In Capital III, Chapter 48, Marx summarises the way Smith's absurd dogma transforms revenues from being derived from the value created in the product by labour, i.e. the Labour Theory of Value, into themselves being factors of production that become the source of revenue, and from which is derived the value of the product, i.e. a cost of production, or factor cost theory of value.
“Landed property, capital and wage-labour are thus transformed from sources of revenue — in the sense that capital attracts to the capitalist, in the form of profit, a portion of the surplus-value extracted by him from labour, that monopoly in land attracts for the landlord another portion in the form of rent; and that labour grants the labourer the remaining portion of value in the form of wages — from sources by means of which one portion of value is transformed into the form of profit, another into the form of rent, and a third into the form of wages — into actual sources from which these value portions and respective portions of the product in which they exist, or for which they are exchangeable, arise themselves, and from which, therefore, in the final analysis, the value of the product itself arises.” (p 826)
Nearly all economists after Smith accepted the absurd dogma. The exceptions are Ramsay and Jones. Ricardo accepted the absurd dogma, although he did not follow Smith into his cost of production theory of value. Marx quotes him,
““It must be understood that all the productions of a country are consumed; but it makes the greatest difference imaginable whether they are consumed by those who reproduced, or by those who do not reproduce another value. When we say that revenue is saved, and added to capital, what we mean is, that the portion of revenue, so said to be added to the capital, is consumed by productive instead of unproductive labourers.” (Principles, p. 163.)” (Capital II, Chapter 20, p 393)
Yet, Ricardo rejected Smith's cost of production theory of value, and continued to argue the labour theory of value. Marx quotes Ramsay against Ricardo.
““... He seems always to consider the whole produce as divided between wages and profits, forgetting the part necessary for replacing fixed capital.” (An Essay on the Distribution of Wealth, Edinburgh, 1836, p. 174.)
By fixed capital Ramsay means the same thing that I mean by constant capital:
“Fixed capital exists in a form in which, though assisting to raise the future commodity, it does not maintain labourers.” (Ibid., p. 59.)” (p 394)
As described, these revenues – rent, profit, wages – whilst they can account for the value of the commodities constituting the consumption fund, and so appear to justify the claim of Smith's dogma, whilst equating a value comprising c + v + s with just revenues comprising only v + s, cannot account for the total value of output. They do not account for the value of output that constitutes the production fund equal to c.
“The entire value portion of the annual product, then, which the labourer creates in the course of the year, is expressed in the annual value sum of the three revenues, the value of wages, profit, and rent. Evidently, therefore, the value of the constant portion of capital is not reproduced in the annually created value of product, for the wages are only equal to the value of the variable portion of capital advanced in production, and rent and profit are only equal to the surplus-value, the excess of value produced above the total value of advanced capital, which equals the value of the constant capital plus the value of the variable capital.”
(Capital III, Chapter 49, p 834)
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