 11)

After the publication of the works by L. von Bortkiewicz (1949 [1907], 1949 [1907]),
and then by G.A. Charasoff (1910), a long break occurred in the study of the transformation
problem in Western literature. Only in 1942 P. Sweezy in Theory of Capitalist Development
discussed Bortkiewicz's results (Sweezy 1942), although these were mentioned earlier in the
articles by Kei Shibata. Then there were the works by J. Winternitz (1948), R. Meek (1956),
F. Seton (1957) and other economists, the results of which showed that the system of price
equations can include only one of the Marx’s postulates, and it does not matter which one. In
any case, one of the postulates of invariance is not to be fulfilled, calling into question the

3
Kalyuzhnyi Valeriy 7

consistency of the entire transformation procedure proposed by Marx. According to a number

of Western economists, if the sum of values is not equal to the sum of prices, this means that
at least part of the price of goods in economy has not arisen as the result of the value
redistribution and so has no value nature. The latter fact raises questions about the meaning of
using the value category in economic analyses.
The failure to fulfill the second Marx's postulate of invariance, i.e. the equality between
aggregate profit and total surplus value, means that part of the profit has not a labor source.
Such a result contradicts the Marxist theory of surplus value. With any choice of the
invariance conditions, we will have to sacrifice one integral component of the Marx’s doctrine
(Blaug 1985 [1962]).
As we see, in the process of studying the problem of the transformation of values into
production prices by the end of the 1950’s, a fairly large number of economists became
convinced that the scheme proposed by Marx for the transformation of labor costs into
production prices was inconsistent.
This assumption contributed to the fact that many radical economists, who had ideas
close to Marxism, moved into the camp of neo-Ricardians and began to criticize the Marxist
theory, especially after the publication in 1960 of the work by P. Sraffa (1960).

3. Reinforcement of neo-Ricardian criticism of Marx's doctrine

In the mass of critical literature that appeared in the 1970’s, the work of the neo-Ricardian Ian
Steedman is particularly noteworthy, since he came to the conclusion that it is possible to
abandon labor theory of value without compromising the results of the economic analysis
(Steedman 1977).
At the heart of his argument lay the assertion that general rate of profit and relative prices
can be obtained directly from a system of equations that determines the production prices:
 = (1 + r)( A + wl), (7)
where:
π= is a 1×n vector of commodity prices;
A= is a n×n matrix of specific direct cost coefficients, showing the amount of the
good i needed to produce a unit of the good of type j;
w= is a n×1 real wage vector, each element of which shows the amount of good i
consumed per unit of used labor;
l= is a 1×n vector of the coefficients of specific labor intensity of the products, each
element of which shows the amount of living labor necessary for the production of a unit
of the output i.
It follows from (7) that the profit rate (r) and the relative prices ( ), ( ), ... ,
can be determined without using additional equations.
To verify this statement, we first determine the coefficients of the specific direct costs (
aij ),
as well as the coefficients of the real wages (
w i li ), from the initial value-model (2):
a11=c1 /C= 0.6; a12=c2 /C= 0.2667;
a13=c 13 /C= 0.1333; w 1 l1 =v 1 /V = 0.3;
w 2 l2=v 2 /V = 0.4; w 3 l3=v 3 /V = 0.3.
Since it is assumed that the composition of the natural wages per unit of labor is the same
in all sectors
w=w 1=w2 =w 3 , while V =wL and v i =wl i , then the coefficients of the real
8 The Transformation Problem: Erroneous Arguments…

wl
wages i i can be replaced by the technological coefficients i
t =wl i / wL=l i /L , where L is
the total cost of the paid living labor in the economic system. These technological coefficients
characterize the direct costs of the living labor for the production of the good “i”.
After doing this, we can write the system of equations of production prices proposed by
I. Steedman:

(8)

