That becomes clear, if instead of being blinded by this multiplicity of individual sales, this overall social exchange is considered, by treating all capitals involved in producing means of production as though they were a single capital, and similarly treating all the capitals producing consumer goods. In that case, the actual situation can be seen clearly, by looking at the overall exchange between these two capitals as follows.
c 4000 + v 1000 + s 1000 = 6000
c 2000 + v 500 + s 500 = 3000.
Of Department I's output of 6000, 4000 is not traded, but is used solely to replace the 4000 of constant capital value used in its own production, constant capital which was itself produced in previous years. Only 2000 of the constant capital produced by Department I (equal to the new value created by labour during the year) is exchanged with Department II, and appears as its constant capital. The total value of Department II output, of 3000, therefore, constitutes the society's consumption fund, annual product, or national income.
This annual product of 3000 is purchased by the workers in Department I, who spend their £1,000 of wages, the workers in Department II, who spend their £500 of wages, the capitalists and landlords of Department I, who spend their £1,000 of profits, interest and rent, and the capitalists of Department II, who spend their £500 of profits, interest and rent.
The other £4,000 of total output value is accounted for by the £4,000 of constant capital consumed in the production of constant capital, which is reproduced as part of the current production, and simply replaces that consumed, to ensure that production continues on the same scale.
The only way in which the total output value could be equal to the annual product is if no constant capital was consumed in the production of constant capital. In other words, to go back to the example of the farmer, miller and baker it would require that the farmer used no constant capital in the production of the wheat. Alternatively, it would require that the constant capital used by the farmer was produced by some other capital that itself used no constant capital in its production.
That essentially is the position put forward by Adam Smith, who sought to avoid the problem by simply pushing back the question of the provision of the constant capital to some other supplier. But, as Marx points out, try as he might, Smith could not find any original starting point where the production occurs purely on the basis of the expenditure of labour without constant capital.
“The difficulty is two-fold. On the one hand the value of the annual product, in which the revenues, wages, profit and rent, are consumed, contains a portion of value equal to the portion of value of constant capital used up in it. It contains this portion of value in addition to that portion which resolves itself into wages and that which resolves itself into profit and rent. Its value is therefore = wages + profit + rent + C (its constant portion of value). How can an annually produced value, which only = wages + profit + rent, buy a product the value of which = (wages + profit + rent) + C? How can the annually produced value buy a product which has a higher value than its own?” (p 834-5)
Leaving aside the question of the fixed capital, only a portion of whose value enters the value of the annual output as wear and tear, and so considering only the circulating constant capital.
“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” (p 835)