Adam Smith's “absurd dogma” that the value of the total product resolves entirely into revenues was accepted by all economists that followed him, except Marx, and, in part, Ramsay and Jones. It forms the basis of orthodox economics, be it of the Neoclassical or Keynesian schools. Indeed, many Marxist economists can be found falling into the same error, and confusing the value of intermediate production for the value of c in c + v + s. See for example, my critique of the position of Michael Roberts, recently.
Lenin quotes Marx's comment in response to Smith's argument.
“... when Adam Smith says that the instruments of labour resolve themselves into wages and profit, he forgets to add: and into that constant capital which is used up in their production. Adam Smith simply sends us from Pontius to Pilate, from one line of production to another, from another to a third,” (p 151)
The problem is obscured by seeing the total product as simply the sum of all individual products. The reality is that the total product divides into two distinct categories, or as Marx defines them Department I and II. Department I produces means of production, and Department II means of consumption. Put another way, assuming simple reproduction, Department I goods are bought from capital, Department II goods from revenue. The difference is fairly obvious in that the output of Department I cannot be consumed, or more correctly cannot be consumed unproductively out of revenue, i.e. you cannot eat a lathe and so on.
There are, in fact, two problems to be solved, here. The first is, if the output of consumption goods, i.e. of Department II consists of c + v +s, how can its value be realised simply out of revenues, i.e. out of just v + s? This problem is fairly easy to resolve. Taking the earlier example, the final output is the bread produced by the baker. If the baker adds £10 of value by their labour the value of final output (bread) is £20 c + £5 v + £5 s = £30. But, its obvious that the £10 of Department II (baker) revenues, here, cannot realise this £30 of value. However, this £10 does not constitute the total amount of revenues. There is a further £20 of revenues represented by the intermediate production, i.e. the sold output of the farmer and miller. So, it is then, absolutely true that the value of final output (consumption fund) although being equal to c + v + s, resolves entirely into revenues £10 farmer, £10 miller, £10 baker. The £30 value of bread is equal to GDP, and is also equal to National Income. This is the equality assumed by Smith, and Say's Law, as well as by Keynes and all of orthodox economics. But, it is also clearly wrong.
As Marx points out, income/revenues equals output/consumption, only in relation to society's consumption fund, but this consumption fund constitutes only part of total output, and a continually shrinking part at that. The missing revenue to enable all of the value of bread to be realised comes from the revenues of the miller and farmer, i.e. Department I revenues, v + s. The grain sold to the miller and the flour sold to the baker, form the constant capital of the baker, what in GDP data is considered intermediate production. But, the grain and the flour, as means of production, are not consumption goods, here. They do not form a part of the farmer or miller's consumption. They can only be consumed productively by the baker, to produce bread. As use values they are means of production, even though no part of their value is comprised of constant capital. The farmer and the miller can only consume their value, created by their labour, in actual consumption goods, i.e. bread. They achieve this by selling flour to the baker with a value equal to their own revenues, i.e. £20.
It is clear, then, that, although this £20 of constant capital, as a component of the baker's output, appears to represent constant capital, in reality, it is not. Its entire value is comprised entirely of revenue. If we examine it in Marx's formulation of two departments.
Department I
c £10 + v £10 + s £10 = £30
Department II
c £20 + v £5 + s £5 = £30.
So, now, final output, represented by Department II is £30, which also equals national expenditure, which equals national income. But, looking at the £20 of constant capital of Department II, it is obvious that this is only the revenues of Department I. Department I exchanges the £20 of its output, equal to its revenues, but which it cannot consume, for £20 of output from Department II, which it can consume. This £20 of value of final output is not value created by labour in Department II, but in Department I, in means of production required by Department II.
Now, however, the second problem becomes apparent. Total revenues/National Income equals £30. National Expenditure also equal £30. That is the farmer, miller and baker spend their revenues buying the final output comprised of £30 of bread. On this basis, Income = Expenditure = Output. However, as Marx sets out, this only relates to society's consumption fund. Looking at Department I, the value of its output is not £20, but £30. That is because in addition to the £20 of new value created, it also includes £10 of constant capital consumed in production, and whose value is transferred to its output. In other words, the farmer uses £10 of seeds, and the value of these seeds is transferred to the value of its output. The farmer does not, and cannot, replace these seeds from their revenue, but only out of capital, just as they cannot consume this £10 of value, because it must replace the seed.
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