LET us recapitulate the conclusions to which Smith’s analysis has brought us:

1. There is a fixed capital of society, no part of which enters into its net revenue. This fixed capital consists in ‘the materials necessary for supporting their useful machines and instruments of trade’ and ‘the produce of labor necessary for fashioning those materials into the proper form’.⁽¹⁾ By singling out the production of such fixed capital as of a special kind, and explicitly contrasting it with the production of consumer goods, Smith in effect transformed fixed capital into what Marx calls ‘constant capital’ – that part of capital which consists of all material means of production, as opposed to labor power.
2. There is a circulating capital of society. After eliminating the part of fixed, or constant, capital, there remains only the category of consumer goods; these are not capital for society but net revenue, a fund of consumption.
3. Capital and net revenue of an individual do not strictly correspond with capital and net revenue of society. What is nothing but fixed, or constant capital for society as a whole cannot be capital for the individual; it must be revenue, too, a fund of consumption, comprising as it does those parts of fixed capital which represent the workers’ wages and the capitalists’ profits. On the other hand, the circulating capital of the individuals cannot be capital for society but must be revenue, especially in so far as it takes the form of provisions.
4. As regards the value of the total annual social product, no trace of capital remains. It can be resolved completely into the three kinds of income: wages, profits of capital, and rents.

If we tried from this haphazard collection of odd ideas to build up a picture of the annual reproduction of total social capital, and of its mechanism, we should soon despair of our task. Indeed, all these observations leave us infinitely remote from the solution of the problem how social capital is annually renewed, how everybody’s consumption is ensured by his income, while the individuals can nevertheless adhere to their own points of view on capital and income. Yet if we wish to appreciate fully Marx’s contribution to the elucidation of this problem, we must be fully aware of all this confusion of ideas, the mass of conflicting points of view.

Let us begin with Adam Smith’s last thesis which alone would suffice to wreck the treatment of the problem of reproduction in classical economics.

Smith’s basic principle is that the total produce of society, when we consider its value, resolves itself completely into wages, profits and rents: this conception is deeply rooted in his scientific theory that value is nothing but the product of labor. All labor performed, however, is wage labor. This identification of human labor with capitalist wage labor is indeed the classical element in Smith’s doctrine. The value of the aggregate product of society comprises both the recompense for wages advanced and a surplus from unpaid labor appearing as profit for the capitalist and rent for the landowner. What holds good for the individual commodity must hold good equally for the aggregate of commodities. The whole mass of commodities produced by society – taken as a quantity of value – is nothing but a product of labor, of paid as well as unpaid labor, and thus it is also to be completely resolved into wages, profits, and rents.

It is of course true that raw materials, instruments, and the like, must be taken into consideration in connection with all labor. Yet is it not true also that these raw materials and instruments in their turn are equally products of labor which again may have been paid or unpaid? We may go back as far as we choose, we may twist and turn the problem as much as we like, yet we shall find no element in the value of any commodity – and therefore none in the price – which cannot be resolved purely in terms of human labor. We can distinguish, however, two parts in all labor: one part repays the wages and the other accrues to the capitalist and landlord. There seems nothing left but wages and profits – and yet, there is capital, individual and social capital. How can we overcome this blatant contradiction? The fact that Marx himself stubbornly pursued this matter for a long time without getting anywhere at first as witness his Theories of the Surplus Value,⁽²⁾ proves that this theoretical problem is indeed extremely hard to solve. Yet the solution he eventually hit on was strikingly successful, and it is based upon his theory of value. Adam Smith was perfectly right: nothing but labor constitutes the value of the individual commodity and of the aggregate of commodities. He was equally right in saying that from a capitalist point of view all labor is either paid labor which restores the wages, or unpaid labor which, as surplus value, accrues to the various classes owning the means of production. What he forgot, however, or rather overlooked, is the fact that, apart from being able to create new value, labor can also transfer to the new commodities the old values incorporated in the means of production employed. A baker’s working day of ten hours is, from the capitalist point of view, divided into paid and unpaid hours, into v + s. But the commodity produced in these ten hours will represent a greater value than that of ten hours’ labor, for it will also contain the value of the flour, of the oven which is used, of the premises, of the fuel and so on, in short the value of all the means of production necessary for baking. Under one condition alone could the value of any one commodity be strictly equal to v + s; if a man were to work in mid-air, without raw materials; without tool’s or workshop. But since all work on materials (material labor) presupposes means of production of some sort which themselves result from preceding labor, the value of this past labor is of necessity transferred to the new product.

