Objections to Smithian National-Income Accounting

Chapter 2: Objections to Smithian National-Income Accounting

In Capital 1, Marx phrases objections to Adam Smith’s national-income accounting thus:

Adam Smith, by a fundamentally perverted analysis, arrives at the absurd conclusion, that even though each individual capital is divided into a constant and a variable part, the capital of society resolves itself only into variable capital, i. e., is laid out exclusively in payment of wages. For instance, suppose a cloth manufacturer converts £ 2,000 into capital. One portion he lays out in buying weavers, the other in woollen yarn, machinery, &c. But the people, from whom he buys the yarn and the machinery, pay for labour with a part of the purchase money, and so on until the whole £ 2,000 are spent in the payment of wages, i. e., until the entire product represented by the £ 2,000 has been consumed by productive labourers. It is evident that the whole gist of this argument lies in the words “and so on,” which send us from pillar to post. In truth, Adam Smith breaks his investigation off, just where its difficulties begin (MECW 35: 586).

The objection had already been privately intimated to Engels in a letter of 6 July 1863, where Marx adds that “Smith himself is conscious of the nonsensicality of subsuming the gross product of a society simply under revenue (which may be consumed annually), whereas in the case of each individual branch of production

he resolves price into capital (raw materials, machinery, etc.) and revenue (wages, profit, rent). If this were so, a society would have to start each year de novo, without capital ” (MECW 41: 485).

Now Smith did indeed assert in his Book I that all payments by the individual firm can be reduced to wages, profit, and rent, and extended the proposition to national income such that “all the commodities which compose the whole annual produce of the labour of every country, taken complexly, must resolve itself into the same three parts, and be parcelled out among different inhabitants of the country, either as the wages of their labour, the profits of their stock, or the rent of their land” (Smith 1937 [1776]: 52). That Smith was “conscious of the nonsensicality” of this position is another matter. Marx may, however, be referring to Smith’s subsequent qualification in Book II, his distinction between net and gross revenue, the former composing wages, profits, and rent and the latter allowing for fixed

Appendices

capital: “ . . . machines and instruments of trade, &c., require a certain expence, first to erect them, and afterwards to support them, both which expences, though they make a part of the gross, are deductions from the neat revenue of the society” (273). On this view aggregate net revenue corresponds to production of consumer goods, or “the stock reserved for immediate consumption, the subsistence, conveniencies, and amusements of individuals.” (See Hollander 1973: 144–6.)

In the course of the Departmental analysis appearing in Capital 2, Marx focuses not on the Smithian qualification – he in fact neglects it, unlike the implicit allusion to it in the letter of 1863 – but on the unqualified assertions which identify aggregate (gross) income with aggregate wages, profit, and rent. Here, in effect, Marx comes very close to adopting Smith’s qualified version, as I shall now show.

As we have seen, the value of consumer goods from the social perspective may

be “resolved” into v + s = (v I + s I ) + (v II + s II ), although from the perspective of consumer-goods capitalists, it is divided into c II + v II + s II . It is precisely the trap into which Adam Smith had fallen: “And it is this circumstance which induced Adam Smith to maintain that the value of the annual product resolves itself into v + s. This is true 1) only for that part of the annual product which consists of articles of consumption, and 2) it is not true in the sense that this total value is produced in II and that the value of its product is equal to the value of the variable capital advanced in II plus the surplus value produced in II. It is true only in the sense

that II (c+v+s) = II (v+s) + I (v+s) , or because II c = I (v+s) ” (MECW 36: 425). In terms of Marx’s example ( v+

s ) = £3000 amounts to a “social revenue” of only one third of the value of national output, the remainder constituting the value of constant capital produced to replace used-up capital goods in both sectors: “Adam Smith, however, has promulgated this astounding dogma, which is believed to this day, not only in the previously mentioned form, according to which the entire value of the social product resolves itself into revenue, into wages plus surplus value, or, as he expresses it, into wages plus profit (interest) plus ground rent, but also in the still more popular form, according to which the consumers must ‘ultimately’ pay to the producers the entire value of the product ” (433). 1

In an elaboration, Marx traces out the vertical stages of production involved in the case of a particular product, shirts valued at £100, and agrees that “[t]he consumers of the shirts pay these £100, i. e., the value of all the means of production contained in the shirts, and of the wages plus surplus value of the flax-grower, spinner, weaver, bleacher, shirt manufacturer, and all carriers” (434). But on the basis of his earlier

departmental analysis whereby v I + s I = c II , this proposition could not be extended 1 The “ultimately” may allude to Smith’s usage 1937 [1776]: 50. Marx credited Storch with the

correct view though “without [his] being able to prove it”: It is clear that the value of the annual product is divided partly into capital and partly into profits, and that each one of these portions of the value of the annual product is regularly employed in buying the products which the nation needs both for the maintenance of its capital and for replacing its consumption fund. . . . The products which constitute the capital of a nation are not to be consumed ” (Storch 1824: 134–35, 150).

495 to all goods in the system as common opinion had it; rather it applied specifically to

Appendices

the totality of “all articles of consumption” purchased out of revenue: “True enough, the sum of the values of all these commodities is equal to the value of all the means of production (constant portions of capital) used up in them plus the value created by the labour last added (wages plus surplus value).” As for “the constant capital of department I [that] is replaced in natura, partly by exchange among capitalists

I, partly by replacement in natura in each individual business” (435) – the putative solution of course, to the constant capital “riddle.”

A modern evaluation brings us full circle. For Paul Samuelson has shown that “paradoxically” the Marxian departmental procedure itself vindicates the unquali- fied Smithian triad (Samuelson 2000: 28–30). Sraffa, on the other hand, apparently takes a different view (1960: 94; cited in our concluding chapter, note 28; and so does Robinson 1980 (1978): 276.