CAPITAL (DAS KAPITAL) (Vol. 2)
(Foreign Languages Publishing House translation)
Part IV: Criticism of Adam Smith
FUTURECASTS online magazine
Vol. 6, No.3, 3/1/04.
Criticism of Smith:
| Criticism of Adam Smith is the primary
contribution that Volume 2 adds to the material already presented in Volume 1.
Most of the rest is just elaboration of or blatant repetition of the material in
|Marx sprinkles this criticism of Smith in various segments throughout Volume 2. By the time Marx is writing Volume 2, about 1880, Smith's explanation of the basics of capitalist economics had long since won wide acceptance, and it was thus important for Marx to at least create an appearance of refutation. There are two segments that are of substantial length and detail. These deal predominantly with their differing views of "capital" and "exchange values."|
G) Differing Views of "Capital" and "Exchange Values."
Smith's definition of "capital:"
| Adam Smith and David Ricardo understood that
a wide variety of elements in capitalist production and distribution all
contribute to the addition of value to the commodities brought to
market. That includes merchant’s capital, financial
capital, human capital, the capital invested in government institutions
that facilitate commerce, time, markets, profit incentives and property
rights - indeed, every human activity or product that facilitates
commerce - as well as industrial capital. See, Adam
Smith, "The Wealth of Nations" (Part I), "Market
Mechanisms," and Adam
Smith, "The Wealth of Nations" (Part II), "Economic
"It is not a question here of definitions, which things must be made to fit. We are dealing here with definite functions which must be expressed in definite categories."
But Marx is forced to engage in extensive mental gymnastics by his ideological need to squeeze the value-creating activity down into just labor expended in production of commodities. He complains about Smith's and Ricardo's relaxed attitude towards this exercise in categorization - noting with severe disapproval Ricardo's view that such categorization is: "A division not essential, and in which the line of demarcation cannot be accurately drawn." Marx complains:
Adam Smith thus had a very different view of capital
and its various functional elements than Marx, a view that has - to
Marx's dismay - been readily adopted by Ricardo and succeeding
"bourgeois economists." Indeed, Smith noted the labor theory
of value in broad terms and just in passing as of no practical
consequence. His only interest in the categories of capital - which he
limited to "fixed" and "circulating" - was to note
that one group must be circulated or used up to engage in value creation
while the other must be held - with obvious practical implications for
replacement and maintenance requirements.
Marx insists that industrial labor is "variable" capital that must be distinguished from other forms of circulating capital because of its unique "value creating power." Only labor involved in production adds value to commodities. He derides Smith's practical view as "crudely empirical."
What Marx distinguishes as "commodity capital" and
"money capital" are just a part of Smith's circulating
capital. This brings us to the heart of the matter.
| Smith's simple, clear, functional categories of
"fixed" and "circulating" capital leave no room for
Marx's artificial designation of wages as the only "variable"
capital capable of adding value. There is no special "variable
capital" category for industrial labor for Smith because ALL
capital is "variable" in the sense that any of it can be used
in activities that are essential to maximize the value of goods and
services in commerce.
Marx thus spends about 25 pages criticizing Smith's views.
He remarks on the Physiocrat François Quesnay who also held a greatly
restricted view of productive capital. Quesnay limited it to agriculture
in a propaganda effort to glorify agriculture. Not even agricultural
labor - but just the processes of nature - add value.
Only capital that is "directly embodied in the process of production - - - [can] function as production capital." That is what creates the use value in commodities.
However, Smith had no need for such minutia. Smith is only
concerned with the distinction between capital that is designed to
stay behind after use and capital that changes hands or is used up
in the ordinary course of production and commerce. It is of no
concern to Smith that commodities contain values derived from fixed
as well as circulating components of "productive capital,"
since it all functions as circulating capital once included in
"But how a profit is to come into existence by changes of form of money and commodities, by a mere transmutation of value from one of these forms to another is more than anyone can tell."
Where Marx concentrates only on production, Smith has his eye fixed equally on those in the chain of distribution as well as on the consumer in the market. Marx only initially notes consumer use values and the level of costs that can be justified as "socially necessary" - a level set by market prices. He is thereafter fixated on the physical process of "transmission of value to the product." His producers act in total ignorance of the desires of consumers in the market. They have no idea of or concern with the actual use values for consumers of their commodities, or what is needed to keep costs below market prices - below what is "socially necessary."