Since there is an excessive number of unknowns in the system of equations (8), it should
be supplemented with an economically acceptable condition, for example, which defines the
nth product as a standard for measuring prices:
π n =1. For example, assuming π 2= 1, we
π=
obtain the following solution of the system of equations (8): π 1= 1.5; 3 0.625 and r=0.25.
On this basis, we determine that π1/π2=1.5 and π3/π2=0.625. If we calculate such relative prices
according to Table 1 or Table 2, we obtain an analogous result.
Therefore, at the first glance, according to Steedman, the production price system of the
kind of equations (7) allows us to determine relative prices and rate of profit without using
labor costs, the analysis of which becomes superfluous. Here it is appropriate to recall Engels'
words that in the capitalist mode of production, the value “is so thoroughly well-concealed
that our economists can happily deny its existence.” (Marx 2004 [1892–5]: 462).
To reveal this hidden value, one recalls that the price system (8) is based on the
t i =l i / L
information about the costs of the living labor . This is information about the vector
t, and also about the matrix A, which is quite sufficient to determine prices proportional to the
total costs of the socially necessary labor, that is, values. To this end, one can apply the
system of equations of V. K. Dmitriev ([1904]1974), which in our case takes the following
forms:

λ=λ A+l ,∨¿

ω=ωA +t (9)
Using the known data on A and t from the numerical system of production prices (8), we
obtain the following system of equations:

(10)
ω
Solving the system of equations (10), we obtain the required reduced costs ( i ), proportional
to the labor-time values ( ) via :
;
;
.
The comparison of the relative costs based on the obtained results 1.875 and
ω2 /ω3 = 1.5 with analogous costs from the system of values (2) shows their complete
coincidence.
Kalyuzhnyi Valeriy 9

Thus the system of production prices contains hidden information about the values of the
corresponding commodity products. This means that the same technological information used
to calculate the production costs allows to calculate the value of goods. And vice-versa:
according to the data on the value of goods, it is possible to calculate the production price
system, in which one of Marx's postulates is fulfilled, as well as the postulate about the
invariance of real wages absent in Marx.
But most interesting is the fact that the system of production prices contains information
on the general rate of surplus value, which for the cost system (2) is
=200 : 300=0.6667.
For the cost system (10), this ratio is also equal to . This
fact refutes the findings of Tugan-Baranovsky, who wrote that with the transition from values
to production prices or from production prices to values:

All the distribution relations vary, depending on whether we express them in monetary
prices or labor values. Thus, for example, the total variable capital (wages) is equal in the
first scheme to 200/625 = 32% of the total social product, and by its labor value it reaches
300/875 = 34% of the value of the product. The percentage of profit, at a money price, was
25%, and in its labor value, the social profit reaches 200/625, almost 30% of social capital.
(Tugan-Baranovsky 1905: 173)

Tugan-Baranovsky4 did not take into account that after a direct (or inverse)
transformation of values (or prices), when the postulate of the invariance of real wages is
introduced, there is an increase (or decrease) in the wages and the distributed proportion also
changes, but changes nominally. Indeed, a comparison of the cost scheme (2) with the scheme
in production prices (see Table 1) shows that the monetary expression of the variable capital
increased by 6.67%, and the price of constant capital by 28%, but the workers receive the
same amount consumable goods.
However, Tugan-Baranovsky skipped such an analysis, since he expressed the value in
natural, rather than monetary, units which does not correspond to the Marxist methodology.
After all, in the first volume of Capital, Marx explained:

Magnitude of value expresses a relation of social production, it expresses the connection

that necessarily exists between a certain article and the portion of the total labour time of
society required to produce it. As soon as magnitude of value is converted into price, the
above necessary relation takes the shape of a more or less accidental exchange ratio between
a single commodity and another, the money commodity. (Marx 1996 [1867]: 111–2).

Marx also pointed out the following:

The distinction between price and value, between the commodity as measured by the labour
time of which it is the product, and the product of the labour time for which it is exchanged,
this distinction demands a third commodity as a measure, in which the real exchange value
of the commodity is expressed. Because price does not equal value, the element
determining value, labour time, cannot be the element in which prices are expressed. For
labour time would have to express itself at once as the determining and the non-determining
element, as the equivalent and the non-equivalent of itself. Because labour time as a
measure of value exists only ideally, it cannot serve as the material for the comparison of
prices. (Marx 1986 [1857–61]: 77).
4
“The assertion of Marx,” wrote Tugan-Baranovsky, “that ‘the deviations of the prices of production from the
values mutually cancel each other’ is erroneous in the sense that such a mutual cancelation of the deviations
takes place only in relation to the aggregate of the social product as a whole, but not in relation to its divisions
in total capital and profit, once that the general percentage of profit is established.” (Tugan 1905: 174].
10 The Transformation Problem: Erroneous Arguments…

