30/01/2008 Marx s accouning soluion o he ransformaion problem R.A. Bryer * Warwick Business School, Universiy of Warwick, ovenry V4 7AL, Warwickshire, UK. Absrac Before Foley 1982 and Duménil s 1983-4 New Inerpreaion NI, mos economiss concluded ha Marx had failed o solve he ransformaion problem in apial, bu ha solving i rigorously showed his labour heory of value was incoheren. The NI allows a rigorous soluion o he problem ha is consisen wih Marx s core claim ha only socially necessary labour ime adds money value o commodiies, bu he NI is inconsisen wih some of Marx s claims and remains conroversial. However, he paper argues ha here is no ransformaion problem in apial o solve in he way economiss pose i, of ransforming socially necessary labour ime ino prices of producion o give all capialiss he general rae of profi, bu an accouning ransformaion ha he did solve rigorously. I argues ha Marx heorised capialis accouning o solve he reverse of he economiss problem how capialiss ransform he general rae of profi and prices of producion ino socially necessary labour ime evenually working ou ha capialiss accouns measure capial as he money value of socially necessary labour ime, which is equal for idenical use-values. Marx concluded ha he hisory of capialism had solved he ransformaion problem by requiring individual capialiss o ake conrol of he valorisaion process and pursue cos-price, wha accounans oday call sandard or arge coss. The paper argues ha his discovery explains Marx s decisions a he end of 1862 o change he ile of his projec o apial, and o begin assuming ha he price of a commodiy equals he money value of he socially necessary labour ime o produce i. I analyses he NI s advance and is accouning limiaions, and challenges is conclusion ha we canno use Marx s heory of value o explain he prices of commodiies and he profis of individual capialis firms. I explains Marx s accouning soluion o he ransformaion from prices o values and concludes ha capialis accouns suppor his claim, highlighed bu no subsaniaed by he NI, ha he sum of all of profis of individual enerprises is sociey s oal surplus value; ha an individual enerprise s profi is a fragmen of sociey s surplus value. I uses Marx s heory of accouning o solve he apparenly incorrigible problem of allocaing join coss, including fixed capial. The paper concludes ha apial provides an inegraed accouning heory of how capialiss collecively conrol individual enerprises o produce, circulae, and simulaneously disribue surplus value from he exploiaion of labour, so ha every capialis ges an equal reurn on capial. I calls on criical accounans o ake Marx seriously, and on Marxiss o ake accouning seriously, as Marx did. Inroducion The nonsense abou he necessiy of proving he concep of value arises from complee ignorance boh of he subjec deal wih and of he mehod of science Marx, 1868, Leer o Kugelmann. Marx claimed his work in apial had deal a heoreical blow o he bourgeoisie from which hey will never recover Marx and Engels, 1987, p.4. Today many economiss including some Marxis economiss hink his labour heory of value is incoheren. I would like o hank Roger Hulme, Simon Mohun Queen Mary ollege, London Universiy, Sion Owen Mancheser Meropolian Universiy, and Seve Toms York Universiy, for helpful commens. * Tel.: +44024 7652 2450. E-mail address: Rob.Bryer@wbs.ac.uk.
2 Mos Marxiss argue defensively ha Marx did no ry o explain prices and raes of profi, bu propounded only a qualiaive heory of capialis exploiaion. Only a beleaguered and dwindling minoriy cling o is inuiive appeal and coninue searching for proof ha Marx s heory has he rigour and generaliy he claimed. The paper suppors he minoriy, bu argues ha only by undersanding accouning can Marxiss overcome he apparenly formidable problem of finding an inerpreaion and reconsrucion of he labor heory of value which is simulaneously an unimpeachable represenaion of Marx s own views and a foundaion for a progressive economic research programme Foley, 2000, p.3. Some economiss have noed an affiniy beween he labour heory of value and accouning Sweezy, 1942; Hicks, 1974; Foley, 1986; Klamer and Mcloskey, 1992, bu have no pursued he maer. Sweezy, for example, said, Marx s value heory has he grea meri, unlike some oher value heories, of close correspondence o he acual accouning caegories of capialisic business enerprise 1942, p.63, bu apparenly hough hese oo obvious o sae or discuss. Ohers simply believe ha profis as evidence of exploiaion is clear o all who care o see Fine, 2001, p.51. The paper argues ha he key o undersanding Marx s labour heory of value is o recognise ha accouning underlies apial s explanaion of how capialism conrols he producion, circulaion, and simulaneous disribuion of surplus value. I shows ha o work ou his explanaion, Marx heorised why and how capialiss keep heir accouns he way hey do. 1 Grounding his heory in accouning would explain why Marx dismissed he criicism ha he had no proved he concep of value. This is his asserion ha Even if here were no chaper on value in my book, he analysis of he real relaionships which I give would conain he proof and demonsraion of he real value relaion Leer o Kugelmann, 1868, quoed by Meek, 1973, p.153. As hroughou apial Marx uses accouning caegories of capial, profi and cos, ec., and real capialis accouns, o explain real relaionships beween capialiss and workers, he paper agrees wih Marx ha he had no need o prove his heory of value. Unil he appearance of he New Inerpreaion NI by Duménil 1983-4 and Foley 1982, a long line of economiss had concluded ha no rigorous soluion exised for Marx s ransformaion problem ha remained consisen wih he cenral claims of his labour heory of value see, for example, Loranger, 2004 for a survey, bu he NI is conroversial. Many sill hink ha apial conains an unresolved logical conradicion eched ino he srucure of is presenaion. In Volumes 1 and 2 Marx assumes ha he marke prices of all commodiies equals he moneary value of he socially necessary labour ime required o make hem, ye from par wo of Volume 3 he acceps ha, in realiy, compeiion means ha prices equal he cos of producion plus he general rae of profi. 2 Mos economiss including supporers of he NI conclude ha Marx failed give 1 There are several good reasons why Marx did no highligh accouning hiapello, 2007, pp.291-292, paricularly, as we shall see here, ha he hough i was oo obvious o need sressing and ha he waned o ge beneah is inchoae caegories. 2 In Volumes 1 and 2 Marx defined socially necessary labour ime o mean he labour ime required o produce an aricle under normal condiions of producion, and wih he average degree of skill and inensiy prevalen a he ime 1996, p.49. Par 3 argues ha in Volume 3 Marx modified he definiion because