As Smith explained - (and two centuries of experience have confirmed) - profits in competitive markets depend on the total amount of capital employed - as "total capital" is normally defined - modified by risk factors. It matters not how much of the capital goes for wages or any other particular constituent - whether "fixed" or "circulating," "commodities" or "labor." The essential variable is always the total amount of capital, not the amount of labor. Thus, ALL capital plays a vital role in creating profits and the resources for the replacement of assets. ALL capital is thus "variable" as Marx uses that term. Marx's explanation of profits is left to Volume 3.
Marx objects repeatedly to circulating capital being
"jumbled together with those forms which capital assumes on
passing from the sphere of production to that of circulation, as
commodity-capital and money-capital." He points to the confusion
that machinery is circulating capital to its producer and fixed capital
to its user. Fixed and circulating capital as defined by Smith are just
proportions of productive capital for both industry and commerce.
Commodities can be "fixed" or "circulating" or a
consumable "all depending on the positions they occupy in the
life-process of capital."
All processes without which it would cost more to bring goods and services to market are "socially necessary" - and processes that increase costs by not including such activities include - by Marx's own definition - work that is not "socially necessary."
"[Smith's] common designation 'circulating capital' abolishes the essential difference" between industrial labor and labor during circulation - between what does and does not add value.
For the last 12 pages of this critique of Smith's definitions
of fixed and circulating capital, Marx simply repeats yet once again all
his assertions as to the proper categorizations of "capital."
He once again advances his reasons - as he must for his propaganda
purposes - for removing industrial wages from circulating capital and
considering it as "variable" capital - the only variable that
can add value to commodities. Then he repeats it all yet once again in
10 pages of criticism of Ricardo. (If you repeat a falsehood often
enough, there may be some who will believe it.)
| So Marx must show practical applications to
support consideration of his fine distinctions. He is desperately
- vainly - trying to demonstrate some practical significance for his
elaborate classification system for capital. He needs the additional
segmentation into "productive capital" and "capital in
circulation" to accommodate his special category for industrial
labor power as the only "variable capital" element of
He begins in his usual verbose fashion, providing three
chapters - 30 pages - to show the simple fact that different time
periods are required for production and circulation of different
products - including variances in turnover times for supply inventories
and inventories of saleable commodities. Spun yarn can be turned over
daily - an armored warship may take a year.
All these periods of time cost money, Marx points out. Various reserves are required during turnover periods. In his usual style he lambastes capitalists and the bourgeois economists for stupidly ignoring the costs - the practical implications - of these turnover periods.
Thus, he emphasizes "the turnover of the
circulating portion of productive capital" - dividing it into
production and circulating segments and analyzing minutely their
permutations. An additional 46 pages of calculations are then provided
in a vain attempt to prove the practical implications of the various
turnover times - of "circulating capital" during production -
and "capital in circulation" after production.
However, both financial systems and adjustments in market prices are still not a part of Marx's calculations. He may be describing a communist system - a system of administered prices - or a monopoly system - but not a capitalist system with even moderately competitive markets. Marx thus goes on interminably about this perfectly simple factor - inventory turnover periods and the financial reserves they require - that is routinely dealt with by credit arrangements and money markets and the market prices that rise or fall to reflect all difficulties in production and distribution.
To demonstrate his point, he provides an example - but an example so divorced from reality as to prove nothing but his ignorance of capitalist production. He provides an "all other things being equal" example where an increase in productivity or a decrease in productivity suddenly "releases" capital as an idle hoard in the first instance, or reduces the capital available for production in the second instance. However, his example - lacking in both financial mechanisms and market pricing responses - is an impossibility for capitalist competitive market systems.
As Engels himself properly notes, the whole exercise in logic chopping was "immaterial."
There are no practical implications - no "definite functions" - for Marx's elaborate classifications of capital.
Marx himself repeatedly admits that his segmentations have no practical impact on production of commodities - are not reflected in the value or price of commodities - and have no impact on the circulation of money.
Friedrich Engels, his editor and friend and ardent
supporter - and also an experienced businessman - mercifully
published only a small segment of this nonsense. He tells us that Marx
spent a great deal of time in this effort - filling "a thick batch
of copybooks containing numerous examples of all kinds of commercial
computations." The 46 pages published in Volume 2 contain only the
simplest of the computations. As for the rest, "Marx got so tangled
up in his computations of turnovers that besides places left uncompleted
a number of things were incorrect and contradictory."
