Wednesday 12 January 2022

Adam Smith's Absurd Dogma - Part 40 of 52

Going back to the previous analysis, it is only the £250 of value newly created by labour that represents revenue, and that can be spent on items of consumption. Likewise, its obvious that the sellers of these items of consumption cannot then replace the £750 of constant capital with the £250 they receive. If we assume that the coal producers constant capital consists of only iron, we can view it from the other direction.

The iron producer buys £1,000 of coal from the coal producer, and we will assume that, likewise, this constitutes all of their constant capital. With the same organic composition of capital, they produce iron with a value of £1300, made up of £1,000 constant capital and £300 labour. They now sell £750 of iron to the coal producer, replacing their constant capital. The constant capital of both the coal producer and iron producer have now been replaced, but neither was done so out of revenues. The iron producer has £550 of iron, which they sell to producers of consumption goods, which replaces their consumed constant capital.

Having sold £1,000 of coal to the iron producer, replacing the iron producer's constant capital, and having replaced their own constant capital by buying £750 of iron, the coal producer has £250 in money, equal to their revenues/new value created. The iron producer, having reproduced their constant capital, by buying £1,000 of coal, covered part of that by selling £750 of iron to the coal producer. In effect, the coal producer replaced all of their constant capital by this mutual exchange, whereas the steel producer replaced 75% of their constant capital, by mutual exchange. But, the steel producer sells £550 of iron to the producers of consumption goods. Of this, £250 is money spent by the coal producer, representing their revenues in excess of what was required to replace their constant capital (iron). In other words, all of the constant capital of the iron producer is also replaced as a result of their mutual production, although this remaining £250 is done so indirectly. The other £300 of constant capital, bought by the producers of consumption goods, is merely the equivalent of the £300 of revenues of the iron producer over and above the £1,000 they pay to replace their constant capital – coal.

Another way of seeing this is if both produce £1,000 of output, and both consume £750 of constant capital. The coal producer sells £750 to the iron producer, who exchanges £750 of iron for it. Both mutually replace the other's constant capital, as though they were a single coal and iron producer. Both, now also sell £250 of coal and iron to the producers of consumption goods, equal to the new value added/revenues. The producers of consumption goods now sell £250 of consumption goods each to the coal and iron producers. Their constant capital has been replaced entirely on the basis of an exchange of capital with revenue.

In other words, assuming that for consumption goods we have, say, £500, constant capital, and £150 of new value created by labour in that sector, that is output of £650. The first £500 is not new value/revenue created in consumption goods production, but is the equivalent of the £500 of new value created/revenue in the production of constant capital. As the producers of constant capital cannot consume that £500 of revenue in their own production, they can only consume it in the form of consumption goods, equal to this component of the value of those consumption goods. So, this component of the value of consumption goods is attributable not to its production but that of the producers of its constant capital, and it is those producers of constant capital, who subsequently provide the demand for that £500 component of value, from their revenues. The rest of the £650 value of consumption goods is equal to the new value created by labour in that sector, and is equal to the revenues of that sector. Those revenues provide the demand for this £150 component of the value of consumption goods.

In other words, total output value is £2,650, whilst total revenues/GDP is only £650. The constant capital of coal and iron producers is entirely replaced out of an exchange of capital with capital between the producers of coal and iron, whilst the constant capital of the consumer goods producers is replaced by an exchange of capital with revenue, and so the new value created by labour in the coal and iron sector. Its only this component that constitutes the category of “intermediate production”, in GDP data, and consists entirely of revenue, and no value component of constant capital.


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