3 a fully rigorous soluion o he ransformaion problem, how he economy ransforms socially necessary labour ime ino prices of producion, he long-run marke prices ha give all capialiss he risk-adjused general rae of profi. The paper argues ha his framing of he problem sands Marx on his head. Tha he problem Marx solved in Volume 3 was how capialiss collecively ransform he general rae of profi and prices of producion ino socially necessary labour ime in producion, which solves he ransformaion problem by requiring individual capialiss o ake conrol of he valorisaion process, and no he oher way around. This would explain why Marx, who was no averse o mahemaics, did no aemp o solve he economiss ransformaion problem in Volume 3, and jusify his apparen dismissal of he issue: our presen analysis does no necessiae a closer examinaion of his poin Marx, 1959, p.165. Foley 1982 and Duménil 1983-84 inerpreaion of he ransformaion problem a he aggregae level of he economy is consisen wih he cenral claim of Marx s heory of value ha only socially necessary labour ime adds money value o commodiies in producion. However, hey conclude ha Marx loca[ed] he labor heory of value a he level of he aggregae producion of commodiies no, as Ricardo expressed i, in each paricular commodiy Foley, 1986, p.15. According o he NI, Marx gave us only an aggregae heory assering ha he labor-ime worked by producive labor is he source of all money value-added, whaever prices happen o be Mohun, 1996, p.41. I follows ha we canno use Marx s heory o explain he prices of individual commodiies and he profis of individual capialis firms. 3 The paper argues ha we can by using Marx s heory of capialis accouning. I shows ha, consisen wih he NI s reamen of variable capial expendiure on producive wages, accouning for he money value of socially necessary labour ime is he key principle underlying capialis accouning ha Marx, wih help from Engels, idenified. This correspondence, he paper argues, is evidence ha profi is, as Marx says i is, a form or fragmen of surplus value, and suppors his claim ha he sum of individual profis equals sociey s oal surplus value. Par 1 presens evidence ha Marx drew on Engels knowledge of accouning o work ou his labour heory of value and heory of capialis conrol. 4 I argues ha a breakhrough in Marx s heorising of accouning for fixed capial explain his decisions in December 1862 o change he ile of his projec o apial and o sar i wih an analysis of he commodiy assuming ha he money value of socially necessary labour ime required o produce i equalled is long-run marke price. Par 2 argues ha Marx s mehod of presening apial followed from his heory of capialis accouns. Volumes 1 and 2 analyse capial in general, he circuis of capial a he level of he capialis firm as a represenaive of all capials combined. Volume 1 analyses how he capialis firm he concluded ha under compeiion capialiss imposed an overriding definiion of socially necessary labour ime o mean ha implied by cos price, wha accounans oday call sandard or arge cos, he maximum cos of producion ha allows he capialis o earn he general rae of profi. Unil hen, references o socially necessary labour ime are o Marx s general definiion. 3 References o he individual capialis, capialis firm or he capialis are o join sock companies wih managers and many shareholders who own diversified porfolios. 4 Bryer 1994 noed he correspondence beween Marx and Engels on he opic of depreciaion. hiapello 2007 analyses some of his and oher correspondence on accouning. This paper exends he range of accouning opics and goes ino he deails and heir significan for Marx s projec in apial.
4 accouns for he producion of surplus value. Volume 2 analyses how i accouns for he producion and circulaion of value is sales and shows hey are par of he same inegraed circui, ha producion equals circulaion. Volume 3 analyses he accouns of oal social capial, he consolidaed accouns of capialiss collecively, and how compeiion beween individual enerprises subsidiaries or branches seeking he general rae of profi ensures hey all produce and circulae surplus value so ha every enerprise ges an equal reurn for equal capial. 5 Tha is, Volume 3 shows ha he producion and circulaion of surplus value simulaneously disribues i so ha individual firms earn an equal reurn on capial. Par 3 provides an accouning criique of he NI and argues ha, while i is an advance on previous inerpreaions, i gives only a parial accouning soluion. Par 4 gives Marx s accouning soluion and suppors his claim ha in Volume 3 he had shown ha labour remained he source of all value in he real world of compeiive capialism when prices diverged from values. The wo criical aspecs of his claim overlooked by economiss are ha his soluion o he ransformaion problem is hisorical and ha i relies on capialis accouning. I presupposes he really difficul hisory of oal social capial, capialiss funcioning as a living collecive, demanding he general rae of profi, and compeing individual capialiss using accouns o conrol heir labour processes o ransform prices of producion ino socially necessary labour imes, which hey accoun for a wha accounans oday call sandard or arge coss. Hisory creaed he general rae of profi and oal social capial, which now requires individual capialiss o make he ransformaion from marke prices o values raher han, as usually undersood, o make he ransiion from values o prices. Par 4 concludes ha Marx gives a general, quaniaive soluion o he ransformaion from prices o values, of capialiss keeping socially necessary labour ime accouns in money, according o he law of one cos whereby idenical commodiies absorb equal amouns of he money value of socially necessary labour ime, Marx s core claim highlighed by he NI. I concludes by using Marx s heory of accouning o solve he apparenly incorrigible problems of accouning for producion overheads, fixed capial and join coss o illusrae how capialiss accoun for he cos of producion as he money value of socially necessary labour ime, as arge cos. The paper concludes ha in apial Marx explained his heory of capialis conrol using a labour heory of value derived from capialis accouns and ha here is herefore no ransformaion problem. More generally, i concludes ha undersanding he role of accouning in apial inegraes Marx s analysis of capialis sociey and he capialis firm, and promises o deal heoreically and empirically wih oher spurious problems invened by economiss such as he disincion beween producive and unproducive labour see, Bryer, 2007. I calls on Marxiss o ake accouning seriously, and on criical accounans o ake Marx seriously. Par 1: Marx s labour heory of value and accouning Marx only occasionally refers o bookkeeping in apial, bu his leers conain many quesions abou accouning Bryer, 1994; hiapello, 2007, paricularly from 1858 when 5 Toal social capial appears when individual capialiss passively hold well-diversified porfolios, bu ac collecively o conrol capialis sociey, which began in Briain from around 1850 and in he US and elsewhere in he developed capialis world from he 1880s Bryer, 1993, 1994.