However, on this list of distortions of Marx’s theory Tugan-Baranovsky, uncritically

received by Bortkiewicz, does not end there. Tugan-Baranovsky, having set the goal to
definitively refute Marx’s theory of the surplus value (Tugan 1905: 155), admits the following
distortions of the Marxian theory of formation of the general rate of profit (the average rate of
profit) and transformation of the value of goods into the price of production.
First, Tugan-Baranovsky interprets the second Marx's postulate of invariance (the sum of
the prices of production of the entire social product must be equal to the sum of its value) in
the sense that by social product he means the aggregate social product, while Marx
understood this product as the final social product. In particular, in the 9th chapter of volume
III of the Capital, Marx unambiguously explains that he is considering the amount of
deviations of profits from surplus values only for those products that are final, and not
intermediate products.

Considering the calculation as a whole we see that since the profits of one sphere of
production pass into the cost price of another, they are therefore included in the calculation
as constituents of the total price of the end product, and so cannot appear a second time on
the profit side. If any do appear on this side, however, then only because the commodity in
question is itself an ultimate product, whose price of production does not pass into the cost
price of some other commodity. (Marx 1998 [1894]: 159)

From this it follows that in the tables of the 9th chapter of volume III of the Capital, Marx
presents the final products of the five independent spheres of production that fabricate
commodities I to V. Marx explains that:

The aggregate price of the commodities I to V would therefore equal their aggregate value,
i.e., the sum of the cost prices I to V plus the sum of the surplus values, or profits, produced
in I to V. It would hence actually be the money expression of the total quantity of past and
newly added labour incorporated in commodities I to V. And in the same way the sum of
the prices of production of all commodities produced in society — the totality of all
branches of production — is equal to the sum of their values. (Marx 1998 [1894]: 159)

Actually this premise means that the total amount of the annual expenditures of living
labor used in the production of final and intermediate goods, in the transformation of the
value of goods into their production price, does not change, since it is a technologically
predetermined quantity. In particular, it follows from system (10) that for simple
reproduction:

, or . (11)
The left-hand side of equation (11) shows the total amount of labor input, which is the
source of the value newly created in a year. In this case, the costs of living labor ( ) are
embodied in intermediate goods (i.e. in constant capital), and the costs of living labor ( t 2 ) and
( ) in the relevant final goods. The right side of equation (11) simultaneously reflects the
sum of the total newly created value and the fact that, in simple reproduction, all the living
labor of the society is embodied in the final goods, i.e. in commodities for workers ( ) and
capitalists (  ).
In this respect, the following remark by Marx is of fundamental importance:
Kalyuzhnyi Valeriy 11

…It is quite correct to say that the component parts of commodities which make up the
constant capital, like any other commodity value, may be reduced to portions of value which
resolve themselves for the producers and the owners of the means of production into wages,
profit and rent. This is merely a capitalist form of expression for the fact that all commodity
value is but the measure of the socially necessary labour contained in a commodity. But it
has already been shown in Book I that this nowise prevents the commodity product of any
capital from being split into separate parts, of which one represents exclusively the constant
portion of capital, another the variable portion of capital, and a third solely surplus value.
(Marx 1998 [1894]: 838)

If this is so, then for the system of value equations (10) the following equality holds:

, or . (12)

Indeed, equality (12) is satisfied, since . Thus, there

is no doubt that by Marx, as social product, it should be understood the final social product,
and not the aggregate social product, as is commonly believed in Western economic literature.
In volume ІІ of the Capital there is Marx's explanation of what should be understood as social
product:

One point herein is correct: that the matter presents itself differently in the movement of
social capital, i.e., of the totality of individual capitals, from the way it presents itself for
each individual capital considered separately, hence from the standpoint of each individual
capitalist. For the latter the value of commodities resolves itself into 1) a constant element (a
fourth one, as Adam Smith says), and 2) the sum of wages and surplus value, or wages,
profit, and ground rent. But from the point of view of society the fourth element of Adam
Smith, the constant capital value, disappears. (Marx, 1997 [1885]: 383).

