The Transformation Problem: A Tale of Two Interpretations

Over 100 years since Marx's value theory of labour was first published, the so-called ``transformation problem'' -- deriving prices from values and providing a theory of profits as arising from surplus value -- has inspired the imagination of economists of all shades of intellectual suasion. However, while mainstream economists have by and large come to dismiss the transformation problem as a trivial technical exercise, the issue has recently received renewed attention in Marxian economic theory. This paper provides a broad historical overview of the transformation problem and specifically focuses on similarities and differences of how the transformation problem has been interpreted, why it was put to rest in mainstream economics and how it has regained prominence in Marxian economics.