5 he was wriing he Grundrisse, o he publicaion of Volume 1 of apial in 1867, which Engels answers. Engels faher, a exile manufacurer, removed him from school before graduaion o rain in business Wheen, 1999, pp.76-77. Afer working in Europe, in 1842 he came o Mancheser o work in a branch of his faher s parnership o learn o be a good radesman hiapello, 2007, p.285. Despie his radical inclinaions, Engels was a businessman who, of necessiy, had a good undersanding of accouning. Marx knew his philosophy, bu before he me Engels his pracical knowledge of capialism was nil Wheen, 1999, p.75; hiapello, 2007, p.285. Engels, by conras had invaluable firshand knowledge of he machinery of capialism Wheen, 1999, p.83, and knew from experience ha accouning was a vial cog. A leer in 1850 abou disagreemens beween his faher and Peer Ermen a parner in he Mancheser firm of Ermen & Engels, suggess knowledge of accouning and reveals his view ha i was criical o conrolling capial: The balance for he year 1849/50 has no ye been sruck; debis and credis are in he mos splendid confusion. Faher would seem o have been pressing hem again, so I hear, and omorrow hey will se abou puing his in order. If Peer Ermen akes over he managemen of he office his will grealy inerfere wih my examinaion of he books. I have absraced he essenials, however. In a few days ime I shall send Faher Ermen Bros complee accouns for 1849/50, duly classified and se ou, as also hose of Ermen s bleaching concern, so ha he may see how hese genlemen carry on business wih his capial Marx and Engels, 1975, p.253. Engels published his firs heoreical work in 1844, his Oulines of a riique of Poliical Economy. This aricle kick-sared Marx s sudy of poliical economy and se he direcion for his laer work. 6 I fied wih Marx s maerialis philosophy, because Engels drew on pracical realiy o criicise he received heories of poliical economy. He denounced Adam Smih for defining value solely as he cos of producion, and John- Bapise Say for defining value solely as uiliy i.e., demand, and criicised boh for sneaking heir opponen s ideas ino heir heories by he back door. He did no hink ha in pracice he cos of producion or he uiliy of he consumer effecive demand deermined value, bu ha boh did: Value is he relaion of producion coss o uiliy. The firs applicaion of value is he decision as o wheher a hing ough o be produced a all; i.e., as o wheher uiliy counerbalances producion coss 1975, p.426. Engels knew from experience ha value o capialiss mean only expeced profi, and hey would no produce wihou i. He criicised he idea ha he cos of producion was he sum of ren, profi and wages, because neiher Smih s heory of ren nor Ricardo s heory deal wih obvious pracicaliies. Smih s heory did no accoun for varying land feriliies and Ricardo s heory assumed ha in pracice landlords could insanly wihdraw inferior land from producion if prices fell Engels, 1975, pp.428-429. More significanly, no economiss recognised ha, in realiy, capial and labour were idenical, and no jus in he sense all admied, ha capial was sored-up labour. In pracice, in he process of producion, he momenarily posulaed separaion of capial 6 Marx referenced his aricle several imes in his laer works, calling i a brillian essay on he criique of economic caegories Marx and Engels, 1975, p.615, fn.180.
Marx 6 and labour is immediaely superseded by he uniy of boh ; capial is nohing wihou labour, wihou movemen Engels, 1975, p.431. Afer heir uniy in producion, he capialis separaed capial and labour a is end, and sared he cycle again, ypically on a larger scale. I was as a businessman ha Engels knew, Afer his separaion [of capial and labour] is accomplished, capial is divided once more ino he original capial and profi he incremen of capial, which i receives in producion; alhough in pracice profi is immediaely lumped ogeher wih capial and se ino moion wih i Engels, 1975, p.430. The relaionship beween he cos of producion, marke prices and value; he pracical inadequacy of Ricardo s heory of ren; how capial and labour were boh separaed and idenical ; were quesions ha preoccupied Marx for many years. Par 3 argues ha his evenual undersanding of hese issues underlay his soluion o he socalled ransformaion problem. 7 Afer many philosophical and poliical deours, Marx began his sudy of poliical economy in earnes in lae 1857, urning o wrie wha became his Grundrisse. In January 1858, he wroe o Engels asking for pracical informaion o simulae his heoreical analysis of he circulaion of capial, he focus of wha became apial: In my economic work I have now reached a poin a which I could do wih some informaion on pracical maers from you, since nohing of he kind is o be found in heoreical wriings. I mean, he circulaion of capial how i varies in various kinds of businesses; he effecs of he same on profis and prices. If you can provide me wih any informaion on he subjec, i would be VERY welcome Marx and Engels, 1983, p.256. Working ou he effecs of he circulaion of capial on profis and prices would preoccupy Marx for several years. Engels provided him wih accouning informaion, paricularly abou he circui of fixed capial, which laer gave Marx serious heoreical problems. This was he subjec of heir leers in March 1858, when Marx was wriing he haper on apial in Grundrisse. He wroe o Engels asking him wheher Babbage was righ ha in Mancheser manufacurers replaced machinery every 5 years. Engels relied, he mos reliable crierion is he percenage by which a manufacurer wries down his machinery each year for wear and ear and repairs, hus recovering he enire cos of his machines wihin a given period. This percenage is normally 7½ on he declining balance and Engels, 1983, pp.279-280. Marx and Engels alked in he language of accouning, bu his did no mean ha a his ime Marx or Engels had an ariculaed heory of capialis accouning. Marx followed up wih oher accouning quesions: 7 I is no possible o accep Oakley s claim ha Engel s paper lacks sophisicaion, or his view ha i is appropriae o see he piece as a caalys in Marx s inellecual developmen only in he sense ha i in no way direced or limied his subsequen sudies 1983, p.24, cf. Meek, 1973, p.140.
