Karl Marx
(Foreign Languages Publishing House translation)

Part IV: Criticism of Adam Smith

FUTURECASTS online magazine
Vol. 6, No.3, 3/1/04.


Karl Marx:
"Capital (Das Kapital)"

Volume 1, Part I: "Abstract Labor Standard of Value."

Volume 1, Part II: "Contradictions in Capitalist Industrialization."

Volume 2, Part III:  "The Circulation & Expansion of Capital."

Volume 3, Part V: "Profits."

Volume 3, Part VI: "Interest, Rent & Labor Use-Values."


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 Volume 1.
  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 Policy."

"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:

  "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."

  If that were true, Marx would have a valid point. But Marx assumes facts not in evidence - facts he strives mightily to prove, but with notable lack of success. See, "Immaterial logic chopping," below. His restrictive view of what adds value is ridiculous.

  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.
  Since he recognized that ALL capital can be involved in expanding wealth and earning profits, he has no need for further attention to minutia. He has no need to be concerned about ambiguities at the margins.

  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."

  However, it is impossible to realize the full "value creating power" of labor in capitalism without the full panoply of capitalist productive and commercial assets and activities. Elimination of any of the essential elements of production or circulation observably reduces the "value-creating power" of the rest - including that of its industrial labor component. The much maligned capitalist markets and ownership incentives are particularly essential. This has been proven by a whole century of disastrous socialist and communist experiments in a wide variety of entities and nations.
  For an extreme modern example: - a reliable paper currency adds far more value to commerce than its cost of production and maintenance. Money is a tool of production as essential as the factory steam engine. Early socialist attempts to run all but the simplest religious cooperative entities without money were all instant disasters.
  Of course, labor can produce something without the rest - and nothing gets produced without labor. However, as Marx notes, labor without the other activities of capitalism produces very little indeed.

  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.
  Marx has no trouble asserting the need for his narrow but somewhat broader view. However, the rationalizations invoked to support his narrow view are similar to those of Quesnay, and he expresses considerable admiration for Quesnay. Both base their rationalizations on how "value" is transferred to commodities to earn the wherewithal for upkeep and replacement of assets and for economic expansion.

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.

  • Marx must criticize Smith for not parsing the distinctions between fixed and circulating capital as finely as Marx does. He complains that Smith does not bother to distinguish between "productive capital" and "capital of circulation." He complains that Smith does not rely on how "value" is transferred in distinguishing fixed from circulating capital.

  "Hence, capital is not called fixed because it is fixed in the instruments of labour but because a part of its value laid out in instruments of labour remains fixed in them, while the other part circulates as a component part of the value of the product."

  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 commodities.
  Marx does not dispute that all forms of capital act as capital and earn profits for individual capitalists. But for society as a whole, all surplus value - including profits - comes from industrial capital rather than commercial capital. The labor component of industrial capital - as the "variable" element - provides all the surplus value and profit created for society, he insists. 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.

  • So Marx complains that Smith "abandons the foundation on which the physiocrats base the distinctions within industrial capital and their effect on turnover." Smith would heartily agree with this - properly viewing those distinctions as immaterial.
  • Then Marx criticizes Smith for not distinguishing between "productive" capital that adds value to commodities and "capital of circulation" that does not - that at most just limits the loss of value suffered by commodities in circulation. Again, Smith would heartily agree - considering artificial and ridiculous the distinction between adding value to goods in commerce and limiting value loss - as long as both are necessary to efficiently bring goods to market.

"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."

  It is not "value" inherent in commodities - or even consumer "use-values" - that count for determining whether costs are within what is "socially necessary." Consumer "use-values" just put a ceiling on this figure. It is not the subjective and highly variable "use-values" that count, but the objective "price" set by competitive markets that determine whether costs of production and circulation have risen above that which is "socially necessary."
  Of course, Marx's analysis still here concerns itself solely with mass production of fungible necessities, for which demand is highly inelastic and predictable. Indeed, by definition, where there are no substitutes, the use value of necessities is infinite. Smith more practically is concerned with the full spectrum of capitalist production.

