Monday, 24 November 2014

Capital II, Chapter 20 - Part 27

9) A Retrospect to Adam Smith, Storch, and Ramsay 

Department I c 4000 + v 1000 + s 1000 = 6000

Department II c 2000 + v 500 + s 500 = 3000

The total value of the social product here is £9,000, made up C 6000 + V 1500 + S 1500. In other words, of society's total output, 6000 or ⅔ must be devoted simply to replacing the means of production. Only a third is left over to be consumed, and is equal to the total income received by workers and capitalists. At first glance, it seems impossible that if the value created by the whole of society in a social working day is only equal to £3,000, then £6,000 could go to replacing means of production. 

We've seen that this is quite possible, because two-thirds of the value of the national output was attributable, not to the value created in the current year, but to the value crated in previous years, and incorporated in the value of this year's output. This is a concept that Adam Smith failed to grasp, and an error that has continued into the writings of modern economists.

So, given simple reproduction, an equivalent amount of value to that transferred by constant capital, in the form of raw materials, wear and tear of machinery etc. to the value of current output, must also be set aside from current output to replace it. None of this value of output forms a revenue, or an income for anyone in the current period.  So, although it forms part of the total national output, it forms no part of the total national income.

Storch recognised this as essential without being able to prove it:

'It is clear that the value of the annual product is divided partly into capital and partly into profits, and that each one of these portions of the value of the annual product is regularly employed in buying the products which the nation needs both for the maintenance of its capital and for replenishing its consumption-fund... . The products which constitute the capital of a nation are not to be consumed.' (Storch, Considèrations sur la nature du revenu national Paris, 1824, pp. 134-35, 150.)” (p 438) 

Adam Smith, as we have seen, did not at all understand this reality. Smith, like Keynes, argued that National Output and National Income are identical. Everything that is produced and sold, thereby provides an income to someone. The firm selling the product takes its receipts and from them pays wages to its workers, profits to its owners, rent to its landlord, and interest to the money-capitalist who lent it money-capital.

The trouble is, of course, that those payments only account for a fraction of the total receipts the company obtains. A much larger amount of money has to be paid that does not come to any of these categories. It has to be paid, not as revenue, but simply to reproduce the circulating constant capital, and has to be kept in a reserve to cover the wear and tear of fixed capital. So, for example, a baker will have to pay out large sums to the miller who provided him with flour, the sugar producer, the energy supplier, and so on. They will have to set aside funds, that form revenue for no one, that cover the wear and tear of their machinery etc.

Now, its true, as Smith says, that the miller will take his receipts from the baker, and from them pay out wages, profits, rent and interest, but that in turn will leave him with a similar situation whereby that only accounts for a fraction of his receipts. He will also have to pay out sums of money that do not fall into these categories. He will have to pay out for the constant capital he has consumed too. So, he will have to pay the farmer for the wheat, the millwright for building or maintaining the mill, and so on. As Marx points out, no matter how far back you take this series, it will always be the case that output cannot be resolved simply into wages, profits, interest and rent because a portion – frequently the largest portion – of the value of output comprises the constant capital consumed.

All that National Income figures (which total up wages, profits, rent and interest) can show is the amount of new value created by labour in the current year. They will always omit the largest component of the value of output, which is the value of the circulating constant capital, in the form of the materials processed etc.

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