The process in question does not only take place in capitalist production; it is the general foundation of human labor, quite independent of the historical form of society. The handling of man-made tools is a fundamental characteristic of human civilization. The concept of past labor which precedes all new labor and prepares its basis, expresses the nexus between man and nature evolved in the history of civilization. This is the eternal chain of closely interwoven laboring efforts of human society, the beginnings of which are lost in the gray dawn of the socialization of mankind, and the termination of which would imply the end of the whole of civilized mankind. Therefore we have to picture all human labor as performed with the help of tools which themselves are already products of antecedent labor. Every new product thus contains not only the new labor whereby it is given its final form, but also past labor which had supplied the materials for it, the instruments of labor and so forth. In the production of value, that is commodity production into which capitalist production also enters, this phenomenon is not suspended, it only receives a particular expression. Here the labor which produces commodities assumes a twofold characteristic: it is on the one hand useful concrete labor of some kind or other, creating the useful object, the value-in-use. On the other hand, it is abstract, general, socially necessary labor and as such creates value. In its first aspect it does what labor has always done: it transfers to the new product past labor, incorporated in the means of production employed, with this distinction only, that this past labor, too, now appears as value, as old value. In its second aspect, labor creates new value which, in capitalist terms, can be reduced to paid and unpaid labor, to v + s. Thus the value of every commodity must contain old value which has been transferred by labor qua useful concrete labor from the means of production to the commodity, as well as the new value, created by the same labor qua socially necessary labor merely as this labor is expended hour by hour.

This distinction was beyond Smith: he did not differentiate the twofold character of value-creating labor. Marx once claimed to have discovered the ultimate source of Smith’s strange dogma – that the aggregate of produced values can be completely resolved into v + s – in his fundamentally erroneous theory of value.⁽³⁾ Failure to differentiate between the two aspects of commodity-producing labor as concrete and useful labor on the one hand, and abstract and socially necessary labor on the other, indeed forms one of the most important characteristics of the theory of value as conceived not only by Smith but by all members of the classical school.

Disregarding all social consequences, classical economics recognized that human labor alone is the factor which creates value, and it worked out this theory to that degree of clarity which we meet in Ricardo’s formulation. There is a fundamental distinction, however, between Marx’s theory of value and Ricardo’s, a distinction which has been misunderstood not only by bourgeois economists but also in most cases by the popularizers of Marx’s doctrine: Ricardo, conceiving as he did, of bourgeois economy in terms of natural law, believed also that the creation of value, too, is a natural property of human labor, of the specific and concrete labor of the individual human being.

This view is even more blatantly revealed in the writings of Adam Smith who for instance declares what he calls the ‘propensity to exchange’ to be a quality peculiar to human nature, having looked for it in vain in animals, particularly in dogs. And although he doubted the existence of the propensity to exchange in animals, Smith attributed to animal as well as human labor the facility of creating value, especially when he occasionally relapses into the Physiocrat doctrine:

‘No equal capital puts into motion a greater quantity of productive labor than that of the farmer. Not any of his laboring servants, but his laboring cattle, are productive laborers ...’⁽⁴⁾

‘The laborers and laboring cattle, therefore, employed in agriculture, not only occasion, like the workmen in manufactures, the reproduction of a value equal to their own consumption, or to the capital which employs them, together with its owner’s profits, but of a much greater value: Over and above the capital of the farmer and all its profits, they regularly occasion the reproduction of the rent of the landlord.”⁽⁵⁾

Smith’s belief that the creation of value is a direct physiological property of labor, a manifestation of the animal organism in man, finds its most vivid expression here. Just as the spider produces its web from its own body, so laboring man produces value – laboring man pure and simple, every man who produces useful objects – because laboring man is by birth a producer of commodities; in the same way human society is founded by nature on the exchange of commodities, and a commodity economy is the normal form of human economy.