7 Anoher quesion in respec of which I require only one example approximae, is how, e.g., in your own mill or raher manufacuring business, floaing capial is apporioned over raw maerial and wages, and wha porion on average you leave in he bank. Furher, how you calculae urnover in your books. Here he heoreical rules are very simple and self-eviden. Bu i is neverheless jus as well o have some inkling of how hings look in pracice. The mehod of businessmen is, of course, parly based on illusions and even greaer han hose of he economiss; on he oher hand i recifies he laer s heoreical illusions by means of pracical ones Marx and Engels, 1983, p.283. Marx used he conemporary accouning erms floaing capial, for curren asses, and urnover for he raio of sales or cos of sales o capial, as we shall see. He waned o know he proporion of raw maerials and wages in he finished goods implicily, we shall see below when he asks again, he wans a breakdown of he cos of producion and how much capial was in he bank, owed by debors, ec. In he same leer, he uses accouning informaion he found in a Repor of he Facory ommissioners o calculae he rae of reurn on sales, bu he also wans o calculae he cos of producion Marx, 1983, p.283: apial sunk in building and machinery 10,000 Floaing capial.. 7,000 500 ineres on 10,000 fixed capial 350 ineres on floaing capial 150 Rens, axes, raes 650 Sinking fund of 6 1/2 p.c. for wear and ear of he fixed capial 1,650 1,100 coningencies?, carriage, coal, oil -------- 2,750 2,600 wages and salaries -------- 5,350 10,000 for abou 400,000 lbs raw coon a 6d ---------- 15,350 [ ]16,000 [sales] for 363,000 LBS TWIST SPUN. VALUE [ ]16,000. Profi [ ]650, OR ABOUT 4.2 P.. HENE THE WAGES OF OPERATIVES here ABOUT 1/6. Marx was no happy wih he abou 1/6 proporion of wages o sales which he simply assumed, and complained I is a grea piy ha he above STATEMENT does no show he number of operaives, or he proporion of acual WAGES o wha appears as SALARIES Marx and Engels, 1983, pp.283, 560, fn.147. This informaion would have allowed Marx o disinguish producive from unproducive workers and herefore o calculae cos of producion. He used hese accouns in he Grundrisse o illusrae calculaing he rae of surplus value, he rae of profi, and he raes of urnover of fixed capial and floaing capial Marx, 1986, pp.485-486. There is no evidence of a reply
8 from Engels o he quesion of he pracical calculaion of urnover and Marx asks i again 10 years laer, as we shall see below. 8 These quesions show ha Marx did no ye have an ariculaed heory of capialis accouns, bu he persised wih his quesions and analysis unil he did. His commen ha he was ineresed in accouns because The mehod of businessmen is, of course, parly based on illusions and even greaer han hose of he economiss; on he oher hand i recifies he laer s heoreical illusions by means of pracical ones Marx and Engels, 1983, p.283, suggess he hough ha capialiss had no heoreical illusions in heir accouns. 9 I also implies ha he heorised pracical accouns o confron and recify he heoreical illusions of he economiss, paricularly he illusion ha he only value of ineres o capialiss was marke value, as we shall see in par 3. Businessmen had pracical illusions, bu i was criical o Marx s heory ha, as he pu i in Volume 3, he naure of surplus-value impresses iself on he capialis s consciousness in he course of he immediae producion process, as we were shown by his greed for he labour ime of ohers Marx, 1981, p.135. As he carefully said, for wihou i his heory would have no pracical relevance, he surplus value and he rae of surplus value are, relaively, he invisible and unknown essence Volume 3, quoed in Meek, 1973, p.187, emphasis added. I is criical o he coherence of his heory ha he capialis have a leas an inchoae inkling of he source of his profi Marx, 1981, p.135, of labour as he source of his surplus value, o explain he bias owards increasing profis by reducing labour coss raher han reducing consan capial Foley, 1986, p.55. In Marx s heory, his inkling, ha i ges is surplus only from labour, is embedded wihin he collecive menaliy of capialiss as a class, in he collecive menaliy of oal social capial, signaured oday in he universal use of double bookkeeping DEB and cos-based accrual accouning Bryer, 1993, 1999a, 1999b, 2000a, 2006b. Predicably, Marx used DEB o deepen his undersanding of oal social capial, he aggregae logic of is circuis of capial and is conrol of individual capialiss and heir workers. Toal social capial and DEB In June 1861, a he beginning of his mos producive hree years during which he wroe he second draf of apial and he Theories of Surplus Value in he Economic Manuscrip of 1861-1863, Marx asks Engels, If i could be done very briefly, wihou making undue demands on you, I should like o have a sample of Ialian book-keeping wih explanaions. I would help hrow ligh on Dr Quesnay s Tableau economique Marx and Engels, 1985b, p.381. 8 In Grundrisse, Marx calculaed i in he same way ha accounans sill do oday Marx and Engels, 1983, p.560, fn.145. 9 By he pracical illusions of businessmen Marx mean ha hey saw cos raher han he money value of socially necessary labour ime, profi raher han surplus value, and believed hey earned profi from all heir capial.
