Home > political-economy > Why is the Bank of International Settlement interested in Karl Marx?

Why is the Bank of International Settlement interested in Karl Marx?

I’m reading, “The Transformation Problem: A Tale of Two Interpretations”, by David Bieri.

According to his profile,

David studied economics at the London School of Economics and international finance at the University of Durham (UK). In 2006, he started his Ph.D. studies in SPIA.

From 1999 until 2006, David held various senior positions at the Bank for International Settlements, most recently as the Adviser to the General Manager and CEO. From 2002 to 2004, he held the position of Head of Business Development in which capacity he was responsible for new financial products and services and reserve management advisory for central banks. From 2004 to 2005, David worked as an economist in the BIS’ Monetary & Economics Department.

Prior to joining the BIS, David worked as a high-yield analyst at Banker’s Trust in London and in fixed-income syndication at UBS in Zurich.

What caught my attention is the notable resume of this author, which is quite unlike that of the typical Marxian economist. High-yield analyst, central bank bureaucrat, mainstream economist? This is not the sort of person you will find at your local Occupy campsite.

Why, I wondered, is the Bank of International Settlement interested in an obscure technical problem of Marx’s theory? So, I decided to give the paper a read.

In the paper Bieri states:

Over 100 years since Marx’s value theory of labour was first published, the so-called “transformation problem” – deriving prices from values and providing a theory of profits as arising from surplus value – has inspired the imagination of economist of all shades of intellectual suasion. Although it is generally accepted that the transformation problem has be solved (at least mathematically) in a number of ways, there are few problems in economics that have excited similar interest over such a prolonged period. Indeed, (Skousen, 2007, p.93) refers to the transformation problem as the “most glaring single hole in the Marxian model”.

Bieri’s definition of the “transformation problem” here is significant: prices are derived from value, and profits are derived from surplus value. It is not clear in this definition that value and surplus value are distinct from one another. Value is socially necessary labor time, right? So what is surplus value? Is it surplus socially necessary labor time? If so, what does “surplus socially necessary labor time” mean? Does it mean labor time that is not socially necessary? If so, then it is not a form of value, because value is defined as socially necessary labor time in Marx’s theory, right? Labor time that is not socially necessary is wasted labor; which is to say all labor beyond the social average of labor times of production of a commodity is not value — it does not count as part of the value of the commodity.

If, for instance, the average labor time to produce a widget is 10 hours, but an individual producer requires 12 hours to produce her widgets, the additional 2 hour of labor does not appear as part of the value of the widget. On the other hand, the exchange value of the widgets are determined both by the social average of labor times required to produce them and by total social need for them. Even if all producers take only the average amount of labor time to produce theirs widgets, it is still possible the total quantity of widgets produced might exceed total social need. In this case, general overproduction of widgets will cause the exchange value of a widget to fall below its value.

In neither of the above case do the additional labor time figure in the exchange value of the widgets; moreover, in the first case additional labor time does not even figure in the actual value of the widget. Therefore, neither example is the source of surplus value — surplus socially necessary labor time — or profit in Marx’s theory.

Both appear to be a dead end in understanding the transformation of surplus value into profit.

However, the most paradoxical and counter-intuitive feature of Marx’s labor theory of value is that while neither of these two forms of excess labor time alone are the source of surplus value, both of them together are the essential condition for it. To produce surplus value, producers must spend more time on the production of the capitalist commodity, labor power, than is socially necessary to produce it, and they must produce more labor power than is required by any measure of existing social need.

This is paradoxical, first, because in capitalist commodity production, unlike simple commodity production, the additional labor time expended in the production of labor power does count as socially necessary, but the definition of socially necessary is now altered: what is socially necessary is now determined by the needs of the capitalist firm, and not society as a whole. Second, the overproduction of the commodity, labor power, is no longer a defect of the anarchy of unplanned social material activity, but the aim of this activity. Capital demands more labor time out of society than is required to satisfy the needs of society; and, it demands the production of more labor power than can be employed by society to satisfy those need.

Bieri notes:

“mainstream economists have by and large come to dismiss the transformation problem as a trivial technical exercise, [but] the issue has recently received renewed attention in Marxian economic theory.”

What I have argued above shows clearly why the transformation problem is far from a trivial technical exercise. Capitalist commodity production rests on premises that are altogether impossible under simple commodity production: chronic extension of labor time beyond what is socially necessary and chronic overproduction of the commodity labor power. Accounting for price equilibrium in this environment is not simply a theoretical problem for Marx’s theory, but first and foremost the overriding material obstacle to the capitalist mode of production itself. Behind it is the whole history of the world market and of the modern state.

The transformation of value into price and the transformation of surplus value into profit are two fundamentally different problems. Value presupposes exchange value (or prices); while surplus value does not presuppose profits. All the element of surplus value imply prices go to zero — this is the whole of the dilemma for mainstream economics.