  • Marx then complains that Smith's simple categories do not take account of the fact that the "values" imparted by fixed capital to commodities circulate every bit as much as the circulation capital itself. Smith again would heartily agree and say: "So What?" He agrees that fixed capital earns its maintenance, replacement and profits only through circulating capital.
  • Marx then complains that Smith uses merchant capital as an example of productive capital. Smith acknowledges that a merchant's capital is all "circulating capital," but properly insists that it adds value to goods and services in commerce by increasing the efficiency with which they are brought to market. Marx states:

  "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."

  But the merchant's services are of great value to the consumer. Indeed, goods are rendered worthless if they are less desirable and/or cost more in the market for lack of merchant services.

  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 criticizes Smith's views as "crudely empirical" for not including the fine distinctions employed by Marx. Smith "jumbles together" all aspects of the capitalist production and commercial system, rather than confining himself to just industrial labor, as the sources of "profit."

  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."
  Labor, raw materials and auxiliary materials that are employed or consumed in production and do not circulate in commerce are lumped in with circulating capital. "Fixed" assets can include movable workhorses and ships.
  But this is not confusing to Smith, who readily agrees that ambiguities exist in these categories. Smith points out that a building is a fixed asset for a business, but a consumable for society. The categories are not that important - they only indicate some general differences in the ways they are maintained and replaced. He does not say his categories are required. He says, "They may very properly" be used.

  Fuzziness at the borders makes no difference, because nothing that is considered capital is excluded from the value-adding process. Smith is not trying to establish artificial distinctions for propaganda purposes, he is just reporting observable facts.
  Circulating capital remains productive as circulating capital both in production and in circulation. Both sets of costs are added as real values to the costs of goods in commerce.
  The distinction that Marx is forced to rely upon between industrial work that adds value to commodities and commercial work that only prevents loss of value is a distinction without a difference, and just too stupid for Smith ever to contemplate. But this stupidity is, after all, the heart and soul of Marx's work.

  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."

  Communist and socialist systems that lack the efficiency enjoyed by capitalist systems because - among other things - they lack the efforts of merchants and other commercial factors - thereby imposed on all socialist states vast costs that were clearly 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.

  • Smith's functional definitions render invisible "the formation of surplus value" as Marx must define it. "The common designation 'circulating capital' abolishes this essential difference" between what does and does not add value, Marx complains. It lumps capital spent for industrial labor in with circulating capital as just one of many constituents that provide value. Their "essential difference in the process of self-expansion and of the formation of surplus-value is hidden, so that the entire secret of capitalist production is obscured still more."

  Precisely! Smith had no interest in showing what does not exist. Even more than two centuries later, Smith provides an accurate view of reality. Those who have attempted to follow Marx's views - including all manner of socialist nations and entities - have invariably suffered disastrous results - frequently resulting in vast human suffering.

  • "Capital" in non-capitalist systems is recognized by Smith - such as the capabilities of labor apart from capitalist processes, and in patriarchal systems that do not engage in wage labor production. Even worse, Marx complains that Smith lumps money in with the circulating capital that Smith recognizes as adding value to goods and services in commerce. 

  Well, if money permits goods and services to be brought to market more efficiently and at less cost, then it would be stupid to ignore it as generating value - as Marx does.

  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 productive capital.

  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.
  There are certain types of production that, for extended periods of time, require no labor. Agriculture, fermentation processes, and chemical processes are examples of processes that simply take time with no human participation.
  It also takes varying periods of time for commodities to circulate prior to use in production or prior to sale after production. These are periods of inventory turnover.
  These periods are all affected by advances in technology in production or transportation which enable increased concentrations of capital to serve more distant markets. Increased transportation times bring increased risks of price changes, among other things.

  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.