9 From his sudy of Ialian book-keeping, ha is, double enry bookkeeping, Marx would learn how i auomaically accouns for flows of capial by simulaneously recording he effec of every ransacion as boh a source a credi and a use a debi of capial Bryer, 1993a. He would also learn ha capialiss used DEB o produce inegraed deparmenal profi and loss accouns ha calculaed profiabiliy as he incremen o capial a he level of he individual deparmen and a he level of he firm. This would cerainly help him undersand ha i was necessary o disinguish beween capial and revenue a he level of he individual firm or secors of producion as Adam Smih did, and a he level of sociey which Smih did no, ha is, a he level of oal social capial. Par 3 argues his was criical o Marx s undersanding of oal social capial and herefore o his soluion of he ransformaion problem in Volume 3 because i allowed him o reconsruc Quesnay s Tableau and hereby reveal Adam Smih s nonsensicaliy of subsuming he gross produc of a sociey simply under revenue which may be consumed annually. Smih s accouning was nonsense, because if his were so, a sociey would have o sar each year de novo, wihou capial Marx and Engels, 1985b, p.485! Marx sayed in Mancheser in April 1862 where he probably wroe his digression on Quesnay s Tableau in he Theories of Surplus Value Marx, 1963, p.484, fn.88. In July 1863, he sen Engels his own Tableau and a presenaion of Quesnay s Tableau ha produced inegraed deparmenal profi and accouns for a wo-secor deparmen economy means of subsisence and means of producion showing how he accouns of boh secors balanced individually and overall Marx and Engels, 1985b, pp.485-487, 490-491. We firs presen Marx s Tableau in modern DEB and hen show ha DEB underlies his presenaion by comparing i wih his version of Quesnay s simpler Tableau: Marx s Tableau using modern DEB Sociey has opening money capial of 1,166.66 all numbers are millions ha i invess in wo deparmens, 500 in he means of subsisence deparmen MOS ha produces he means of consumpion, and 666.66 in he means of producion deparmen MOP. The subsisence deparmen spends 400 on means of producion consan capial and 100 on wages variable capial. I sells is oal oupu for 700 and makes a profi surplus value of 200. The means of producion deparmen spends 533.33 on consrucing is own means of producion and spends 133.33 on wages. I sells is oal oupu for 933.33 and makes a profi of 266.66. The deparmenal businesses disribue all heir profis o heir capialiss as dividends who spend hem all on he means of subsisence consumpion. Similarly, he workers spend all heir wages on subsisence. Marx effecively does wo deparmenal profi and loss accouns using he simples possible double enries indicaed by he connecing arrows, recognising ha each ransacion had wo sides each involved a use of capial a debi, Dr and a source of capial a credi, r. The debi sides of he deparmenal and gross produc accouns record he coss of producion and he balance of profi; he credi sides record he sales.
10 Deparmen 1 Means of Subsisence MOS: Dr r ------------------------------------------------------------------------------------------------ Wages 100.00 Wages MOS 100.00 Means of producion 400.00 Wages MOP 133.33 Dividends MOS 200.00 Profi 200.00 Dividends MOP 266.67 --------- --------- Sales 700.00 700.00 ===== ===== Deparmen 2 Means of Producion MOP: Dr r ------------------------------------------------------------------------------------------------ Wages 133.33 MOP MOS 400.00 Means of producion 533.33 MOP MOP 533.33 Profi 266.67 --------- --------- Sales 933.33 933.33 ===== ===== Gross Produc Sociey: Dr r ------------------------------------------------------------------------------------------------- Wages 233.33 MOS 700.00 Means of producion 933.33 MOP 933.33 Profi 466.67 ------------ ----------- Sales 1,633.33 1,633.33 ======= ======= Marx used a complex diagram showing he flows of capial beween he wo secors 1985b, pp.490-491. We can see ha he lines joining up he numbers in he deparmens effecively indicaed he double enries 10 by looking a his soluion o Quesnay s much simpler Tableau in Theories of Surplus Value 1963, pp.308-344 where he uses he same diagrammaic approach. Here he links ogeher he effecs of ransacions beween farmers Quesnay s producive class, landlords owners and manufacurers Quesnay s unproducive class, bu his ime wih a leering sysem which maps he appropriae double enry debis and credis: Quesnay s Tableau The farmers buy 1,000 million of means of producion from he manufacurers and produce 3,000 million worh of food for sale afer heir consumpion. The farmers sell 1,000 million of food o landlords, 1,000 million of raw maerials o manufacurers, who also consume 1,000 million of food. Farmers make a surplus of 2,000 million ha hey pay o he landlords as ren. The landlords spend 1,000 million of heir ren on food and 1,000 million on manufacured goods. The 10 These lines show he double enries, bu Marx does no call he links beween he numbers debis and credis.