This means that the social product consists in the sum (V + M), and not (C + V + M). But
this circumstance does not prevent the possibility of depicting individual final products
included in (V + M) as a sum of (ci + vi + mi).
Secondly, Tugan-Baranovsky, through the use of the rigid design of the three-branch
simple reproduction scheme (2), implicitly introduced an additional postulate of invariance:
the assertion that real wages do not change when the value of goods is converted into their
production price. But at the stage of “the initial transformation of values into prices of
production and the initial establishment of a general rate of profit”, Marx does not have
“a change in the rate of surplus value corresponding to an increase or a fall of wages” (Marx
1991 [1861– 3]: 261), which would maintain the level of the real wages:

In our consideration of the transformation of surplus value into profit, we assumed that
wages do not fall, but remain constant, because there we had to investigate the fluctuations
in the rate of profit, independent of the changes in the rate of surplus value. (Marx 1998
[1894]: 844–5)

The consequence of this approach of Marx was that after the initial transformation of
values into production prices presented in Chapter 9 of Volume III of the Capital, there is a
slight change in the level of real wages. Here is how Marx writes about this fact:

As for the variable capital, the average daily wage is indeed always equal to the value
produced in the number of hours the labourer must work to produce the necessities of life.
But this number of hours is in its turn obscured by the deviation of the prices of production
of the necessities of life from their values. However, this always resolves itself to one
12 The Transformation Problem: Erroneous Arguments…

commodity receiving (too little of the surplus value while another receives too much, so that
the deviations from the value which are embodied in the prices of production compensate
one another. (Marx, 1998 [1894]: 160).

Nevertheless, the mutual cancellation of the deviations from values, consisting in the
production prices of consumable goods for workers, is not complete:

Suppose, the average composition is 80c + 20v. Now, it is possible that in the actual capitals
of this composition 80c may be greater or smaller than the value of c, i.e., the constant
capital, because this c may be made up of commodities whose price of production differs
from their value. In the same way, 20v might diverge from its value if the consumption of
the wage includes commodities whose price of production diverges from their value; in
which case the labourer would work a longer, or shorter, time to buy them back (to replace
them) and would thus perform more, or less, necessary labour than would be required if the
price of production of such necessities of life coincided with their value. (Marx, 1998
[1894]: 204).

In the Grundrisse, having considered the simplest examples of the formation of a general
rate of profit and its effect on the wages of the worker, Marx comes to the following
important conclusion:

For the worker, therefore, all three cases are possible: his gain or loss by the operation [the
evening-up of profits] could=zero; the operation could depreciate his necessary Wage so
that it no longer suffices, hence depress it below the necessary minimum; lastly, it could
create for him a surplus wage, which would amount to an extremely small share of his own
surplus labour. (Marx 1986 [1857–61]: 366)

Let us consider the transformation of values into production prices under those postulates
of invariance that Marx himself introduced. To this end, we use the simple reproduction
scheme (2) as the basis of the transformation and we also assume that during the
transformation the sum of the profits of all the different spheres (branches) of production must
be equal to the sum of surplus values, and the sum of the prices of production of the final
product is equal to the sum of its value. Under such assumptions, it is sufficient to solve the
following system of equations with an unknown index of the price of the constant capital (x)
and a new unknown total profit rate (r) for transforming the values of commodity products of
the scheme (2) into appropriate prices:

(13)

Solving the system of equations (13) using data w 1 ,c1 , v 1 ,V , and M from the scheme
(2), we obtain x=1.24339811320566 and r=0.261003144657233. The original version of the
transformation of values into production prices is shown in Table 3.
An analysis of the results of the transformation of values into the production prices
shows that after the establishment of the general rate of profit, a direct modification of the
value of constant capital takes place, the price of which increases by 1.243 times, and also an
indirect modification of variable capital, which remains nominally unchanged (V=300) and
can use only a part of its previously owned means of consumption (300 out of 308.11327, i.e.
about 97.4%). This is due to the fact that the production price of consumable goods is higher
than its value by 2.7% (=8.11327/300).
Kalyuzhnyi Valeriy 13