It was left to Marx to recognize that a given value covers a definite social relationship which develops under definite historical conditions. Thus he came to discriminate between the two aspects of commodity-producing labor: concrete individual labor and socially necessary labor. When this distinction is made, the solution of the money problem becomes clear also, as though a spotlight had been turned on it.

Marx had to establish a dynamic distinction in the course of history between the commodity producer and the laboring man, in order to distinguish the twin aspects of labor which appear static in bourgeois economy. He had to discover that the production of commodities is a definite historical form of social production before he could decipher the hieroglyphics of capitalist economy. In a word, Marx had to approach the problem with methods of deduction diametrically opposed to those of the classical school, he had in his approach to renounce the latter’s faith in the human and normal element in bourgeois production and to recognize their historical transience: he had to reverse the metaphysical deductions of the classics into their opposite, the dialectical.

On this showing Smith could not possibly have arrived at a clear distinction between the two aspects of value-creating labor, which on the one hand transfers the old value incorporated in the means of production to the new product, and on the other hand creates new value at the same time. Moreover, there seems to be yet another source of his dogma that total value can be completely resolved into v + s. We should be wrong to assume that Smith lost sight of the fact that every commodity produced contains not only the value created by its production, but also the values incorporated in all the means of production that had been spent upon it in the process of manufacturing it. By the very fact that he continually refers us from one stage of production to a former one – sending us, as Marx complains, from pillar to post, in order to show the complete divisibility of the aggregate value into v + s – Smith proves himself well aware of the point. What is strange in this connection is that he again and again resolves the old value of the means of production, too, into v + s, so as finally to cover the whole value contained in the commodity.

‘In the price of corn, for example, one part pays the rent of the landlord, another pays the wages of maintenance of the laborers and laboring cattle employed in producing it, and the third pays the profit of the farmer. These three parts (wages, profit, and rent) seem either immediately or ultimately to make up the whole price of corn. A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his laboring cattle and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a laboring horse, is itself made up of the same three parts: the rent of the land upon which he is reared, the labor of tending and rearing him, and the profits of the farmer who advances both the rent of this land and the wages of this labor. 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, of labor, and profit.’⁽⁶⁾

Apparently Smith’s confusion arose from the following premises: first, that all labor is performed with the help of means of production of some kind or other – yet what are these means of production associated with any given labor (such as raw materials and tools) if not the product of previous labor? Flour is a means of production to which the baker adds new labor. Yet flour is the result of the miller’s, work, and in his hands it was not a means of production but the very product, in the same way as no the bread and pastries are the product of the baker. This product, flour, again presupposes grain as a means of production, arid if we go one step further back this corn is not a means of production in the hands of the farmer but the product. It is impossible to find any means of production in which value is embodied, without it being itself the product of some previous labor.

Secondly, speaking in terms of capitalism, it follows further that all capital which has been completely used up in the manufacture of any commodity, can in the end be resolved into a certain quantity of performed labor.

Thirdly, the total value of the commodity, including all capital advances, can readily be resolved in this manner into a certain quantity of labor. What is true for every commodity, must go also for the aggregate of commodities produced by a society in the course of a year; its aggregate value can similarly be resolved into a quantity of performed labor.

Fourthly, all labor performed under capitalist conditions is . divided into two parts: paid labor which restores the wages advanced, and unpaid labor which creates profit and rent, or surplus value. All labor carried out under capitalist conditions thus corresponds to our formula v + s.⁽⁷⁾

All the arguments outlined above are perfectly correct and unassailable. Smith handled them in a manner which proves his scientific analysis consistent and undeviating, and his conceptions of value and surplus value a distinct advance on the Physiocrat approach. Only occasionally, in his third thesis, he went astray in his final conclusion, saying that the aggregate value of the annually produced aggregate of commodities can be resolved into the labor of that very year, although he himself had been acute enough to admit elsewhere that the value of the commodities a nation produces in the course of one year necessarily includes the labor of former years as well, that is the labor embodied in the means of production which have been handed down.

