Transformation problem

The transformation problem for the Marxist economists was that if the labor theory of value of value holds true then consumers would feel obliged to pay more for an equally useful good that was more labor intensive than one which was less labour intensive. This is clearly not the case, so the labour theory of value does not transform to the consumer.

Furthermore if the labor theory of value held up then capital would not relate back to the same long term rate of return, as some capital would be employed in more labor intensive areas. This would mean that different forms of capital would have different intrinsic rates of return, something that immediately put Marxist economics at a disadvantage to the neoclassical, Austrian and Keynesian schools. This was a problem that dogged Marxist economists.

Originally put forward by the Austrian School economist Eugen von Boehm-Bawerk:

Either products do actually exchange in the long run in proportion to the labour attaching to them—in which case an equalisation of the gains of capital is impossible; or there is an equalisation of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labour attaching to them.

External Links

Karl Marx and the Close of His System (http://www.marxists.org/subject/economy/authors/bohm/ch04.htm)