Table 3. The calculation of the production prices in full accordance with the two postulates
of invariance of the initial transformation by K. Marx
Constant Variable Profit Price Rate of Rate of
Industr Capital Capital Surplus Value profit
y c*=cx v p*=r(cx+v u*=c*+v+p* s' r
)
I 279.76458 90 96.50972 466.27429 1.07233 0.261003
II 124.33981 120 63.77346 308.11327 0.53145 0.261003
III 62.16991 90 39.71682 191.88673 0.44130 0.261003
Total 466.27429 300 200 966.27429 0.66667 0.261003

The opposite result is achieved for the capitalists. In the example under consideration, at
the production prices, the capitalists will be able to consume not only all their luxury goods,
but also a part of the consumable goods worth 8.11327 day units. Thus, there is a certain
change in the real incomes of workers and capitalists, and this change is the lower the more
insignificant is difference in the organic composition of capital in the various branches, and
the larger is the number of consumable goods produced in the economic system, since here
the action of the law of the large numbers begins to manifest, leading to a more complete
mutual repayment of positive and negative deviations of prices from values. The critics of
Marx consider the change in real wages during the initial transformation not otherwise than
the collapse of Marx's theory, i.e. as a situation that from a logical point of view is
unsatisfactory. However, it should be kept in mind that capitalists consume the same
necessary commodities as workers. For example, the increase in their real income by reducing
the price of luxury goods in comparison with their value can be spent either on the direct
consumption of additional commodities, or on additional luxury goods, if we take into
account the foreign trade of surplus commodities needed for luxury goods. Let us note that
Marx understood this contradiction and, in addition to indicate the probability of mutual
repayment of the deviations from value (consisting in the production prices of consumable
goods for workers), formulated a second approach to his solution. He wrote:

Suppose that the general rate of profit, and therefore the average profit, are expressed by
money value greater than the money value of the actual average surplus value. So far as the
capitalists are concerned, it is then immaterial whether they reciprocally charge 10 or 15%
profit. Neither of these percentages covers more actual commodity value than the other,
since the overcharge in money is mutual. As for the labourer (the assumption being that he
receives his normal wage and the rise in the average profit does not therefore imply an
actual deduction from his wage, i.e., something entirely different from the normal surplus
value of the capitalist), the rise in commodity prices caused by an increase of the average
profit must correspond to the rise of the money expression of the variable capital. Such a
general nominal increase in the rate of profit and the average profit above the limit provided
by the ratio of the actual surplus value to the total invested capital is not, in effect, possible
without causing an increase in wages, and also an increase in the prices of commodities
forming the constant capital. The reverse is true in case of a reduction. (Marx 1998 [1894]:
178–9).

What does Marx's explanation mean in relation to the result of the initial transformation
of value into production price given in Table 3? So, from the table it follows that the average
profit is 200 day units and is higher than the actual average surplus value in monetary terms,
amounting to 191.88673. At the same time, workers do not receive their normal wages,
therefore an increase in the average profit means a real deduction from wages, that is, the
profit is too high in spite of the fact that the nominal rate of surplus value remained at the
14 The Transformation Problem: Erroneous Arguments…

level of 0.66667. Thus, after the initial transformation of the values into the production prices,
the results of which are presented in Table 3, there was a general nominal increase in the rate
of profit and the average profit above the level determined by the ratio of the actual surplus
value to all the advanced capital. In other words, the rate of profit r=0.261003 is too high and
this should cause an increase in the real wages, as well as an increase in the prices of goods
forming a constant capital. An increase in the prices of goods constituting a constant capital is
required to balance the growth of the monetary wage in order to equalize the general rate of
profit at a lower level. In order to see the indicated changes, we solve the following system of
equations, in which the initial parameters must be taken from Table 3:

(14)

Here the indices of change in the prices of constant and variable capital, respectively (x)
and (y), and also the new average rate of profit (r') are unknown. Using the data in Table 3
and solving the corresponding system of equations (14), we obtain: x=1.02943698112906;
y=1.0667 and r'=0.25. After this, it is simply enough to transform the data of Table 3. The
result of the transformation is shown in Table 4.

