““There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer.” (Wealth of Nations, Book II, Chap. I, p. 189, Aberdeen edition, 1848.)” (p 194)
But, as Marx says, this is neither true nor tells us anything about the division of PRODUCTIVE CAPITAL into fixed and circulating capital. In fact, there are as many different ways of utilising capital to turn a profit as there are different branches of industry to invest in. Then there are those uses of capital such as Merchant Capital or Money Capital that are not productive and yet turn a profit for the owner of the capital.
Smith himself goes on to describe the use of capital in agriculture, manufacture and commerce, but, in doing so, moves backwards, even from the understanding of the Physiocrats that the distinction of fixed and circulating capital is a distinction only in relation to productive capital.
“More. He uses merchant’s capital as an illustration in a problem which concerns exclusively differences within the productive capital in the product and value-creating process, which in turn cause differences in its turnover and reproduction.” (p 195)
Smith: ““The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession or continues in the same shape.” [Vol. II, p. 254.]” (p 195)
But, its not clear what “this manner” means. If it means it produces no profit until its product is sold, this takes us no further forward. As demonstrated earlier, money-capital can be neither fixed nor circulating. It only becomes so when it is transformed into productive capital. Likewise, the productive capital, when it becomes the end product i.e. commodity-capital, is no longer fixed or circulating. Both those forms have become subsumed within it.
Smith: ““The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. His capital is continually going from him in one shape, and returning to him in another, and it is only by means of such circulation, or successive exchanges, that it can yield him any profit. Such capitals therefore may very properly be called circulating capitals.” [Vol. II, p. 254.]” (p 196)
But, this blurs the distinction correctly made by the Physiocrats, because it confuses the capital involved in the process of circulation with circulating capital, as a form of productive capital.
“These are not different kinds into which the industrial capitalist divides his capital, but different forms over and over again assumed and stripped off successively by the same advanced capital-value during its curriculum vitae. Adam Smith lumps this together — and this is a big step back compared to the Physiocrats — with the distinctions in form which arise in the sphere of circulation of capital-value, in its circular course through its successive forms, while the capital-value exists in the form of productive capital; and they arise because of the different ways in which the different elements of productive capital take part in the formation of values and transfer their value to the product.” (p 196)
Smith: “Secondly, it (capital) may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in suchlike things as yield a revenue or profit without changing masters, or circulating any further. Such capitals therefore may very properly be called fixed capitals. Different occupations require very different proportions between the fixed and circulating capitals employed in them. ... Some part of the capital of every master artificer or manufacturer be fixed in the instruments of his trade. This part, however, is very small in some, and very great in others. ... The far greater part of the capital of all such master artificers (such as tailors, shoemakers, weavers) however is circulated, either in the wages of their workmen, or in the price of their materials, and to be repaid with a profit by the price of work.” (p 197)
For Smith here, profit is more or less assumed to arise merely as a result of the price charged for the product being greater than its cost of production, which begs the question of how this is possible without providing the solution, which only Marx was able to produce. For Smith, the profit arose out of the process of exchange itself – the change of masters.
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