The foundation for understanding the nature of Smith's absurd dogma is the process of social reproduction itself, as set out by Marx in Capital II. The easiest way of understanding that is via the schemas for simple reproduction, as set out in Chapter 20, in which all surplus value is consumed unproductively, without any capital accumulation. That, of itself, removes the delusion that the demand for constant capital comes from the revenues represented by surplus value.
The model then establishes that there are two departments of production – Department I producing means of production, and Department II producing consumption goods.
Department I
c 4000 + v 1000 + s 1000 = 6000
Department II
c 2000 + v 500 + s 500 = 3000
Its important to understand that the values represented on the left hand side of the equation are existing stocks, or material balances, whilst the value on the right hand side is the value resulting from this year's production. As no change in social productivity is assumed, these values also represent constant physical balances. The material balances on the left hand side are, thereby reproduced out of the total output shown on the right hand side. Indeed, this is the point of the reproduction process, as Marx describes in Capital III, Chapter 49, to reproduce these material balances, as the basic requirement for then expanding social production. If social productivity remains constant then the values involved remain constant, if it rises, then less social labour-time is required to do so, and capital is released, the rate of profit rises, and vice versa.
“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness. If the productiveness of labour remains the same, then this replacement in kind implies replacing the same value which the constant capital had in its old form. But should the productiveness of labour increase, so that the same material elements may be reproduced with less labour, then a smaller portion of the value of the product can completely replace the constant part in kind. The excess may then be employed to form new additional capital or a larger portion of the product may be given the form of articles of consumption, or the surplus-labour may be reduced. On the other hand, should the productiveness of labour decrease, then a larger portion of the product must be used for the replacement of the former capital, and the surplus-product decreases.”
Or as Marx puts it in Capital II, Chapter 20,
“The value of the annual product may decrease, although the quantity of use-values may remain the same; or the value may remain the same although the quantity of the use-values may decrease; or the quantity of value and of the reproduced use-values may decrease simultaneously. All this amounts to reproduction taking place either under more favourable conditions than before or under more difficult ones, which may result in imperfect — defective — reproduction. All this can refer only to the quantitative aspect of the various elements of reproduction, not to the role which they play as reproducing capital or as a reproduced revenue in the entire process.” (p 399)
So, the value of output of Department I is 6000, consisting of 4000 value of c preserved and transferred to its output, plus 2000 of new value created by labour. Again, it is important not to think of this as the 2000 of Department I v + s, already existing, in the form of the money/consumption goods used for the reproduction of Department I capitalists and workers. As stated earlier, this value is totally unrelated to the new value created by Department I labour. Department I v (500), and Department I s (500) rather have to be viewed as these material balances (stocks) of consumption goods, consumed by Department I workers and capitalists throughout the year. They are the product not of this year but of last year/previous year's. This must be the case, because neither workers nor capitalists could wait until the end of the year to consume this year's product.
Viewing it from the other perspective is the mistake made by Smith, of going from the value of output into its division into revenues, to instead going from the value of revenues, and turning them into the source of the value of output.
The value of output of Department II is 3000 consisting of 2000 of constant capital preserved and transferred to its current production, and 1,000 of new value created by Department II workers. Again, the 2000 of c, is its existing stock of means of production consumed during the year, and it has stocks of consumer goods to a value of 1,000, which are consumed by Department II workers and capitalists during the year. All of these material balances have to be reproduced on a like for like basis out of current production. The obvious nature of Smith's absurd dogma can, therefore, be seen that the total value of output is equal to 9,000, whereas total revenues are equal to only 3,000. It would be impossible, therefore, for the value of output to resolve entirely into revenues. Revenues cannot form the total demand for all goods and services produced within the economy. They form only the demand for the consumable product/GDP, which does not include the value of constant capital consumed in total production.
Putting this in terms of GDP data, the 2000 of constant capital consumed in Department II, is the equivalent of “intermediate production”, but, despite the fact that it assumes the appearance of constant capital, as a consequence of its use value, none of it represents the value of constant capital in total output. It all represents Department I revenues, which is what gives the appearance that “what is capital for one is revenue for another”. It is only equal to the new value created by labour in Department I, which by definition contains no value portion of constant capital whatsoever, and, thereby, also equals Department I revenues. GDP data would show an output value of 3000, equal to this “intermediate production” plus the new value created by Department II labour, i.e. all value added. That equals all revenues, thereby, confirming the identity equation of Say's Law, but this output value of 3000, presented in GDP statistics, and mirrored in National Income data, thereby, leaves out the actual value of constant capital consumed in production of national output, which amounts to 6,000.
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