Table 4. The result of the final transformation of values into production prices in
accordance with the methodology of K. Marx
Constant Variable Profi Pric Rate of surplus Rate of
Industr Capital Capital t e value profit
y ci x=ci' vi y=vi' s' r'
pi' ui'
I 288 96 96 480 1.00000 0.25
II 128 128 64 320 0.50000 0.25
III 64 96 40 200 0.41667 0.25
Total 480 320 200 1000 0.62500 0.25

The analysis of the data of Table 4 shows that after the final transformation all the
balance conditions for the realization of simple reproduction are fulfilled: , ,

and . What is important is that all those changes in the parameters about which Marx
wrote are actually confirmed, namely:
1) the nominally overestimated rate of profit, which caused a fall in the real wages,
decreases from 0.261003 to 0.25;
2) there is an increase in the wages from 300 to 320, that is, to a level at which money
wages correspond again to real wages;
3) the price of the constant capital increases from 466.27429 to 480.
No less important for understanding the problem of transformation is that Table 4
completely reproduces the result of Bortkiewicz’s transformation, presented in Table 1. But
now it becomes clear that the allegation by Bortkiewicz to Marx of using the erroneous
invariant postulate—the aggregate price is equal to the aggregate value—is devoid of logical
grounds. This postulate refers to the initial transformation and, in addition, to the totality of
commodity products forming the final social product, and not the aggregate social product.
Kalyuzhnyi Valeriy 15

By the way, the first economist who took this into account was Wolfgang Mühlpfordt (1895).
Probably, Wolfgang Mühlpfordt fully took into account the following advice from F. Engels:

… When a man wants to deal with scientific questions he should above all learn to read the
works he wishes to use just as the author had written them, and above all without reading
anything into them that they do not contain. (Marx 1998 [1894]: 23)

It is quite obvious that the introduction of a new postulate on the invariance of the real
wages makes the equality between the aggregate price of production and the aggregate value
unnecessary, since the monetary expression of real wages changes. But Marx never insisted
that this postulate of equality between the aggregate price of production and the total cost
should be fulfilled at the stage of the final transformation of values into production prices. It
should be borne in mind that at final production prices, the amount of wages nominally
deviates from the actual value of variable capital. Therefore, it is impossible to accurately
calculate the real rate of surplus value (M/V) with the help of data from the numerical model
presented in Table 4.
To calculate the actual rate of surplus value, it is necessary to inverse the transformation
of production prices into values (Kalyuzhnyi 2006). For the model in question, presented in
Table 4, the inverse transformation algorithm reduces to finding unknown parameters
Jc , Jv
and m' from the following system of equations:

(15)

Where is the real general rate of surplus value, determined by the formula: ; c 
J
is the index of change in the price of production of constant capital after the transition to its
value;
J v is the index of the change in the price of production of consumable goods for

workers after the transition to their value. Given that: , the system of
equations (15) is simplified:

(16)
Using the first and third equation of system (16), we obtain the formulas for determining
the unknowns
J v and J c :

(17)

(18)
Substituting in equation (17) and (18) the known parameters of the numerical model
from Table 4 and solving it with respect to the unknowns, we obtain:
J c =0.78125 and J v
=0.9375.
16 The Transformation Problem: Erroneous Arguments…

After this, the actual general rate of surplus value is calculated:

=200/ (3200.9375)]100% = 66.67%.
With the help of the known quantities
J v and , the model with the final production
prices (see Table 4) is transformed into the original value model, represented in the form of
the system of equations (2). Thus, between the sector value model and the same model with
the final production prices, there is an unconditional internal relationship. The link between
the system of values and the system of production prices is the amount of profit equal to the
sum of surplus value and, of course, the unchanged technological coefficients. As it can be
seen from system of equations (16), for an inverse transformation of the final (or simply
market-based) prices of production of goods into their values, no preliminary information is
required on the actual general rate of surplus value. And, nevertheless, the prices of
production can be transformed into values so to determine the actual general rate of surplus
value. This means that the level of the general rate of the real surplus product is actually
determined by the production price system, as it was also demonstrated by the algorithms of I.
Steedman and V. K. Dmitriev.
Therefore, the general rate of surplus value, admitted by Marx as a theoretical
simplification, is, in fact, not only a historical prerequisite of the system of production prices
established as a result of the mutual competition of capitals, but is also a practical
consequence of the existence of this system of prices. The production price system contains
information on the overall degree of labor exploitation.

