Resolving the transformation problem set out by Karl Marx in Chapter 9 of Volume 3 of Das Kapital is the supreme challenge facing Marxian theory. Without such a resolution, the labour theory of value cannot be defended. Many attempts have been made to resolve this issue over the years, and in attempting to do so, the transformation problem has become the reputational graveyard for many, especially those who sought to reinterpret Marx or render him more profound. Like DIY bodgers trying to improve the house that Marx and Engels built, their shoddy workmanship has only served to devalue this house.

This article provides a novel approach to the resolution of the transformation problem. It reformulates “prices of production” to be those prices which yield an average rate of profit, not on the original capital, but on the newly priced capital. This categorisation sets the requirement to split the stream of surplus value needed to equalise profits into two, one to reprice capital, and the other, to adjust profits, so that the newly adjusted profit earns an average rate of profit when measured against the newly priced capital.

Historically, this is the first time this twin allocation has been done, and until it was done, it was impossible to resolve the transformation problem. I submitted this article to Historical Materialism for publication but it was rejected because of its “complexity”. The irony is that this article provides the simple key needed to unlock the transformation problem, the splitting of the stream of redistributed surplus value into its two components.

For ease of explanation, I have divided the process of transforming value into price into a number of steps.

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