Marx introduces a number of caveats to this process, but maintains it overall: prices must go to zero and the law of value will be abolished. He holds to this prediction by explicitly arguing that the profit rate must fall. This is why in Capital Volume 3 Marx follows the argument on equalization of profit, with the tendency toward a falling rate of profit.

The solution to the conversion of capitalist values into prices IS the declining rate of profit. How is this true — why is this not just the muttering of a somewhat mediocre blogger?

My first piece of evidence is circumstantial: the organization of Volume 3. Marx always builds on previously explicated concepts. My second piece of evidence is also circumstantial: the times economists address the transformation problem have been striking: Bieri identifies those periods as “the writings of von Bohm-Bawerk (1898), Winternitz (1948) and then by Samuelson (1971)”.

It is no surprise to me that each of these periods have been associated with changes in the economic policy of the state. The writings of von Bohm-Bawerk appears just prior to the establishment of the Federal Reserve and the switch from bimetallism to the gold standard. Winternitz appears just with the establishment of the Bretton Woods Agreement and US efforts to absorb its conquered foes in the aftermath of World War II, when the threat of a reemergence of the Great Depression loomed large. Samuelson’s discourse appears around the time of the collapse of Bretton Woods and the onset of the Great Stagflation.

These three examples lead me to conclude economists in each case were reviewing Marx’s work precisely to discover a solution to a pressing practical issue. I do not think these episodes are spurious or coincidental — when pressed by insolvable contradictions, Marx’s work becomes fashionable among economists.

Beyond these two pieces of circumstantial evidence, however, is the theory itself. Marx’s theory suggests the fate of prices rests on the necessary realization of the sum of surplus value into profit:

If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital.

The implication of Marx’s argument here should not be overlooked or underestimated: capital expressly rests on chronic overproduction and chronic overwork. If surplus value cannot be realized as profit, what occurs is not, as in simple commodity production, just a collapse of prices. Instead, the entire system of production starts to unwind, and all the accumulated over-capacity of the previous period of expansion is suddenly exposed.

This is because of the unique nature of the capitalist commodity, labor power, itself. We are used to thinking about labor power as if it were an individual commodity. like shoes. This is true in a certain sense: we each possess our own labor power which we sell as a commodity. But, there is another sense of labor power that is not the least bit individual; it’s the productive capacity of the combined labor power of society — the total social capital of society that can be employed in ceaseless self-expansion.

This is how labor power looks from the standpoint of the fraternity of capital, who exploit the common labor power of society and share the surplus value wrung from it as their alloted share of the profits. Marx explains this in his discussion of equalization of the rate of profit: the sharing of the surplus wrung from this mass of labor power. If this common fund of surplus value is not realized as profit, the value of the entire labor power of society is threatened with collapse. The value of the overaccumulated social capital, of labor power in excess of society’s needs, is exposed to the law of value as if it were a simple commodity. And. like any other commodity so exposed, the exchange value of this mass of social labor power vanishes all at once and together.

Which is to say, prices collapse and capital grinds to a halt.

Each of the three great crises of the 19th and 20th Century: the Long Depression, the Great Depression and the Great Stagflation has sent economists scurrying to bone up on their Marx. And, each for the same reason: to discover some clue in his writings to their present predicament.

  1. Threecrow
    January 9, 2012 at 2:24 pm

    With this piece of writing arrives an important Aha moment even for this dull witted fan of your writings. I would add this to your ending: As recent events (2008 to present) have shown, it seems instinctual to me that you have perhaps purposely toned down your observation’s obvious conclusion; that being, the men you have mentioned as scurrying back to Marx did so and do so now not so much for the purpose of finding clues to cure their present predicament, but, rather, in a Three Stooge manner of a plumbing job, in a final attempt to postpone the inevitable collapse of all they hold dear, including dominion over all the earth.
    A brave and wonderful piece of writing Jehu.

  2. January 10, 2012 at 4:07 pm

    As Pink Floyd aptly noted, there are always “Pigs on the Wing”. What Pink Floyd failed to note is that Communist Pigs are no better than Capitalist ones. The album, “Animals”, which I will play on my radio show this afternoon with commentary, was based on George Orwell’s “Animal Farm”. Which, in turn, was based on Karl Marx’s “Communist Manifesto”.

    “The first chapter of the Manifesto, “Bourgeois and Proletarians”, examines the Marxist conception of history, with the initial idea asserting that “The history of all hitherto existing society is the history of class struggles”. It goes on to say that in capitalism, the working class, proletariat, are fighting in the class struggle against the owners of the means of production, the bourgeois, and that past class struggle ended either with revolution that restructured society, or “common ruin of the contending classes”.

    It continues by adding that the bourgeois exploits the proletariat by “constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones”.

    The Manifesto explains that the reason the bourgeois exist and exploit the proletariat with low wages is because of private property, “the accumulation of wealth in private hands, the formation and increase of capital”, and that competition amongst the proletariat creates wage-labour, which rests entirely on the competition among the workers!

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