4. The practical usefulness of the theory and the methods of direct and inverse
transformation of value into price

The practical usefulness of the theory and the methods of direct and inverse transformation of
value into price is the following. They allow us to justify the methods of measurement of
efficiency in social production (large-scale national economic investment projects) on the
basis of values, and not only on the basis of production prices alone, which do not allow us to
reveal the actual effectiveness of these projects on the ground of measuring social labor
productivity (Marx 1998 [1894]).
The results of the study of the measured properties of value prices and production prices
are given in Tables 5 and 6. The comparison of the option b) and the option a), presented in
Table 5, shows that in terms of productivity growth the option b) is more effective. In
particular, with the price of the second industry remaining unchanged, the rate of surplus
value in the option b) increases from 0.66667 to 0.75.

Table 5. Comparison of the two options of the functioning of economy when using value prices
Industr Constant Variable Rate of Rate of
Profit Price
y Capital Capital Surplus Value Profit
a) basic production option
I 225 90 60 375 0.666667 0.19048
II 100 120 80 300 0.666667 0.36364
III 50 90 60 200 0.666667 0.42857
Total 375 300 200 875 0.666667 0.29630
b) production option, when in the second industry the costs of the constant capital
increase by 1.25 times and the costs of the variable capital are reduced by 1.2 times, at
constant value prices
Kalyuzhnyi Valeriy 17

I 262.5 105 70 437.5 0.666667 0.19048

II 125 100 75 300 0.750000 0.33333
III 50 90 60 200 0.666667 0.42857
Total 437.5 295 205 937.5 0.625000 0.27986

The comparison of the option b) and the option a), presented in Table 5, shows that in
terms of productivity growth the option b) is more effective. In particular, with the price of
the second industry remaining unchanged, the rate of surplus value in the option b) increases
from 0.66666 to 0.75. If according to the basic production option a) the productivity of the
social labor for the final product was (
300 w2 +200 w3 )/ 300 V =1.6667, then, according to

the option b), it increased to (

300 w2 +200 w3 )/ 295 V =1.6949, or by 1.7%. Consequently,
option b) is actually more effective than option a). Now we consider an analogous model of
reproduction based on production prices and reported in Table 6.
The comparison between option b) and option a) shows that, in terms of productivity
growth, option b) is still more effective in this case. In particular, at a constant production
price for the goods of the second industry, the rate of surplus value in option b) increases from
0.5 to 0.6. If according to the basic production option a) the productivity of the social labor in
the final product was (
320 w2 +200 w3 )/ =1.625, then according to option b) it
increased to
320 w2 +200 w3 )/ =1.65254, or 1.7%. Consequently, option b) is
actually more effective than a) in terms of productivity of social labor. But in conditions of
production prices and competition of capitals, instead of the criterion for the greatest growth
in the productivity of social labor, as it is well known, the local criterion for the growth of the
rate of profit is applied.

Table 6. Comparison of the two options of the functioning of economy when using production
prices
Constan
Industr Variable Rate of Rate of
t Profit Price
y Capital Surplus Value Profit
Capital
a) basic production option
I 288 96 96 480 1.00000 0.25000
II 128 128 64 320 0.50000 0.25000
III 64 96 40 200 0.41667 0.25000
Total 480 320 200 1000 0.62500 0.25000
b) production option, when in the second industry the costs of the constant capital increase
by 1.25 times and the costs of the variable capital are reduced by 1.2 times, at constant
production prices
I 336 112 112 560 1.00000 0.25000
II 160 106.6666 53.3333 320 0.50000 0.25000
7
III 64 96 40 200 0.41667 0.25000
Total 560 314.6666 200.3333 1080 0.65254 0.23467
7
The analysis of the data of Table 6 shows that the rate of profit decreased from 25% in
the basic option a) to 20% in the basic option b). Consequently, option b), in terms of
inefficient rate of return, leads to a reduction in the overall payback period of capital, and it is
18 The Transformation Problem: Erroneous Arguments…

unlikely that anyone would implement a less efficient investment project, especially if it is a
large-scale national economic project.
The decrease in the total amount of labor entering the commodity would seem to serve as
an essential sign of an increase in the productive power of labor in any general condition of
production. However, as Marx wrote:

So far as capital is concerned, this productive power does not increase through a saving in
living labour in general, but only through a saving in the paid portion of living labour, as
compared to labour expended in the past... <…> Here the capitalist mode of production is
beset with another contradiction. Its historical mission is unconstrained development in
geometrical progression of the productivity of human labour. It goes back on its mission
whenever, as here, it checks the development of productivity. It thus demonstrates again that
it is becoming senile and that it is more and more outlived.”(Marx 1998 [1894]: 261).