But even if the four statements enumerated are perfectly correct in themselves, the conclusion Smith draws from them – that the total value of every commodity, and equally of the annual aggregate of commodities in a society, can be resolved entirely into v + s – is absolutely wrong. He has the right idea that the whole value of a commodity represents nothing but social labor, yet identifies it with a false principle, that all value is nothing but v + s. The formula v + s expresses the function of living labor under capitalism, or rather its double function, first to restore the wages, or the variable capital, and secondly, to create surplus value for the capitalist. Wage labor fulfills this function whilst it is employed by the capitalists, in virtue of the fact that the value of the commodities is realized in cash. The capitalist takes back the variable capital he had advanced in form of wages, and he pockets the surplus value as well. v + s therefore expresses the relation between wage labor and capitalist, a relationship that is terminated in every instance as soon as the process of commodity production is finished. Once the commodity is sold, and the relation v + s is realized for the capitalist in cash, the whole relationship is wiped out and leaves no traces on the commodity. If we examine the commodity and its value, we cannot ascertain whether it has been produced by paid or by unpaid labor, nor in what proportion these have contributed. Only one fact is beyond doubt: the commodity contains a certain quantity of socially necessary labor which is expressed in its exchange. It is completely immaterial for the act of exchange as well as for the use of the commodity whether the labor which produced it could be resolved into v + s or not. In the act of exchange all that matters is that the commodity represents value, and only its concrete qualities, its usefulness, are relevant to the use we make of it. Thus the formula v + s only expresses, as it were, the intimate relationship between capital and labor, the social function of wage labor, and in the actual product this is completely wiped out. It is different with the constant capital which has been advanced and invested in means of production, because every activity of labor requires certain raw materials, tools, and buildings. The capitalist character of this state of affairs is expressed by the fact that these means of production appear as capital, as c, as the property of a person other than the laborer, divorced from labor, the property of those who, themselves do not, work. Secondly, the constant capital c, a mere advance laid out for the purpose of creating surplus value, appears here only as the foundation of v + s. Yet the concept of constant capital involves more than this: it expresses the function of the means of production in the process of human labor, quite independently of all its historical or social forms. Everybody must have raw materials and working tools, the means of production, be it the South Sea Islander for making his family canoe, the communist peasant community in India for the cultivation of their communal land, the Egyptian fellah for tilling his village lands or for building Pharaoh’s pyramids, the Greek slave in the small workshops of Athens, the feudal serf, the master craftsman of the medieval guild, or the modern wage laborer. They all require means of production which, having resulted from human labor, express the link between human labor and natural matter, and constitute the eternal and universal prerequisites of the human process of production in the formula c + v + s stands for a certain function of the means of production which is not wiped out in the succession of the labor process. Whereas it is completely immaterial, for both the exchange and the actual use made of a commodity, whether it has been produced by paid or by unpaid labor, by wage labor, slave labor, forced labor or any other kind of labor; on the other hand, it is of decisive importance, as for using it, whether the commodity is itself a means of production or a consumer good. Whether paid or unpaid labor has been employed in the production of a machine, matters to the machinery manufacturer and to his workers, but only to them; for society, when it acquires this machine by an act of exchange, only the quality of this machine as a means of production, only its function in the process of production is of importance. Just as every producing society, since time immemorial, has had to give due regard to the important function of the means of production by arranging, in each period of production, for the manufacture of the means of production requisite for the next period, so capitalist society, too, cannot achieve its annual production of value to accord with the formula v + s – which indicates the exploitation of wage labor – unless there exists, as the result of the preceding period, the quantity of means of production necessary to make up the constant capital. This specific connection of each past period of production with the period following forms the universal and eternal foundation of the social process of reproduction and consists in the fact that in every period parts of the produce are destined to became the means of production for the succeeding period: but this relation remained hidden from Smith’s sight. He was not interested in means of production in respect of their specific function within the process to which they are applied; he was only concerned with them in so far as they are like any other commodity, themselves the product of wage labor that has been employed in a capitalist manner. The specifically capitalist function of wage labor in the productive process completely obscured for him the eternal and universal function of the means of production within the labor process. His narrow bourgeois approach overlooked completely the general relations between man and nature underneath the specific social relations between capital and wage labor. Here, it seems, is the real source of Adam Smith’s strange dogma, that the total value of the annual social product can be resolved into v + s. He overlooked the fact that c as the first link in the formula c + v + s is the essential expression of the general social foundation of exploitation of wage labor by capital.

