#20: Your Economics Questions Answered (II)

Posted: June 6, 2025

Want your economics questions answered? Send them to se4wp@proton.me, or on Instagram (@read.sewp). 

Thanks to @kevinomeara52 on Instagram for this week's question: 

What is the proper approach/answer to the transformation problem? 

This is a fantastic question, but one that I won’t be able to do full justice to in this post alone. So I’m going to take this opportunity to do two things: 1) outline what has become known as ‘the transformation problem,’ and 2) point towards what I believe to be the best answer, and the resources I’ve used to reach this conclusion. This is our most technical post yet, but I encourage everyone to engage with it. We must destroy the divide between mental and physical labour. Every worker must equally develop the capabilities for scientifically constructing socialism. 

The ‘transformation problem’ is a much-debated theoretical issue within Marxist theory, and between Marxist and mainstream economists. At the core of the argument for the existence of the 'transformation problem’ is the claim that Marx’s work fails to provide a general rule for transforming a production input’s value (labour power, raw materials, etc) into a price of production (in money). Marx’s labour theory of value posits that value is determined by socially necessary labour time. The ‘socially necessary’ part of this definition is crucial. Without it, labour time alone would produce value. So a chair that took an amateur 40 labour hours to make would be 10x more valuable than one that took an expert 4 labour hours. As such, value is the ‘sturdy’ reality behind market price fluctuations.  

Let’s look at how the ‘transformation problem’ appears as values become prices. Different companies will take varying amounts of socially necessary labour time to produce identical goods, which are then sold on the market for the same price. For example, Company A takes five hours to produce a $20 toaster, while Company B takes three hours to produce functionally the same $20 toaster. In this scenario, both 5 labour hours = $20 and 3 labour hours = $20 are true, which would mean there is no strict relationship between value (determined by labour hours) and price, and different profit rates (assuming a similar cost structure). At an individual firm (microeconomic) level, prices and values can (and do) diverge. However, this flows into another consequence of the ‘transformation problem’: negating Marx’s claim that the profit rate averages out across industries. If two companies making the same product in the same industry have different profit rates, how can the profit rate possibly average out across industries?  

Many capitalist economists have taken this perception of a fatal flaw in Marx’s analysis to render his entire body of work incorrect. As socialist economists, we gain nothing from dismissing these difficult theoretical problems. If the criticism is earnest, engaging with it only strengthens the science of socialism. Marx’s work arose from a similar critique of 19th-century liberal political economy. If the criticism is made in bad faith, we must be able to debunk it as junk economics or capitalist propaganda, to sharpen our collective analytical and explanatory abilities. The century-plus history of the ‘transformation problem’ makes addressing it an important milestone in the development of Marxist economics. 

Now that we’ve outlined the ‘transformation problem’ and its importance, let’s get into the answer, or at least my current thinking on it. As a preface, I am not an academic economist or Marxist theorist, so my assessment of this problem is based on the original work of others. However, while we cannot be direct experts in every subject, this should never restrain us from direct investigation of difficult problems, to understand the analysis of direct experts. The working class is denied the time and energy to study these deep theoretical problems, so we must harness the intellectual heritage of socialist thinkers to understand these urgent problems as thoroughly as we can.  

That being said, for a full answer/refutation of the ‘transformation problem,’ I will direct readers to the work of Michael Roberts and Fred Moseley. Roberts is one of the Marxist economists whose work has inspired and shaped this project. Years of engagement with his work has built my confidence in his judgement that the most compelling answer to the ‘transformation problem’ is Moseley’s Money and Totality: A Macro-Monetary Interpretation of Marx's Logic in Capital and the End of the 'Transformation Problem.' In this work, Moseley draws broadly on Marx’s own writing, to address the elements of which that lead to claims of a ‘transformation problem’ in the first place. I endeavoured through Moseley’s dense book, and while not understanding everything, I gained a ton of insight into how he finds the non-existence of the ‘transformation problem’ in Marx’s own work. As an introduction to Moseley’s analysis, I want to outline the two main points of his argument, which are used in the book’s title: money and totality.

Money: We need to start with Marx’s formula of the circuit of money capital: M-C...P...C'-M', where M = money, C = commodities, P = production, and C'/M' = more commodities/money. This is how capitalists increase their capital by putting it into motion. A capitalist uses money to buy commodities (labour power, machinery, raw materials), puts the commodities to work in production, which results in more commodities, which they sell for more money, and start the circuit over again. 

Moseley’s insight is to draw our attention to how the so-called ‘transformation problem’ is already solved within the circuit of capital, which is emblematic of how the real world capitalist production functions. Rather than starting with value that must be ‘transformed’ into a price, the capitalist starts with money and ends with more money as the result. By considering the entire circuit as such, we can see how money (as the universal equivalent) can seamlessly be transformed into labour power, which is the only commodity that produces surplus value, which is then turned into more money. 

Totality: In our above toaster example, we see how the ‘transformation problem’ spills over to allegedly negate Marx’s claim about the equalization of the profit rate across industries. While this appears glaring at the level of individual firms (microeconomics), Moseley uses Marx’s own writing to show that this consequence evaporates on a macroeconomic scale. Profit comes first from the exploitation of labour power’s surplus value, in production at millions of individual firms. It is then redistributed among capital’s different branches through competition, with capital moving to wherever the profit rate is highest. This is how the profit rate averages out across industries. The total value (socially necessary labour time) in an economy equals the total prices of all commodities. Then, the total surplus value is redistributed to various capitals according to their size, so total surplus value equals total profit. All of this also plays out in real time, in material production, circulation, and distribution processes, not instantaneously, which is another mistake advocates of the ‘transformation problem’ make. 

Remember that this is just an introduction to the rich theoretical work at play here, so I encourage you to read Roberts’ overview of Moseley’s argument here, watch this lecture on the ‘transformation problem,’ or find a copy of Moseley’s book to get the complete argument.