Controversial Issues in the Theories of Value and Distribution: The ‘Transformation Problem’ and the ‘Capital Theory Critique’

Abstract

Two central issues of economic theory are dealt with in some detail: the first is the famous ‘transformation problem’, which essentially refers to the logical consistency of the classical theory of value and, in particular, to Marx’s labour theory of value. We explicate the various approaches and solutions to the transformation problem starting from Marx’s one, which, despite its semifinished character, was, as we argue, in the right direction that could not be further advanced because of the lack of necessary mathematical theorems, which were discovered much later. The second issue that this chapter deals with is what came to be known as ‘capital theory controversy’. Hence, we bring together and compare the two distinct theories of value: the classical political economics (CPE) labour theory of value (LTV) and the neoclassical (or marginal) theory of value. We show that if the CPE theory of value makes the labour time expressed in terms of technological requirements of production, the principal determinant of equilibrium prices, then the neoclassical theory makes preferences and endowments, along with technology, the data of its theory of value. In the neoclassical theory, however, prices reflect relative scarcities, and the capital theory controversies refer precisely to whether or not this holds true when evaluating capital goods as produced means of production, and according to those involved in the debate, the answer was negative.