The idea that this “intermediate production” represents the element of constant capital, i.e. the c in c + v + s, stems from the fallacy, inherent in Smith's absurd dogma, that “what is capital for one is revenue for another”. It is certainly true that what appears in terms of use-value, as capital for Department II producers, is merely revenue for Department I producers, but this merely reflects the fact that this social exchange is an exchange of capital for revenue, i.e. Department I producers exchange capital goods they cannot consume for consumption goods they can.
It might be asked, well don't the same kinds of exchange take place within Department I? The simple answer is no, because none of the Department I production is of consumption goods, and so all exchanges are of capital for capital, or else for money, which is required to buy other capital goods. In other words, the intermediate production, within Department I, is qualitatively different to that between Department I as a whole, and Department II.
Take an economy where there is just a farmer, miller and baker and no fixed capital. Using the above schema, assume, then, that we start with a stock of seed equal to the 4000 c in Department I. The farmer adds labour of 1000, so the value of grain amounts to 5000. However, they cannot sell 5000 of grain to the miller, because they must replace the 4000 of seed. The farmer can only sell 1000 of seed to the miller, equal to the value added, i.e. their revenues. The miller processes the grain into flour, adding 1000 in new value by their labour. In both cases, the 1000 of new value divides into 500 wages 500 profit. It doesn't matter whether the miller pays for the grain by handing to the farmer 1000 in value of flour or 1000 in value of money. The farmer can exchange 1000 in flour/money with Department II for consumption goods.
If the miller pays the farmer 1000 in money, they retain the 1000 in flour. Now they have 2000 in flour to exchange with Department II, but they must now take 1000 of that in money to replace the 1000 they paid to the farmer, so as to reproduce their own constant capital. If they paid the farmer in flour, this becomes clear, because the farmer now buys the 1000 of consumption goods they require with 1000 of flour, and the miller does the same. So, it is then clear that, as far as intermediate production goes, it is only this aggregate of Department I revenues, whatever exchanges take place within Department I itself.
But, whilst its true that, in respect of the exchange between Department I and II, this is an exchange of revenue for capital, so that what is capital for one, in Department II, is revenue for another in Department I, this fails to account for the 4000 of capital in Department I, in the form of seeds, which is not sold, and does not exchange as revenue against capital, but is merely replaced as an exchange of capital with capital. Here, what is capital for one is likewise simply capital for another. The 4000 starts out as capital, for the farmer, and completes its cycle once more simply as capital, never assuming the form of revenue at any point between.
Looking at Department II, the baker starts the year with a stock of flour with a value of 2000, and adds labour of 1000, divided 500 wages, 500 profit. They produce an output with a value of 3000 comprising 2000 value of flour, preserved by labour and transferred to final output, and 1000 of new value created by labour. But, again it is only this 1000 of new value that constitutes revenue, i.e. a new value available for consumption. They must sell the other 2000 to Department I, in order to replace their consumed flour.
In Department I, the stocks of bakery goods (variable-capital), required to reproduce labour power, are consumed by Department I workers, and the stocks held by Department I capitalists for their own consumption, are likewise run down, during the year. They are replaced in the exchange between Department I and II, at the end of the year, so that, at the start of the new year, all material balances have been restored. Of course, this is an unrealistic and simplified example. Its not possible to live on bread alone, to produce bread without fixed capital, and other materials, just as its not possible to produce grain or flour without fixed capital and other materials. Nor could stocks of bread or flour last a year before needing replenishment. But, these represent merely added complexity to the model, not any fundamental challenge to the basic social relations described within it.
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