Editing Transformation problem (section)

== Marx's theory ==
Marx defines [[Exchange value|value]] as the number of hours of labor socially necessary to produce a commodity. This includes two elements: First, it includes the hours that a worker of normal skill and dedication would take to produce a commodity under average conditions and with the usual equipment (Marx terms this "living labor"). Second, it includes the labor embodied in raw materials, tools, and machinery used up or worn away during its production (which Marx terms "dead labor"). In capitalism, workers spend a portion of their working day reproducing the value of their means of subsistence, represented as wages (necessary labor), and a portion of their day producing value above and beyond that, referred to as [[surplus value]], which goes to the capitalist (surplus labor).

Since, according to Marx, the source of capitalist profit is this [[surplus labor]] of the workers, and since in this theory only new, living labor produces value, it would appear logical that enterprises with a low [[Organic composition of capital|organic composition]] (a higher proportion of capital spent on living labor) would have a higher rate of profit than would enterprises with a high organic composition (a higher proportion of capital spent on raw materials and means of production). However, in models of classical perfect competition, higher rates of profit are not generally found in enterprises with a low organic composition, and low profit rates are not generally found in enterprises with a high organic composition.{{citation needed|date=May 2024}} Instead, there is a tendency toward [[Surplus value#Equalization of rates of surplus value|equalization of the rate of profit]] in industries of different organic compositions. That is, in such models with no barriers to entry, capitalists are free to disinvest or invest in any industry, a tendency exists towards the formation of a general rate of profits, constant across all industries.

Marx outlined the transformation problem as a theoretical solution to this discrepancy. The tendency of the rate of profit toward equalization means that, in this theory, there is no simple translation from value to money—e.g., ''1 hour of value equals 20 dollars''—that is the same across every sector of the economy. While such a simple translation may hold approximately true in general, Marx postulated that there is an economy-wide, systematic deviation according to the organic compositions of the different industries, such that ''1 hour of value equals 20 dollars times T'', where ''T'' represents a transformation factor that varies according to the organic composition of the industry in consideration.

In this theory, ''T'' is approximately 1 in industries where the organic composition is close to average, less than 1 in industries where the organic composition is below average, and greater than 1 in industries where the organic composition is higher than average.

Because Marx was considering only [[Socially necessary labour time|socially necessary labor]], this variation among industries has nothing to do with higher-paid, skilled labor versus lower-paid, unskilled labor. This transformation factor varies only with respect to the organic compositions of different industries.