11 manufacurers buy 1,000 million of raw maerials from he farmers and produce manufacured goods for sale worh 2,000 million. The manufacurers sell 1,000 million o he landlords and 1,000 million o he farmers. Marx presens Quesnay s Tableau hus: Producive lass Owners Unproducive lass a 2 milliards Dr a 2 milliards Dr a 1 milliard Dr. b 1 milliard r c 1 milliard r/dr b 1 milliard r d 1 milliard r b 1 milliard r In he Theories of Surplus Value Marx says ha his leering sysem and lines make Quesnay s Tableau clearer by showing wha Quesnay regards each ime as he saring poin of a circulaion, as a, a, a, he following link in he circulaion as b, c, d, and as b, b respecively 1963, p.308. All he saring poins, a, a, a and c in he line c o d, which Marx neglecs o menion, are debis uses of capial. The ending poins c, d, b, b are credis sources of capial. We can see his by wriing Quesnay s Tableau in double enry profi and loss accouns for farmers and manufacurers: Quesnay s Tableaux in DEB Farmers Profi & Loss Accoun Dr r ----------------------------------------------------------------------------------------------- Means of producion 1,000 Landlords food 1,000 Manufacurers maerials 1,000 Ren 2,000 Manufacurers food 1,000 ------- ------- Sales 3,000 3,000 ==== ==== Manufacurers Profi & Loss Accoun Dr r ----------------------------------------------------------------------------------------------- Maerials 1,000 Landlords 1,000 Farmers 1,000 Surplus value 1,000 ------- ------- Sales 2,000 2,000 ==== ==== Par 3 argues ha Marx s excursion ino DEB made concree his heory of oal social capial, he idea ha capial as a whole conrolled he deparmens of producion, wheher secors or individual firms, hrough he general rae of profi, and his underlay his accouning soluion o he ransformaion problem in Volume 3 which he wroe in 1864-65. In he meanime, Marx coninued o sudy accouning a he level of he firm and quickly ran ino a major problem undersanding accouning for fixed capial ha emporarily hrew him as Engels pu i off he rails. Jumping back ono he rails
12 appears o have been a waershed in Marx s undersanding of accouning ha he needed o solve he ransformaion problem and fix he name and srucure of apial. Theorising capialis accouning a he level of he firm: jumping off and back ono he rails Engels gave Marx more informaion from he accouns of his firm when he visied Mancheser in Augus and Sepember 1861. Marx used hese plus laer figures in onribuion o he riique of Poliical Economy Marx and Engels, 1988, p.161 and in Volume 1 of apial 1996, pp.228-229 o illusrae how o use capialis accouns o calculae he rae of surplus value. In Augus 1862, Marx wroe asking for pracical guidance: In my criique I have demolished so much of he old suff ha here are a number of poins I should like o consul you abou before I proceed Marx and Engels, 1985b, p.411. Top of he lis was One poin which you, as a pracical man, mus have he answer, namely, he quesion of wha becomes of his fund, which yearly replaces [in his example] 1/12 of he machinery? Marx and Engels, 1985, p.411. In oher words, wha happened o he capial reurned for wha accounans call he wear and ear or depreciaion of fixed asses? Marx s commens and quesions show ha, in addiion o seeking suppor for his conclusion ha i was in fac, an accumulaion fund o exend reproducion, he was sruggling o undersand he heory underlying capialiss calculaions of depreciaion: [T]he same applies o machinery as o a horse wih a life or useful life of 10 years. Alhough i would have o be replaced wih a new horse afer 10 years, i would in pracice be wrong o say ha 1/10 of i died every year. Raher, machinery a leas some ypes of machinery RUNS BETTER in he second year THAN IN THE FIRST. AT ALL EVENTS, in he course of [a useful life of] 12 years does no 1/12 of he machinery have o be replaced in naura each year? Marx and Engels, 1985, p.411. Marx here asked fundamenal quesions abou he calculaion of depreciaion for fixed capial, raher han merely assuming an average calculaion ha, if say a life is 12 years, he capialis always recovers 1/12 h of he cos each year. Engels blunly replied, quie righly as we shall see, ha on he quesion of wear and ear I raher suspec you have gone off he rails, bu promised more abou his Marx and Engels, 1985, p.414. Alhough a his ime Marx undersood ha labour ransferred he value of he fixed asse o commodiies, his quesions show ha he had no ye grasped ha changes in echnical efficiency did no deermine his ransfer. In capialis accouning, he same rules do apply o machines and horses. If a horse lass 10 years, Marx knew he capialis recovered is cos over his period. However, his saemen ha i would be wrong o say ha 1/10 of i died every year really asks he quesion, how does he capialis recover he cos if he or she canno allocae i over he horse s useful life in accordance wih he decline in is echnical efficiency? Horses lose
13 very lile echnical efficiency over heir useful working lives and have no los 90% of i by he end of year nine of a en-year life, for example. His quesion abou machines ha run beer in heir second year raised he same poin. I implies ha, if echnical efficiency deermined he ransfer of value from he machine o he commodiy, in year 2 we could have negaive depreciaion, i.e., appreciaion in value, a clear non-labour source of value and a caasrophe for Marx s heory if rue. 11 This quesion shows ha Marx had no ye undersood ha run-in coss were addiional socially necessary coss of producing he machine. Tha is, he had no ye worked ou ha capialiss added hese coss o he cos of he machine and spread hem over is economically useful lifeime such ha each use-value he machine produced cos he same amoun, jus as hey did wih all oher necessary coss. 12 Exacly he same principle applied o he recovery of he cos of he horse ha assuming equal operaing coss he capialis spreads evenly over he horse s use-values for example, he disances i ravels or he loads i pulls. There is no furher correspondence on his issue unil 1867, bu in December 1862 when Marx resumed work on The haper on apial, urning o draf he secion on apial and Profi Oakley, 1981, p.89, he makes i clear ha, hrough discussions wih Engels or by oher means, he had jumped back on o he accouning rails. Marx now heorises capialis accouning for he cos of producion, including he coss of fixed capial: The value of a commodiy is deermined by he oal labour ime, pas and living, which eners ino i ; hence no only by he labour ime which is added in he final producion process, bu by he labour conained in he fixed capial and he circulaing capial, or in he condiions of producion of he labour las o be added, by he labour ime conained in he machinery, ec., he maières insrumenals [such as he coal consumed, he heaing, lighing, ec ] and he raw maerial, in so far as heir value reappears in he commodiy, which is enirely he case wih raw maerials and he maières insrumenals, whereas he value of he fixed capial only reappears parially in he produc in proporion o is WEAR AND TEAR Marx, 1991, pp.136-137. 13 Par 2 argues ha Marx s heorisaion of capialis depreciaion accouning compleed his heory of capial in general begun in Grundrisse. The link beween his discovery and his decision in December 1862 o change he ile of his proposed books from A onribuion o a riique of Poliical Economy o apial is, we shall see, ha i was hrough heorising he cos of producion as capial, as cos-price, ha Marx found he accouning soluion o his ransformaion problem. 14 11 The idea ha machines ransfer heir use-value o he commodiies hey help o produce appears o be a lingering influence of Ricardo whose views on fixed asses Marx applauds in he Grundrisse 1987, p.35. 12 The paper shows his in par 3. 13 The paper discusses capialis accouning for he cos of producion in pars 3 and 4. Bryer 1994 shows ha Marx undersood capialis depreciaion accouning, whereas Par 3 shows ha Marxis economiss do no. 14 Oakley 1981, pp.105-109 leaves as a complee mysery why Marx changed he ile of his projec o apial, and is implicaions for our undersanding of wheher a his poin Marx eiher compromised his ambiions or fel he could accomplish hem under he heading of apial. Par 3 argues for he laer inerpreaion.