  "[The] recollection of the time of circulation disappears from the hollow skulls of the capitalists and a confused idea is formed that his capital has served continuously in the production process."
  "The economists who as a general rule have nothing clear to say in reference to the mechanism of the turnover, always overlook the main point, to wit, that only a part of the industrial capital can actually be engaged in the process of production if production is to proceed uninterruptedly."

   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.
  He attempts to show that these various circulation periods force capitalists to stretch their working capital to maintain continuous production. Money is tied up in inventories, and various monetary reserves are required for various purposes - all reducing the amount of production that a given amount of capital can be employed in. This is true for an individual capitalist and for an economy as a whole.

  Rather than ignoring these obvious facts, every capitalist strives to limit turnover time, and economists keep a wary eye on interest rates - the time cost of money - pertinent for the financing of inventories and reserves - among other things. However, incredibly, Marx can repeatedly emphasize the importance of "the rate of turnover" and yet refuse to recognize the time-cost of money and assets.

  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.

  "A very  considerable portion of the social circulating capital, which is turned over several times a year, will periodically exist in the form of released [idle] capital during the annual turnover cycle."

  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.

  Obviously - Economics 101:

  • Financing mechanisms instantly put any "released" capital to work, and provide any additional capital that may be required to sustain any level of production that can be sustained at sufficient levels of profitability.
  • Prices MUST fall or rise and markets MUST expand or contract with productivity increases or decreases - and interest rates will fluctuate to clear the money markets except during the depths of some already severe depression.
  • It is profitability that justifies the use of capital - no matter how rapid or slow, even or disjointed, the turnover.
  • It is profitability that serves the purpose - among other things - of assuring ample capital for all production and distribution that can be carried out at profitable price levels.

  However, Marx - and Marxists - must for propaganda purposes stupidly insist that interest rates and profits and competitive markets play no role in capitalist productivity.

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."
  Marx must have been truly desperate here - working long and feverishly to prove the impossible. And it was all for naught - for as Engels himself properly notes, this whole exercise in logic chopping was "immaterial."

  The key variables are risk levels, applicable interest rates - which are the time cost of money - and profit rates calculated on the basis of ALL the capital employed in production and circulation. How much is employed for different segments is - precisely - "immaterial" - as Engels notes.

  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.

  Why Engels published any of this nonsense - occupying about 75 pages - is a good question. But Marx left such vast volumes of "tangled" computations for which he expended so much effort and time,  undoubtedly discussing his “turnover” concepts widely within his intellectual circles, that Engels probably felt obliged to publish at least those simple computations that were not embarrassing on their face.
  At least Engels was wise enough to let the rest die. On this subject as elsewhere, it turns out that it is Marx and his followers who have "hollow skulls."

Criticism of Smith's reliance on exchange values:

  Marx returns to the attack on Adam Smith. This 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.
  • Smith always looks at value from the point of view of exchange value realizable - revenue receivable - an objective and practical standard.
  • Marx always looks at value from the point of view of values added to commodities during production - a subjective, indeterminable and impractical standard.

  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.
  Smith clearly demonstrates that he had no intention of expressing such nonsense. Yet, Smith, too, views labor as the primary ingredient in all wealth. However, his labor theory of value is universal. It is derived from the viewpoint of the consumer, not the producers. It relies on the objective value of the labor that can be obtained by exchange of commodities, not the subjective value of labor expended in producing commodities.
  To Smith, the value of commodities is NOT based on the amount or even the skill of the labor expended in production, although those factors obviously play a major role in such values. The market, after all, responds to both factors of supply and factors of demand. Instead, it is the labor of others that can be acquired by exchange in the market that provides the measure of value. The important thing about commodities in commerce is not the value of their production, but the revenue they realize in the market.

