Understanding Capital Volume II, John Fox, 1985

Chapter 19: Former Presentations of the Subject

"Now Adam Smith's first mistake consists in equating the value of the annual product to the newly produced annual value . . . . By this confusion Adam Smith spirits away the constant portion of the value of the annual product." (p. 381 [453])

Chapter 19 is devoted to criticism of other economists' treatment of the reproduction process. Although the chapter begins with a brief consideration of the physiocrats and ends with some remarks on later economists, the major part of Marx's effort is directed towards the errors and contributions of Adam Smith. The chapter is not central to the argument in Volume II of Capital, but it is interesting insofar as it reveals the sources of Marx's insights into the process of reproduction. In this chapter, Marx formulates the kernel of his analysis of simple reproduction.

Marx argues that the physiocrats had a fundamentally sound conception of simple reproduction, but a conception limited by the physiocratic doctrine that only the agricultural sector produces new value. Paradoxically, their concentration on agriculture permitted the physiocrats to avoid the hazard on which Adam Smith's analysis foundered: anincorrect conceptualization of the role of constant capital in the reproductive process. In agriculture, part of the previous year's product (e.g., in the form of seed) stays in the hands of its producer to furnish "constant capital" for the subsequent year's productive activity. Because this portion of the annual product of society does not circulate, its role in reproduction is not obscured by the process of circulation.

Adam Smith extends the physiocrats' treatment of reproduction beyond the agricultural sector. A similar point was made in connection with Smith's analysis of fixed and circulating capital. Smith, however, perpetuates physiocratic errors by according a special status to agricultural production, and, more importantly, confuses the role of constant capital in the creation of commodity value and in the process of reproduction. This confusion does not wholly permeate Smith's analysis, for at times he points towards correct conceptions, but his work is at best inconsistent.

Smith argues that the annual product of society may be divided into three components, and, moreover, that these components are the "original sources" of all commodity value. The sources, wages, profits, and rents, represent the revenues of workers, capitalists, and landlords, consecutively. In Marx's terms, Smith's three sources of value are variable capital (i.e., wages) and surplus-value (which is divided into profit and rent, as detailed in Volume III of Capital). What is missing, of course, is constant capital, whose value is transferred to the product, and which, therefore, also constitutes part of commodity-value.

Smith partially rescues his analysis, reintroducing the value of constant capital by distinguishing between gross and neat (net) revenue, although even here the role of constant capital is not clearly conceived. Furthermore, Smith proceeds to argue that even if the whole of commodity value includes a component derived from constant capital, this component ultimately is "reduced" to surplus-value and wages. The argument entails successive substitution for the constant capital portion of the value of the product: when purchased, part of. the value of the constant capital originated from the labor directly expended in its production and part from means of production; these means of production also had a direct labor component; and so on. Although it is true that all value is the direct or indirect product of labor (and hence, under capitalism, of necessary and surplus labor), part of the value of any given product is transferred pre-existing value. This point is crucial to an understanding of social reproduction, for society does not start each year's production without previously fabricated means of production, nor does it consume the entirety of its annual product.

Smith's error results from failing to distinguish clearly between (1) the value of the product, and (2) newly produced value incorporated in the product. This distinction applies equally to a particular commodity product and to the annual social product. The value of the product consists of the value of constant capital, variable capital, and surplus-value. Variable capital and surplus-value represent newly produced value, while constant capital represents previously existing value, which is merely transferred to the product. In simple reproduction, all of surplus-value and wages are consumed, by capitalists and workers, respectively. At the social level, then, value equal to surplus-value and variable capital -- the annual value product -- is consumed by the capitalist and working classes. Because the part of the annual product representing constant capital is left over, this part is available to furnish means of production (i.e., real elements of constant capital) for next year's production. Thus, under the regime of simple reproduction, the value of constant capital with which annual production begins reappears at the end of the year, permitting production to continue; only the newly created value is consumed.

Smith did, however, point towards the key distinction between production of means of production (incorporating the value of the constant capital component of the annual social product), and production of articles of consumption. This insight is vitiated by Smith's elimination of constant capital, by his confusion of the processes of circulation and production, and by other errors.

Some later economists, such as Ricardo, fall prey to Smith's mistakes, while others (e.g., Ramsey) correctly criticize Smith without producing adequate positive accounts of social reproduction. Vulgar economists use Smith's analysis to argue that all of society's annual product is consumed, a conclusion that follows from Smith's errors, but which he (correctly) denied.