We conclude that the value of every commodity must be expressed by the formula c + v + s. The question now arises how far this formula applies to the aggregate of commodities within a society. Let us turn to the doubts expressed by Smith on this point, the statement that an individual’s fixed and circulating capital and his revenue do not strictly correspond to the same categories from the point of view of society. (Cf. above, p.64, no.3.) What is circulating capital for one person is not capital for another, but revenue, as for instance capital advances for wages. This statement is based upon an error. If the capitalist pays wages to the workers, he does not abandon his variable capital and let it stray into the workers’ hands, to become their income. He only exchanges the value-form of his variable capital against its natural form, labor power. The variable capital remains always in the hand of the capitalist, first as money, and then as labor power, to revert to him later together with the surplus value as the cash proceeds from the commodities. The worker, on the other hand, never gains possession of the variable capital. His labor power is never capital to him, but it is his only asset; the power to work is the only thing he possesses. Again, if he has sold it and taken a money wage, this wage is for him not capital but the price of his commodity which he has sold. Finally, the fact that the worker buys provisions with the wages he has received, has no more connection with the function this money once fulfilled as variable capital in the hands of the capitalist, than has the private use a vendor of a commodity can make of the money he has obtained by a sale. It is not the capitalist’s variable capital which becomes the workers’ income, but the price of the worker’s commodity labor power which he has sold, while the variable capital, now as ever, remains in the hands of the capitalist and fulfills its specific function. Equally erroneous is the conception that the income of the capitalist (the surplus value) which is hidden in machines – in our example of a machinery manufacturer – which has not as yet been realized, is fixed capital for another person, the buyer of the machines. It is not the machines, or parts of them, which form the income of the machinery manufacturer, but the surplus value that is hidden in them – the unpaid labor of his wage laborers. After the machine has been sold, this income simply remains as before in the hand of the machinery manufacturer; it has only changed its outward shape: it has been changed from the ‘machine-form’ into the ‘money-form’. Conversely, the buyer of this machine has not, by its purchase, newly obtained possession of his fixed capital, for he had this fixed capital in hand even before the purchase, in the form of a certain amount of cash. By buying this machine, he has only given to his capital the adequate material form for it to become productive. The income, or surplus value, remains in the hands of the machinery manufacturer before and after the sale of the machine, and the fixed capital remains in the hands of the other person, the capitalist buyer of the machine, just as the variable capital in the first example always remained in the hands of the capitalist and the income in the hands of the worker.

Smith and his followers have caused confusion because, in their investigation of capitalist exchange, they mixed up the use-form of the commodities with their relations of value. Further, they did not distinguish the individual circulations of capitals and commodities which are ever interlacing. One and the same act of exchange can be circulation of capital, when seen from one aspect, and at the same time simple commodity exchange for the purpose of consumption. The fallacy that whatever is capital for one person must be income for another, and vice versa, must be translated thus into the correct statement that what is circulation of capital for one person, may be simple commodity exchange for another, and vice versa. This only expresses the capacity of capital to undergo transformations of its character, and the interconnections of various spheres of interest in the social process of exchange. The sharply outlined existence of capital in contrast with income still stands in both its clearly defined forms of constant and variable capital. Even so, Smith comes very close to the truth when he states that capital and income of the individual are not strictly identical with the same categories from the point of view of the community. Only a few further connecting links are lacking for a clear revelation of the true relationship.

Footnotes

⁽¹⁾An Inquiry into the Nature and Causes of the Wealth of Nations, vol.i, p.19

⁽²⁾Theorien über den Mehrwert (Stuttgart, 1905), vol.i, pp.179-252

⁽³⁾Capital, vol. ii, p. 435

⁽⁴⁾ Smith, op. cit., vol.ii, p.148.

⁽⁵⁾Ibid., p.149.

⁽⁶⁾Op. cit., vol.1, pp.86-7.

⁽⁷⁾ In this connection, we have disregarded the contrary conception which also runs through the work of Smith. According to that, the price of the commodity cannot be resolved into v + s, though the value of commodities consists in v + s. This distinction, however, is more important with regard to Smith’s theory of value than in the present context where we are mainly interested in his formula v + s