We note that this contradiction, which actually takes place under capitalism, can be resolved
in those countries where a state regulation of the market economy is carried out. As a last
resort, nothing prevents the effectiveness of large investment projects done by the state to be
assessed using appropriate value categories (Kalyuzhnyi 2010). Thus, the analysis of the labor
costs is not at all superfluous, as Ian Steedman argued.

5. Conclusions

So, it can be argued that such a prolonged existence of the transformation problem is caused,
on the one hand, by an inattentive reading of the works of Marx, and on the other hand - there
could not have been without "furies of private interest" (Marx 1996 [1867]). In addition,
many people wanted to surpass the great scientist that Marx was.
This article shows that the relative production prices can indeed be determined without
the use of values, based only on: the technological coefficients, the coefficients of
consumption of the means of production, and the labor per unit of output, as established by
Ian Steedman.
However, the values can be determined on a similar basis using the system of equations of the
total labor costs by Dmitriev. This means that the production price system contains in a
hidden form information about values prices, directly proportional to the total labor costs.
The article shows that the price system also contains information on the actual rate of
surplus value, which differs from the apparent average rate of surplus value in conditions of
production prices. This means that it is possible to develop a method for the inverse
transformation of the price of production of goods into value. This method is shown for the
first time in this article. It is also established that, in full accordance with Marx’s
methodology, it is necessary to distinguish, first, the stage of the initial transformation of
values into production prices, which is based on the two well-known Marx's postulates of
invariance. In the article it is proved that as ‘social product’ Marx meant the final social
product, and not the aggregate social product, as most of the Marx’s opponents still believe. 5
The realization of this feature leads to a change in the real wages of workers, which,
according to Marx, cannot be significant, taking into account the mutual cancellation of the
deviations from value, given the numerous production prices for the goods.

5
“For the purposes of the following analysis we may leave out of consideration the distinction between price of
production and value, since this distinction disappears altogether when, as here, the value of the total annual
product of labour is considered, i.e., the product of the total social capital.” (Marx 1998 [1894]: 818–9)
“The entire value portion of commodities, then, in which the total labour of the labourers added during one day,
or one year, is realized, the total value of the annual product, created by this labour, is divided into the value of
wages, into profit and into rent.” (Marx 1998 [1894]: 820) (bold by the author of the present paper)
Kalyuzhnyi Valeriy 19

Secondly, it is necessary to distinguish the stage of the final transformation of values into
production prices, at which the real wages of workers are restored through a corresponding
change in the level of the prices of consumable goods for workers, and constant capital. In
this case the equality of the total surplus value and total profit holds, but the second postulate
of invariance (the sum of the prices of production of the entire social product must be equal to
the sum of its values) is replaced by the postulate of the invariance of the real wages.
The paradox is that the solution obtained by Bortkiewicz completely corresponds the
results of the final transformation, which Marx substantiated. However, neither Bortkiewicz
nor his followers understood that in the final transformation only one of Marx's postulates
should be fulfilled, since the second postulate is replaced by a new postulate of the invariance
of the real wages. For example, if the amount of profit is equal to the sum of the surplus-value
of all the spheres of production, the sum of the production prices of the entire social product
must deviate from the sum of its values. However, this deviation is nominal in the same way
as the GDP at current prices deviates from the GDP at constant prices.
The algorithms of transformation of price values into production prices, and production
prices into price values, considered in this paper allow us to substantiate new methods for
measuring the effectiveness of the social production (large-scale national economic
investment projects) on the basis of measuring the social productivity of labor.
20 The Transformation Problem: Erroneous Arguments…

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