There are no practical implications - no "definite functions" - for Marx's elaborate classifications of capital. Marx, himself, must repeatedly remind his readers that his elaborate segmentation of capital is not at all reflected in the value or price of commodities produced - that all these elements are included in the market value of commodities regardless of these segmentations - that these distinct categories are indeed "immaterial" for production as a practical matter. When discussing the circulation of money, he again has to state that these segmentations are "immaterial." Only with inventory turnover times and productivity variances did he think he could show some "definite functions" for his fine distinctions.
Criticism of Smith's reliance on exchange values:
| Marx returns to the attack on Adam Smith.
time, he adds extensive criticism of Smith's reliance on exchange values
for the value of commodities. Smith's views leave little room for
concepts of "surplus value."
Marx parses Smith's words in ways that clearly take
them out of context. He hunts for phrases that seem to indicate that
Smith's thinking about the value of commodities was tending in the same
direction as that of Marx - and then criticizes Smith for not continuing
in Marx's direction.
For Smith, value is equivalent to revenues realized in the market.
For Marx, values are what is added to commodities during their production.
| He claims that Smith commits a "ridiculous
blunder" by instead going in the opposite direction. Smith
emphasized that "value" is governed by the revenues produced
by commodities exchanged in the market. Marx yet once again repeats the
rationalizations by which he supports his more complex segmentation of
capital based on the values added in the production of commodities.
Here, Marx goes into greater detail than before. At last -
when discussing Smith - Marx sometimes distinguishes between
"surplus value" and its "profit" component, but
nevertheless often continues to simply confound the two.
For Smith, it is the labor of others that can be acquired by exchange in the market that provides the measure of value, NOT the labor expended in production. The important thing about commodities in commerce is not the value of their production, but the revenue they realize in the market.
Marx pounces on Smith's statement that the "annual
produce of the land and labour - - - naturally divides itself into two
parts," one of which replaces productive assets, and the other of
which provides the revenues of wages and profits. Marx argues that - by
lumping wages and profits together in this way - Smith's analysis thus
supports the contention that only capital expended for wages -
"variable capital" in Marx's terminology - produces profits.
But this completely misrepresents Smith's explanation of the factors
that give value to commodities.
| Marx bitterly complains about Smith's
concentration on revenue. It is "this category of 'revenue'
which is to blame for all the harmful confusion in Adam Smith."
His eye on the market, Smith emphasizes the revenue realized - the "exchange value" - which is measurable and which governs production - rather than the value produced - which is not measurable and must conform to market demand.
Smith emphasizes that raw labor is actually of
little value. It is management that provides the vast majority of
the value of labor. More than just the productive tools and facilities
provided by the capitalist, it is all the institutions and factors that
facilitate and engage in commerce that enhance the labor power of the
ordinary worker. Property rights, political freedom and the legal and
political empowerment of a free society - of the yeomanry - are
emphasized by Smith as "perhaps contributing more to the present
grandeur of England than all their boasted regulations of commerce taken
The view that all types of capital determine and are the source of profits opens the door to "vulgar economy."
For Smith, there is no reason for further
segmentation. See, "Criticism of Smith's definition of
capital," above. This renders the distinctions relied upon by Marx
"immaterial" for practical economic purposes.
Marx's contention violates his own basic concept that only goods produced for market constitute "commodities." No individual can make a market by buying and selling with himself, and seeds produced as a servitude by a field hand for his master are not "commodities" as Marx defines them.
Marx nitpicks at Smith.
The revenue flows from the sale of commodities are divided by Smith into wages, profits and rents. This exchange value viewpoint is not dependent on the values of productive assets and industrial labor.
Smith's assertion that "wages, profits and rent"
form the component parts of the value of commodities is criticized for
excluding fixed assets and commodities consumed in production - the
"constant capital" of Marx's categorization. Marx's insistence
that profits and rent should be lumped together in the single category
of "profits" is not unreasonable, although Smith does
adequately explain the practical differences between the two.
| Marx plays games with semantics, confounding
Smith's meanings by inserting his terminology of "surplus
value" and "variable capital" into Smith's statements.
Where Smith explains the market value of commodities as being divided
ultimately into wages and profits and rent - Marx substitutes his
phrases - variable capital for the former and surplus value for the last
See, Marx, "Capital (Das Capital)" Volume 1, Part I: "Abstract Labor Standard of Value," and Volume 1, Part II: "Contradictions in Capitalist Industrialization," and Volume 2, Part III: "The Circulation & Expansion of Capital," and Volume 3, Part V: "Profits," and Volume 3, Part VI: "Interest, Rent & Labor Use-Values."
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