  The two concepts are not, of course, totally separate. The costs of distribution, which include the values introduced in production, play a vital role in the "supply" side of the supply and demand factors that determine exchange value for Smith. On the other hand, Marx initially concedes that market prices limit the labor that is "socially necessary" - one of his most important limiting factors that his subsequent rationalizations all too frequently violate. Indeed, Marx totally disregards this vital requirement in Volume 2, but returns to it quite emphatically in Volume 3.

  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."

  However, "value" is always just a question of subjective opinion - which cannot be resolved by Marx's "abstract labor standard." As a practical matter, it is useless for economic purposes. "Revenue," on the other hand, is a statement of objective fact. As such, it can be applied in the understanding and regulation of the vast array of economic phenomena.

  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.

  Up to this point, Marx has been assuming that market prices reflect production costs - which they tend to do. But it is the market that determines the value of production as much as it is the cost of production that determines values in the market. Both supply and demand affect value in the market.
  Anything that hinders or destroys the market, reduces or destroys the value of commodities and labor. By destroying or restraining markets, communism and socialism would reduce and destroy the value of labor and the commodities they produce.

    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 together."
  Ownership incentives play indispensable roles in adding value to labor and thus to commodities and services.
  Profits play an indispensable role and are thus ordinary and necessary expenses of enterprise. They provide an incentive to bring together machinery, supplies, enterprise, management skills, and to assume financial risk.

  They do much more than that. See, "Profits and Capitalist Productivity."

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.
  It is only profitability - not "surplus value" as a whole - that determines the extent of capitalist investment and production. Longer turnover rates create greater needs for capital and higher risks that are only assumed if justified by greater profitability. However, if the profitability is there, sufficient capital will materialize.
  This view - that all types of capital determine and are the source of profits - opens the door to "vulgar economy," Marx complains. He criticizes Ricardo and subsequent economists for following Smith.

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.

  • Marx questions whether seed retained from one crop to sow the next is a fixed asset as Smith uses the term or is circulating capital that the farmer sells to himself as Marx contends. 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 goods produced as a servitude by a field hand for his master are not "commodities" as Marx defines them.

  But Smith's purpose - to indicate assets for which there is no need for further outlay - is at least a practical economic consideration.

  • Marx asserts that labor power is a "commodity" in the hands of the laborer, not his "capital" as Smith contends. Marx needs this distinction for the propaganda purpose of separating labor from the capitalist class.

  However, Smith's view makes more sense when considering the "human capital" component of a nation's productive capacity - one of the most significant components of the productive capacity of nations.

  • Marx complains that Smith makes no distinction between the commodities held in inventory by merchants and those held in industrial warehouses.

  Smith correctly sees no difference. They both are part of the process that most efficiently brings value to market.

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.
  But Smith does not ignore productive capital. He clearly states that "wealth" is what is left over from gross revenue after deducting maintenance for circulating and fixed capital - including human capital. The "price" - (not the "value") - of productive capital running all the way back to the produce of farms and mines - back to the initial production of productive implements and supplies - can also be described as being divided into wages, profits and rent, Smith contends. Marx counters that this is not possible when calculating current annual product, since commodities produced this year consume materials produced in prior years that must be replaced.
  However, the difference arises mainly because Smith measures the "value" of commodities objectively by the revenue they bring in the market - by their market price - which can indeed be logically divided into "wages, profits and rents" - while Marx must struggle vainly to calculate values by the use-value of labor employed in industry - an inherently subjective factor rendered objective only by the "socially necessary" limitations imposed by the market - the market which Marx insists adds no value to commerce. (Of course, many valuable services do not involve any fixed or circulating productive assets.)

  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 two.

  But the definitions of these phrases are not synonymous, and the differences facilitate Marx's nitpicking. Surplus value is much broader than profits and rent, as those terms are normally defined and as Smith uses them. Variable capital is confined to industrial wages, and is much narrower than the nation-wide wages referred to by Smith. Where Smith was discussing objectively established market prices and exchange values, Marx transposes it into a discussion of the indeterminable values involved in production.

  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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