14 Accouning and he reproducion and accumulaion of capial In Volume 2 of apial Marx explicily recognised he imporance of accouning o capialiss in conrolling he valorizaion process: By way of bookkeeping, which also includes he deerminaion or reckoning of commodiy prices price calculaion, he movemen of capial is regisered and conrolled Marx, 1978, p.211. 15 Here, as Engels did, he saw he role of bookkeeping as providing he means for he supervision and ideal recapiulaion of he process [of producion] Marx, 1978, p.211, for conrolling he circulaion of capial hrough producion and back from he marke. To deermine selling prices, Marx knew from Engels ha capialiss urned o heir books. He knew ha where purchased and self-produced commodiies are no changed ino acual money [i.e., sold], hey are convered ino accouning money; in shor hey are used as exchange-values and he elemen of value hey add o he produc in one way or anoher is precisely calculaed Marx, 1976, p.952. In he capialis s mind, he hough, he value of he produc is express[ed] more precisely as money of accoun Marx, 1976, p.955. Like accounans, he hough of capial as money invesed for recovery wih a reurn, 16 and disinguished fixed from circulaing capial and producive from capial of circulaion. He shared heir idea of physical capial mainenance. The socks in Marx s circui of capial are he asses we find in capialis balance shees and he flows appear in heir profi and loss accouns Bryer, 1999a, 1999b. Some Marxis economiss recognise he affiniy beween capialis accouning and Marx s circui of capial, bu hey do no probe i. Sweezy said ha c + v + s = oal value is in effec a simplified version of he modern corporae income saemen and ha i consiues he analyic backbone of Marx s economic heory 1942, p.63, bu did no explain he underlying principles of accouning. He is broadly righ ha Toal value is equivalen o gross receips from sales, consan capial o oulay on maerials plus depreciaion, variable capial o oulay on [producive] wages and salaries, and surplus value o all income Sweezy, 1942, p.63. Foley says ha he circui of capial, M P M corresponds direcly o he income, or profi and loss saemen, of a capialis firm Foley, 1986, p.33. Tha is, ha capialis accouns measure he cos of producion as he capial oulays on labor and nonlabor inpus o producion over a period of ime Foley, 1986, p.68; ha M is sales ha reurns value as money capial, and ha gross profi is herefore sales minus he cos of producion. Foley adds, and is righ, ha he sock variables in he circui of capial model correspond o he caegories on he asse side of he balance shee of he firm 1986, p.68. He is righ again ha When we urn o Volume III of apial we find Marx firmly in conrol of capialis accouning caegories underlying profi and profi rae measures. He clearly disinguishes socks and flows and he definiions of accouning cos Foley, 2000, p.11. I is Indeed, i is sriking ha he ordinary convenions of capialis accouning reflec he labour heory of value conceps so faihfully, boh insising on a sric rule of 15 Bookkeeping was no a erm of abuse in he 19 h cenury, having he same meaning as accouning oday. 16 Alhough Marx added ha money became producive capial only by exploiing labour so ha, for example, speculaive profis did no come from exploiaion alhough he value did.
15 conservaion of value Foley, 1986, p.69; 2000, p.12; ha is, he accounans principle ha paricular coss aach, which we shall see in par 3, Marx s heory of value explains. Finally, Foley is righ ha All he circui of capial variables for a real capialis firm can be deermined from ordinary accouning daa 1986, p.69, including surplus value p.70 ha, assuming prices equal value, or in he aggregae ha surplus value equals accouning profi. He is cerainly righ ha apialiss calculae he rae of profi as he raio of surplus value o he sock of capial ied up in heir producion Foley, 1986, p.76. Foley 1986 models he circui of capial using accouning convenions paricularly, ha coss aach and, apparenly wihou realising i, shows how Marx s circui of capial anicipaes he widely used so-called Du Pon formula supposedly invened in US company in he early 20 h cenury for decomposing he rae of profi o financially conrol corporaions. 17 However, neiher Foley nor any oher Marxis economis has old us wha capialis accouning caegories are, how capialiss measure capial, he cos of producion, and asses, profi, ec. Earlier work argues ha in Volumes 1 and 2 of apial, Marx s heory deal wih many of he major issues facing accounans hen and oday Bryer, 1994, 1998, 1999a, b; hiapello, 2007. Par 4 shows how Marx applied his heory o solve his ransformaion problem, bu firs we mus explain he origin of he economiss problem in he accouning logic of apial as a whole. Par 2: The accouning logic of apial Why did Marx begin apial assuming ha prices equal he money value of socially necessary labour? Some say he did because i had he poliical advanage of allowing him o firs focus on he disincion beween consan and variable capial o demonsrae ha labour alone in producion was he source of all value. Workers could hen plainly see ha capialiss exploied hem even if hey bough labour power and sold commodiies a heir values Duménil, 1983-84, p.443; Mohun, 1994a, p.396. Ohers sugges i fied in wih Marx s hisory of he ransiion from feudalism o capialism Meek, 1971; 1977. Neiher explanaion commands general suppor as a sufficien reason for srucuring his presenaion in a way ha would cause problems for readers, as i apparenly lef he proof of real world relevance o he end. However, consisen wih he evidence of par 1, anoher possible explanaion is ha only having resolved he problem of accouning for fixed capial was Marx confiden ha he could explain how in compeiion capialiss accouned for cos and profi as forms of value. Only hen did he fully undersand ha in he real world of compeiion capialiss accouned as hough cos equalled he money value of socially necessary labour ime and herefore ha profi equalled he money value of surplus socially necessary labour ime. Secure in his knowledge, he could hen prove his heory while simulaneously simplifying, poliicising and hisoricising he presenaion by saring wih simple commodiy producion, he circui -M- ha prevailed in pre-capialis formaions. He could fulfil his inellecual projec and simulaneously hope o reach poliical heoriss, 17 See he Appendix.
