In 20th-century discussions of Karl Marx's economics the transformation problem is the problem of finding a general rule to transform the "values" of commodities (based on socially necessary labour content according to his labour theory of value) into the "competitive prices" of the marketplace. This problem was first introduced by Marx in Chapter 9 of Capital's draft Volume III, where he also sketched a solution. The essential difficulty was this: given that Marx derived profit, in the form of surplus value, from direct labour inputs, and that the ratio of direct labour input to capital input varied widely between commodities, how could he reconcile this with the tendency to an average rate of profit on all capital invested?
Read more about Transformation Problem: Marx's Theory, British Classical Labour Theory of Value, Transformation of Values Into Prices, Critics of The Theory
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