In order properly to understand the theory of realisation we must start with Adam Smith, who laid the foundation of the erroneous theory on this subject that held undivided sway in political economy until Marx. Adam Smith divided the price of a commodity into only two parts: variable capital (wages, in his terminology) and surplus-value (he does not combine “profit” and “rent,” so that actually he counted three parts in all.) Similarly, he divided the sum-total of commodities, the total annual social product, into the same parts and allocated them directly to the “revenue” of the two classes of society: the workmen and the capitalists (undertakers and landlords, as Smith calls them).
On what did he base his omission of the third component of value, constant capital? Adam Smith could not fail to observe this part, but he assumed that it also is made up of wages and surplus-value. Here is how he argued on this subject: “In the price of corn, for example, one part pays the rent of the landlord, another pays the wages or maintenance of the labourers and labouring cattle employed in producing it, and the third pays the profit of the farmer. These three parts seem either immediately or ultimately to make up the whole price of corn. A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same three parts” (namely, rent, profit and wages). “Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labour and profit.” Marx calls this theory of Smith’s “astonishing.” “His proof consists simply in the repetition of the same assertion” (II, S. 366). Smith sends us “from pillar to post” (I. B., 2. Aufl., S. 612). In saying that the price of farming instruments itself resolves into the same three parts, Smith forgets to add: and also into the price of the means of production employed in the making of these instruments. The erroneous exclusion by Adam Smith (and also by subsequent economists) of the constant part of capital from the price of the product is due to an erroneous conception of accumulation in capitalist economy, i.e., of the expansion of production, the transformation of surplus-value into capital. Here too Adam Smith omitted constant capital, assuming that the accumulated part of surplus-value, the part converted into capital, is entirely consumed by the productive workers, i.e., goes entirely in wages, whereas actually the accumulated part of surplus-value is expended on constant capital (instruments of production, raw and auxiliary materials) plus wages. Criticising this view of Smith (and also of Ricardo, Mill and others) in Capital, Volume I (Part VII, “The Accumulation of Capital,” Chapter 22, “Conversion of Surplus-Value into Capital,” § 2, “Erroneous Conception, by Political Economy, of Reproduction on a Progressively Increasing Scale”), Marx there states that in Volume II “it will be shown that Adam Smith’s dogma, inherited by all his successors, prevented political economy from understanding even the most elementary mechanism of the process of social reproduction” (I, 612). Adam Smith committed this error because he confused the value of the product with the newly created value: the latter does indeed resolve itself into variable capital and surplus-value, whereas the former includes constant capital in addition. This error had been earlier exposed by Marx in his analysis of value, when he drew a distinction between abstract labour, which creates new value, and concrete, useful labour, which reproduces the previously existing value in the new form of a useful product.
An explanation of the process of the reproduction and circulation of the total social capital is particularly necessary to settle the problem of the national revenue in capitalist society. It is extremely interesting to note that, when dealing with the latter problem, Adam Smith could no longer cling to his erroneous theory, which excludes constant capital from the country’s total product. “The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labor; the neat revenue, what remains free to them after deducting the expense of maintaining; first, their fixed; and, secondly, their circulating capital; or what, without encroaching upon their capital, they can place in their stock reserved for immediate consumption, or spend upon their subsistence, conveniences, and amusements” (A. Smith, Wealth of Nations, Book II. “Of the Nature, Accumulation, and Employment of Stock,” Chapter II, Vol. II, p. 18. Russ. trans., II, p. 21). Thus, from the country’s total product Adam Smith excluded capital, asserting that it resolves itself into wages, profit and rent, i.e., into (net) revenue; but in the gross revenue of society he includes capital, separating it from articles of consumption (= net revenue). This is the contradiction in which Marx catches Adam Smith: how can there be capital in the revenue if there was no capital in the product? (Cf. Das Kapital, II, S. 355.) Without noticing it himself, Adam Smith here recognises three component parts in the value of the total product: not only variable capital and surplus-value, but also constant capital. Further on, Adam Smith comes up against another very important difference, one of enormous significance in the theory of realisation. “The whole expense of maintaining the fixed capital,” he says, “must evidently be excluded from the neat revenue of the society. Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings, etc., nor the produce of the labor necessary for fashioning those materials into the proper form, can ever make any part of it. The price of that labor may indeed make a part of it; as the workmen so employed may place the whole value of their wages in their stock reserved for immediate consumption.” But in other kinds of labour, both the “price” (of labour) “and the produce” (of labour) “go to this stock, the price to that of the workmen, the produce to that of other people” (A. Smith, ibid.). Here we find a gleam of recognition of the need to distinguish two kinds of labour: one that produces articles of consumption which may enter into the “neat revenue,” and another which produces “useful machines and instruments of trade...buildings, etc.,” i.e., articles that can never be used for personal consumption. From this it is only one step to the admission that an explanation of realisation absolutely requires that two forms of consumption be distinguished: personal and productive (= putting back into production). It was the rectification of these two mistakes made by Smith (the omission of constant capital from the value of the product, and the confusing of personal with productive consumption) that enabled Marx to build up his brilliant theory of the realisation of the social product in capitalist society.
As for the other economists, those between Adam Smith and Marx, they all repeated Adam Smith’s error and for that reason did not advance one step. Of the confusion that consequently reigns in the theories of revenue we shall speak later. In the controversy as to the possibility of a general overproduction of commodities that was waged by Ricardo, Say, Mill and others, on the one hand, and by Malthus, Sismondi, Chalmers, Kirchmann and others, on the other, both sides adhered to Smith’s erroneous theory, and consequently, as Mr. S. Bulgakov justly remarks, “in view of the false premises and the wrong formulation of the problem itself, these controversies could only lead to empty and scholastic wordspinning” (loc. cit., p. 21. See an account of this wordspinning in Tugan-Baranovsky’s Industrial Crises, etc., St. Petersburg, 1894, pp. 377-404).
 Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, 4th ed., 1801, Vol. I, p. 75, Book I: “Of the Causes of Improvement in the productive Powers of Labor, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People,” Chapter VI, “Of the component Parts of the Price of Commodities,” Bibikov’s Russian translation (St. Petersburg, 1866), Vol. I, p. 171.—Lenin
 Loc cit., I, pg. 78 Russ. trans. I, p. 174.—Lenin
 Ibid., Vol I pp. 75-76. Russ. trans, I, p. 171.—Lenin
 Vol. I, 2nd Ed., p. 612.—Lenin
 For example, Ricardo asserted that “the whole produce of the land and labour of every country is divided into three portions: of these, one portion is devoted to wages another to profits, and the other to rent” (Works, Sieber’s translation, St. Petersburg, 1882, p. 221.)—Lenin
 Karl Marx, Capital, Vol. II, Moscow, 1957, p. 373.
 Karl Marx, Capital, Vol. I, Moscow, 1958, p. 590.
 Karl Marx, Capital, Vol. I, Moscow, 1958, Chapter XXIV, Section 2.
 Karl Marx, Capital, Vol. I, Moscow, 1958, pp. 199-202.
 Karl Marx, Capital, Vol. II, Moscow, 1957, pp. 363-64.