Before I deal with the specific points raised by comrade Mandel in the last issue of International, I find it necessary to make some preliminary remarks. It must be emphasized, first of all, that the differences that exist on the transformation problem have no bearing on an overall assessment of the IS permanent arms economy theory. Whatever solution to the transformation problem is adopted, that of Marx or that of von Bortkiewicz, it cannot be used to demonstrate that a fall in the general rate of profit can be prevented by investment in the arms sector. Michael Kidron's argument is wrong on logical grounds because he says nothing about the development of the conditions of production in the capital and consumer goods sectors, and it is here, according to his assertions, that the rate of profit is determined. (See International, Vol. 1, No. 8, pp. 58-60.)
Hence it is a serious theoretical and tactical error to centre a critique of the permanent arms economy on the question of the transformation problem. The IS opposition grouping around David Yaffe made precisely this mistake. As a consequence they failed to demolish Kidron in the eyes of a large section of the IS membership and facilitated their own expulsion.
Prices of Production and the Rate of Profit
Of course, if prices of production are defined in the explicit manner that Marx defines them in his solution to the transformation problem, then it follows as a mere tautology that total value equals total price of production, and total surplus value equals total profit. What is at issue is the adequacy, relevance and internal consistency of Marx's approach.
When we talk of the equalization of the rate of profit in capitalist society, we are talking of a real process which exists as a general tendency under all forms of capitalism. Hence any theoretical treatment of this phenomenon must identify the actual mechanisms by which the rate of profit is equalized. The capitalist perceives his world in terms of everyday market prices. He is not aware of, or disposed to be interested in, data concerning the labour embodied in his plant or the value of the labour power employed. The capitalist bases his investment decisions on the magnitude of the rate of profit in price terms, i.e. his money profit divided by the price of his total capital investment. Each capitalist will search out a higher rate of profit measured as a ratio between prices, not between values.
The transformation problem covers the abstract equilibrium situation where the rate of profit is equalized between firms; where capitalists cannot increase their [illegible] rate of profit is not 5/(c+v), or any other ratio between values in this form. It is the ratio between profit and capital invested in price terms, in each and every firm. The prices of production that are relevant in this situation are the actual equilibrium prices which are associated with the formation of the general rate of profit in price terms. Contrary to Mandel's assertion, no solution to the transformation problem yet published is concerned with the 'problem of price fluctuations on the [illegible].' [illegible] tarred with the brush of bourgeois micro-economic theory.
We can define new 'prices of production' and eschew 'actual prices' until the cows come home, but these questions remain: Have we identified the real process of the equalization of the rate of profit in a [illegible] economy? Are our definitions analytically useful? The 'prices of production' that Mandel gleans from Marx will not produce an equalization of the rate of profit, neither is there any reason to suppose that Marx's solution describes an actual process in the capitalist economy. But there is plenty of evidence in Capital that Marx was not trying to construct empty tautologies. For [illegible] he writes: 'The price of production is regulated in [illegible] sphere and likewise regulated by special [illegible]. And this price of production is, in its turn, the centre around which the daily market prices fluctuate and tend to equalize one another within definite periods.' (Capital, Vol. 3, Moscow 1962, page 176, my emphasis.) This [illegible] definition of prices of production is in logical contradiction with the implicit definition elsewhere in Capital — the one so tenaciously defended by Mandel.
Profit and Surplus Value
Mandel writes: 'The circulation and competition process can only modify the division of the mass of surplus value, not the quantity of this mass itself.' But it does not follow that total profit equals total surplus value. The reason for this is incredibly simple. The surplus product can be measured in three ways:
1. by a physical unit, e.g. tons, cubic feet;
2. by value units, i.e. hours of socially necessary labour time;
3. by price units, e.g. dollars, ounces of gold.
Surplus value cannot, indeed, be created or destroyed in circulation, but when it becomes transformed into profit the same surplus is measured by a different accounting system. Hence, in general, total profit does not equal total surplus value.
This does not, by any means, amount to a negation of the law of value. Profit is still an increasing function of surplus value; when surplus value is hypothetically zero so too are profits. Profit and surplus value are different quantitative expressions of the same surplus product. But they are not the same category.
The Arms Sector
Mandel writes: 'The idea that value and surplus value production in the armaments sector is "neutral" to the average social rate of profit leads to absurd conclusions. Does it mean that no profit is made in that sector at all? Does it mean that all profit made in that sector originates only and exclusively from surplus value produced in that sector . ...?'
Of course the surplus value produced in the arms sector enters into the general pool of surplus value, and this extra surplus value is in turn transformed into more profit. What is actually asserted by von Bortkiewicz and myself is that the rate of profit is determined by the conditions of production in those industries which directly or indirectly produce the real wage. To compare absolute profit with the rate of profit is like comparing distance with speed.
The former von Bortkiewicz assertion about the determinants of the rate of profit is not the same thing as equating the rate of surplus value with the rate of profit. This latter confusion arose in Ricardo because he 'forgot' constant capital in the wage goods sector, and Marx was quite correct to criticize him on this point. Von Bortkiewicz's assertion is easy to understand if it is remembered that the rate of profit in each firm is profit divided by capital advanced. By definition the physical form of this advanced capital [illegible] or luxury goods. Hence the conditions of production the arms and luxury goods sector do not enter into the determination of the rate of profit in the other sectors, and the general rate of growth must be determined solely by the conditions of production in the wage and capital goods departments.
Mage's Data for the US Economy
Challenging Shane Mage's data which appeared in Appendix 2 of my article, Mandel remarks that it is human 'miracle' that the US economy has been growing much faster in postwar decades with a lower rate of profit. However, the rate of profit is not mechanically related to the rate of growth; the economy does not respond automatically, in all circumstances, to a fall in the rate of profit.
In fact the rate of growth also depends on the rate of accumulation. (See Appendix 1 of my article.) And a relatively high rate of growth with a low rate of profit can possibly be explained by a high rate of accumulation. As the rate of accumulation is less than unity in all circumstances, Mage's data would be invalidated if at any time the rate of growth was higher than the rate of profit in a full employment situation.
Personally, I find none of the existing sets of 'Marxist' data on postwar capitalism completely satisfactory. But Mage's data seem to indicate certain trends, such as a falling rate of surplus value, which seem consistent with the British experience. I feel that the onus is on comrade Mandel to produce an adequate alternative set of data for the US.
Seven Questions on the Transformation Problem
If the debate on the transformation problem is going to be useful for the revolutionary left, then a dialogue, rather than a sequence of assertions and counter-assertions, has to take place. To this end I would like to pose seven questions:
1. Do capitalists base investment decisions upon the rate of profit in price terms, or in value terms?
2. What definition of prices of production, if any, will ensure that (a) total price equals total value and total profit equals total surplus value; (b) the rate of profit is equalized; and will also (c) be the 'centre around which daily market prices fluctuate'?
3. In what units are these prices of production measured?
4. Are these units the same as those used to measure values?
5. Do prices generally and permanently deviate from values, or do equal values tend to exchange?
6. Why is the average rate of profit the same as the general rate of profit? Or are they unequal?
7. What is wrong with (a) the assumptions used, or (b) the logic of the argument made by von Bortkiewicz? Or is his approach correct?
Geoff Hodgson
Short Bibliography on the Transformation Problem
Marx, Capital, Volume 3, Part 2.
Paul Sweezy, The Theory of Capitalist Development, New York 1942, Chapter 7.
Geoff Hodgson, Marxist Epistemology and the Transformation Problem, available from the Conference of Socialist Economists.
Ernest Mandel, Marxist Economic Theory, London 1968, Volume 1, pp. 327-8.