## Friday, 21 October 2016

### Capital III, Chapter 49 - Part 4

A confusion arises because it appears that the value of this annual product does include the value of the constant capital consumed. In other words, if we look at the value of final output, it appears to consist not just of the new value created by labour [I (v+s) + II (v+s)] but, also of the value of all of the intermediate production – production of materials, components, machinery, energy etc. - required as inputs for this final production.

The confusion is then compounded by the fact that each of these commodities that comprise the intermediate production, are themselves the result of a production process that involves not just the creation of new value, as a consequence of labour expended, but also itself involves the use of a range of commodities which themselves comprise intermediate production.

Assume a fairly straightforward series of such processes. A baker produces 10,000 loaves with a value of £10,000. This value breaks down as follows:

New value produced by labour £2,000

Flour £8,000

Of the new value produced, £1,000 is paid as wages to the bakery workers, and £1,000 comprises surplus value, which is divided into profits, interest and rent.

If we look then at the flour, with a value of £8,000, this comprises the constant capital of the baker, and forms part of the intermediate production of the society. Of this £8,000 of value:

£2,000 new value produced by labour employed in milling

£6,000 constant capital in the form of wheat bought from the farmer.

Of the £2,000 of new value produced, £1,000 is paid as wages, and £1,000 goes to surplus value, and is divided again into profit, interest and rent.

Finally, of the £6,000 of constant capital this comprises wheat bought from the farmer. This again breaks down as:

£2,000 of new value produced by agricultural labour.

This £2,000 of new value is again divided £1,000 of wages and £1,000 of surplus value. But, what about the other £4,000 of value of the wheat?

The total value of production available for consumption in the form of bakery products is £10,000, but the total amount of new value produced by labour, and divided as revenue between wages, profits, interest and rent is only £6,000! If we take the total national income £3,000 as wages and £3,000 paid to capitalists and landlords, its clear that there is not enough national income to buy the total value of national output.

There is a shortfall of £4,000. A look at the above figures shows why this is the case. Of the farmer's production, which is the first element of intermediate production, only £2,000 of the value of output of £6,000 comprises new value, i.e. the value produced in this year. So, where does the other £4,000 of value in this production come from?

Quite simply, as with the baker and the miller this additional value comes from the constant capital used by the farmer. In other words, the farmer's output of wheat does not spring magically from just the expenditure of labour, creating new value this year. It also requires inputs at least in the shape of seeds, but in reality also fertiliser, machinery and so on. In other words, constant capital. But, this constant capital used in the production of the farmer is not output created this year, nor is it value created this year. The seeds and other constant capital the farmer uses in their production this year, is comprised of commodities produced last year, and in previous years!
 The Physiocrats were ahead of Adam Smith, Marx says, because they recognised that the starting point for understanding national output, and social reproduction is last years' harvest/production.  They recognised that a part of the value of this year's production comprises the value of the circulating constant capital produced last year (and previous year's), and so provides no part of this year's incomes (National Income).  They also recognised that for the same reason the materials produced last year, and used this year in production, must be physically replaced, on a like for like basis, out of this year's production.  In this way, they avoided Adam Smith's "absurd dogma" that the value of output (c + v + s) can be resolved into revenues (s + v).  An absurd dogma that continues today in the idea that National Output equals National Income/Expenditure.
The reality is that the total value of output of £10,000 could not possibly all be comprised of revenue (wages, profits, interest and rent), and thereby consumed, because a portion of the total value of this output comprises not just new value produced, but also the value of constant capital (not fixed capital, but circulating constant capital, plus wear and tear) which is itself the consequence of production not this year, but in previous years. Not all of the total value of output can be consumed, because an equivalent portion of this output value must be set aside solely to replace this constant capital, produced in previous years, and used in this year's production.

If we were to restate the example, therefore, starting with the farmer we would have the following:

Value of wheat produced £6,000 made up

c 4000 + v 1000 + s 1000.

Of the farmer's production, £4,000 of the value is not sold, but as seeds is used to replace the seeds used in its production, and which were themselves the product of last year's harvest, not this year's production. The farmer then sells the remaining £2,000 of wheat to the miller. The miller's output then has a value of £4,000 made up of:

c 2000 + v 1000 + s 1000.

The miller then sells this £4,000 of flour to the baker whose value of output is £6,000, made up:

c 4000 + v 1000 + s 1000.

The baker's output constitutes the value of the society's consumption fund. It is equal to National Income and Expenditure, or the national annual product. In other words, it is equal to the new value created by labour during this year.

The baker's £6,000 of bread is bought by the worker's who spend their £3,000 of wages, and by capitalists and landlords who spend their £3,000 of profits, interest and rent.

But, its clear that although the society's consumption fund, its national product, and national income and expenditure is equal to £6,000, the total value of this society's production during the year was £10,000. This comprised the value of its national output, as opposed to its national income, or consumption fund.

The total value produced by the farmer was £6,000, and the miller added £2,000 of value to this making £8,000, whilst the baker added a further £2,000 of value to this making £10,000.

To be clear, the difference here is not accounted for by fixed capital, which only passes part of its value, as wear and tear, to the final commodity-capital. The difference does not arise because fixed capital is produced, in previous years, and only part of its value is consumed this year. The difference here does not comprise the fixed capital of the farmer, but his circulating constant capital, in the shape of his seeds.

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