16 aciviss and educaed workers in his simple world where fixed capial was non-exisen, where all coss were labour coss, and where value equalled price, knowing ha he same principles underlay capialis commodiy producion, he circui M--M, which he could pospone o he concluding volume. In shor, Marx s mehodological approach o wriing apial is consisen wih him knowing from real accouns produced under compeiion condiions, ha he heory of value developed in Volumes 1 and 2 also worked when he money value of socially necessary labour ime and price were no equal under compeiion, in Volume 3. This knowledge would allow Engels o confidenly aun Marx s rivals in his Preface o Volume 2 o come up wih heir own soluion before he published Volume 3, and i would jusify Marx s claim ha The laws hus found hold good no maer how he surplus value is laer divided among he producer, ec Marx and Engels, 1988, p.23. Marx had a soluion he was confiden worked for capial in general. This undersanding appears o explain his decision o begin apial wih a deailed analysis of he commodiy, jus as he rules of accouning mus begin wih a definiion of an asse e.g., FASB, 1976; IASB, 2006 and he producion of surplus value before urning o is circulaion in Volume 2 and is disribuion hrough producion and circulaion in Volume 3. The commodiy as capial in general Wha did Marx mean when he wroe, he commodiy-form of he produc of labour or he value-form of he commodiy is he economic cell-form Preface, Volume 1? Sweezy gives he common explanaion and, we shall see, he saring poin for he NI when he says i is because he commodiy absorbs a par of sociey s oal available labor force i.e., hey are all maerialized absrac labor which presupposes use value and manifess iself in exchange value ha makes of commodiy he saring poin and cenral caegory of he poliical economy of he modern period 1942, p.33. In oher words, Marx sars wih he commodiy because, like an accounan, he wans o add hese up o ge oal capial as he sum of is pars, and his is one meaning of wha Marx calls capial in general. His oher meaning, almos wholly negleced by Marxiss and non-marxiss alike, is he oal capial as more han he sum of he pars, as he srucured oaliy ha he calls oal social capial. Marx does wan o add up commodiies. However, he oher reason for saring wih he commodiy was ha undersanding he formaion of commodiy value under oal social capial and compeiion was he key o undersanding capialiss conrol of sociey s valorisaion process, and from his sudy of heir accouns he evenually concluded he same principle applied o boh capial in general and o oal social capial. Rosdolsky 1977 highlighed he imporance of Marx s idea of capial in general, bu Heinrich 1989 argues ha Marx had difficulies applying he concep o compeiion when wriing he second draf of apial in he early 1860s, abandoned i, and his
17 explains he srucure of apial 1989, p.64. Moseley shows ha Heinrich s evidence is weak and argues ha Marx did mainain he idea hrough Volumes 1 and 2 and pars of 3, bu fails o analyse oal social capial as a developed form of capial in general for he remainder of Volume 3. Heinrich is righ ha Marx did encouner difficulies, bu hey were no over he idea of capial in general, and is righ ha he idea of oal social capial is presen in Volumes 1 and 2, bu he also only hinks of i, like Moseley and ohers, as he whole defined as he sum of is pars. In Grundrisse, Marx disinguished beween capial in general as an absracion, and as a real exisence, as capial in moion as an acing individual: apial in general as disinc from paricular capials, does indeed appear 1 only as an absracion; no an arbirary absracion, bu which grasps he specific characerisics which disinguish capial from all oher forms of wealh 2 however, capial in general, as disinc from he paricular real capials, is iself a real exisence 1973, p.449. apial in general, reaing he sum of all individual capials as an absrac, undiffereniaed individual, is he focus of Volumes 1 and 2. There Marx was no concerned wih an individual capial as disinc from oher individual capials, no wih he differences beween capials, bu wih wha was common o hem all, capial as such, say he capial of he whole sociey 1973, pp.310, 346. In Volumes 1 and 2, capial in general mean, he individual capials are o be regarded simply as fragmens of social capial Rosdolsky, 1977, p.48; ha we rea he whole sociey as an undiffereniaed individual, or he individual as he ideal-ypical represenaive of he whole Moseley, 1997, p.12. In Volume 3, however, capial in general means oal social capial, he whole in moion caused by differences beween individuals, where he whole did no jus equal he sum of he pars, bu is a srucured oaliy, he emergen oucome of ineracions beween he pars and he whole. Marx gave his soluion o he hisorical ransformaion problem in Volume 3, where he analysed capialis producion as a whole, carefully labelling i oal social capial, aggregaing he effecs of compeing individual capials ino he movemens of one single capial 1981, p.255. There he explains he resul of compeing individual capials he resuls ha emerge in realiy from he process of capial s movemen considered as a whole Marx, 1981, p.117, he funcioning of oal social capial. Marxis economiss, including supporers of he NI we shall see, hink only of capial in general as he sum of he pars. For example, Moseley, following Rosdolsky 1977, disinguishes beween capial in general or oal social capial on one side, and many capials or compeiion 2000, p.286 on he oher see also Moseley, 1995; Foley, 1986. Arhur sees he disincion beween he wo meanings of capial in general, bu hinks here are