It is Smith's confusion of this value, created by labour, with the value of labour-power that leads him into his cost of production theory of value, and his error, therefrom, of believing that the value of commodities must resolve entirely into those revenues. But, this cannot be the case, because, having accounted for all these revenues, there is still the component of the value of the commodity which does not resolve itself into the new value created by labour, but which must reproduce the value of the consumed means of production.
The labour undertaken in the current year reproduces the use values – material balances – that must be reproduced, and in extended reproduction those required for such accumulation, but it does not replace the value of these consumed means of production, a value which is merely preserved. Unlike Ricardo, who avoided this issue entirely, Smith recognised this problem, and tried to answer it, in the way previously described, i.e. he tried to argue that means of production are themselves commodities whose value resolves entirely into revenues. This is the error that those who view “intermediate production” as the component of c in national output also make. Marx quotes Smith's comment,
““A fourth part, it may he thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered, that the price of an instrument of husbandry, such as a labouring horse, is itself made up of the same three parts; the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer, who advances both the rent of this land, and the wages of this labour.”
“Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself, either immediately or ultimately, into the same three parts of rent, labour and profit” ([Wealth of Nations, O.U.P. edition, p. 56], [Garnier] b. I, ch.VI).” (p 98)
Marx points out that,
“... just as the farmer included the price of the horse and the plough in the price of the corn, the horse breeder or the plough maker from whom the farmer bought the horse and the plough, would include in the price of the horse and the plough the price of the instruments of production (in the case of the former, perhaps another horse) and of raw materials such as feeding stuffs and iron, whereas the fund from which the horse breeder and plough maker paid wages and profit (and rent) consisted only in the new labour which they added in their sphere of production to the amount of value present in their constant capital? Since therefore Adam Smith admits, in relation to the farmer, that the price of his corn includes, besides the wages, profit and rent paid by him to himself and others, also a fourth constituent part which is different from these—the value of the constant capital he has used up, such as horses, agricultural implements, etc.—this must also hold good for the horse breeder and the manufacturer of agricultural implements; and it is of no avail for Adam Smith to send us from pillar to post.” (p 98-9)
And, indeed, Marx says, the choice of a farmer for the example, by Smith, is particularly unfortunate for him, because one of the means of production for the farmer is seed, which they do not buy from some other producer, and whose value cannot, therefore, resolve into the revenues of some other producer, or for the farmer.
If the value of output resolves into revenues, and (at least under simple reproduction) all revenues are used for personal consumption, not productive consumption, then the whole output must be consumed unproductively. Marx, again quotes Smith to this effect, and notes,
“This is in fact the necessary consequence. What is true of the individual commodity is necessarily true of the total sum of commodities.” (p 100)
But, if all output is consumed unproductively, out of revenues, wherein lies the fund for the replacement of the consumed means of production? Smith himself contradicts his assertion that the value of commodities resolves entirely into revenues, because he distinguishes between gross revenues and net revenues, the latter being after the deduction of costs, including the cost of means of production. In other words, Smith accepts that for each individual producer there is this fourth part of the components of the value, representing means of production, but rejects it when it comes to production as a whole.
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