What Marx demonstrates, in Theories of Surplus Value, is that, as productivity rises, the value of labour-power falls, and the rate of surplus value rises. The fall in v creates a release of capital, which is then available for accumulation. At these lower unit wages, more labour can be employed, so the mass of surplus value rises. It rises because of a) a greater mass of labour employed, as the released capital is accumulated, and b) each worker produces more surplus value, i.e. the rate of surplus value rises. But, also the rise in productivity reduces the value of constant capital, again releasing capital for accumulation, and increasing the rate of profit. Rather than contracting the market, as Sismondi and the Narodniks believed, the result is an expansion of capital, and of the market.
Setting out Sismondi's arguments, of how the introduction of machines results in the replacement of labour, which must then result in a shrinkage of the market, without foreign trade, Lenin says,
“The reader will see that in these words he already has before him all that so-familiar “theory” of “the shrinkage of the home market” as a consequence of the development of capitalism, and of the consequent need for a foreign market. Sismondi very frequently reverts to this idea, linking it with his theory of crises and his population “theory”; it is as much the key point of his doctrine as it is of the doctrine of the Russian Narodniks.” (p 136)
Sismondi was well aware that this process, which led to the ruination and unemployment of the individual producers, goes hand in hand with a rise in commercial wealth. But, it is this rise in commercial wealth, arising from capitalism, which he believes results in a shrinkage of the market, due to increased inequality. He says,
“Equality in consumption must always lead to the expansion of the producers’ market, and inequality, to the shrinking of the market” (de le [le marché] resserrer toujours davantage) (I, 357).” (p 136)
However, Sismondi faced the same contradiction as that presented to the Narodniks. If the market was to be created and expanded on the basis only of income equality of the producers, how to explain the existence of this commercial wealth, i.e. of this inequality of income. The reality was that a market implies competition, and, if the individual producers compete, some will win and some will lose. The winners will grow, and become even more competitive, and the losers will go to the wall. So, Sismondi cannot prove that the market can only expand on the basis of equality of income. It is just a pious wish on his part that that is how things should be.
“He simply decrees that that is what must occur. Instead of further analysing the contradiction he rightly pointed to, he begins to talk about the undesirability of contradictions in general. “It is possible that when small-scale agriculture is superseded by large-scale and more capital is invested in the land a larger amount of wealth is distributed among the entire mass of agriculturists than previously” . . . (i.e., “it is possible” that the home market, the dimension of which is determined after all by the absolute quantity of commercial wealth, has expanded—expanded along with the development of capitalism?). . . . “But for the nation, the consumption of one family of rich farmers plus that of fifty families of poor day labourers is not equal to the consumption of fifty families of peasants, not one of which is rich but, on the other hand, not one of which lacks (a moderate) a decent degree of prosperity” (une honnête aisance) (I, 358).” (p 137)
So, Sismondi, in his own description, admits that the development of capitalism in agriculture results in the development of a home market for capitalism. Lenin summarises Sismondi's description of the paternalistic relations in agriculture, whereby, to begin with, the farmers are themselves nothing but labourers, who, rather than employing day labourers as wage workers, instead employed servants, who were treated as equals, shared the same table and so on.
“So then, it all amounts to this, that these patriarchal muzhiks, with their patriarchal servants, are much more to the author’s liking, and he simply turns his back on the changes which the growth of “commercial wealth” brought about in these patriarchal relationships.” (p 138)
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