Karl Marx Definition

Some Marxian Definitions

Before analyzing Marx's solution to the great contradiction in detail, it is necessary to clarify some of his technical terms. In solving the valuation problem, Marx employed the following terminology:
Constant capital (c) = charges on fixed capital (i.e., depreciation plus the cost of raw-material in­puts)
Variable capital (v) = total wages paid to labor
Outlay (k) = cost of production (excluding profit), or c + v
Surplus value (s) = contribution of workers for which they
are not paid, or excess of gross re­ceipts over the sum of constant and variable capital
Rate of surplus value (s') = ratio of surplus value to variable capital employed, or slv
Rate of profit (p') = ratio of surplus value to outlay, or s/ (c + v)
Organic composition of capital (O) = ratio of capital to labor employed in production

In contemporary terms it could be said that GNP = c + v + s and NNP = v + s.

The Transformation Problem, Karl Marx’s Definition

Marx attempted to resolve the great contra­diction by employing the illustration reproduced below as Table 1. His anal­ysis and discussion rest on three major assumptions: (1) different commodities are produced with different organic compositions of capital (i.e., different capital/labor ratios) and use up constant capital at different rates in production; (2) for convenience, the rate of surplus value is taken to be 100 percent; and (3) competition will tend to equalize the rate of profit among industries at the "av­erage rate," that is, the ratio of aggregate surplus value to aggregate outlay.

Marx noted that the organic composition of capital in any single industry will depend on the technical relation of labor power to other means of produc­tion. But for purposes of illustration, the ratios of constant capital to variable capital in Table 1 are arbitrarily chosen. Five different commodities are rep­resented in column 1, each produced with different capital/labor ratios, as re­vealed in column 2. Commodity A, for example, is produced with 80 units of constant capital and 20 units of variable capital. For simplicity assume that 80 and 20 are dollar expenditures so that the heterogeneous units of "capital" and "labor" can be summed to determine outlay in each of the five industries. It can be noted, therefore, that outlay equals $100 in each industry and that the aggregate outlay of the simple economy is $500. Column 3 shows the units of constant capital used up in the production process for each of the five indus­tries. The dollar cost of each commodity is determined in column 4 by adding wage costs (variable capital) to column 3. Land is left out of the illustration as a means of production but can easily be accommodated along with constant capital. Column 5 shows surplus value in each industry, entered at 100 percent of expenditures on variable capital. Column 6 reveals the "true" value of each commodity according to Marx's labor theory. The values in this column are determined by adding each row in column 4 to each row in column 5.

According to Marx, the cost of a commodity differs from its sales price by the average amount of profit, which is added to cost (column 4) in order to determine the sales price (column 8). Column 7 is the average profit for each industry and is uniform across industries because of the law of competition. The profit rate in Marxian terms is s/(c + v), or 110/500 = 0.22, which, when multiplied by the outlay in each industry ($100), yields the dollar amounts shown in column 7. A comparison of columns 8 and 6 shows that market price differs from labor value for each commodity, as the critics contended, but col­umn 9 reveals that the algebraic sum of the individual differences is zero. Marx concluded: "The deviations of prices from values mutually balance one an­other by the uniform distribution of the surplus value, or by the addition of the average profit of 22 percent of advanced capital to the respective cost-price of the commodities" (Capital, III, p. 185).

This transformation of values into prices supports Marx's contention that in the aggregate, labor is the true source of value, and in his preface to the third volume of Capital, Engels touted it as a triumph over Marx's critics. The truth is, however, that few economists today are willing to accept the transforma­tion problem as a valid substantiation of the labor theory of value. Ingenious as it is, Marx's solution still denies that machinery is productive over and above the amount of labor congealed in it, a view that modern economists refuse to accept.
Although much attention has been concentrated in this section on the me­chanics of value theory, it should be noted that this subject was of relatively minor importance to Marx, who was more interested in the construction of a quasi-Ricardian model of the development of an entire socioeconomic system. The narrower subject of value theory gained importance after Marx's death because of an emphasis on price determination in neoclassical economics. It is interesting to note, however, that debates over the transformation problem have been most furious among neoclassical economists rather than among neo-Marxians.

Stuart Mill was more open to the prospects of technological change, and yet he did not allow it the central role in his theory that Marx did in his.

Marx described five laws, or general tendencies, inherent in capitalism. Each stemmed from the dynamic nature of the economy, and each was rooted in the conflict between the dynamic "forces of production" and the static "re­lations of production."