“When the patrons of this system assert, that the consumption of artificers, manufacturers, and merchants, is equal to the value of what they produce, they probably mean no more than that their revenue, or the fund destined for their consumption, is equal to it” (that is, to the value of what they produce)” (p 169)
This is correct in respect of wages and profits. As Marx has set out elsewhere, the consumption fund is equal to the new value created during the year, and this is equal to the revenue as wages and profit, in the first instance, with rent and interest being only subdivisions of that profit, paid out by the capitalist to the landlord and money lender.
Smith goes on in his criticism of the Physiocrats.
“The annual produce of the land and labour of any society can he augmented only in two ways; either, first, by some improvement in the productive powers of the useful labour actually maintained within it; or, secondly, by some increase in the quantity of that labour.” (p 169)
This creates, Marx says, a double vicious circle for Smith. Firstly, for the annual product to be increased by higher labour productivity, according to Smith, itself requires an accumulation of capital.
“The increase in the quantity of useful labour actually employed within any society must depend altogether upon the increase of the capital which employs it; and the increase of that capital, again must be exactly equal to the amount of the savings from the revenue, either of the particular persons who manage and direct the employment of that capital, or of some other persons, who lend it to them” ([ibid., p. 297], [Garnier], pp. 534-35).” (p 169)
In fact, Marx says, this is not true. Increased productivity from machinery requires intensive accumulation, i.e. the introduction of better, labour-saving machines, not extensive accumulation, where simply more of the same type of machine is rolled out.
“... it has been shown above that the increase of productivity in its origin always presupposes merely the concentration of capital, not the accumulation of capital.” (p 170)
The first vicious circle Smith lands in here then is that in order to bring about this accumulation of capital, the annual product must increase, but he has rested the increase in the annual product on the increased capital accumulation. The second vicious circle arises because his other means of increasing the annual product is for more labour to be employed, but for more labour to be employed, more capital must be accumulated to set it to work, but more capital can only be accumulated if the annual product is increased. Smith's solution to both circles is “savings”. In other words, the capitalist must transform a portion of their revenue into capital.
But, Marx had indicated towards the end of Capital III, that the idea of capital being created out of profits is wrong. Profits are received as a form of revenue, just as are wages, rent and interest. Capital is no more a direct consequence of profits, therefore, than it is the consequence of wages, or rent. However, it is also wrong to consider all of profits purely as revenue, because a portion of profits must always be set aside for accumulation, because capital by its nature must accumulate or die.
“The law of capitalist production requires on the contrary that a part of the surplus-labour, of the unpaid labour, performed by the workman should be transformed into capital. When the individual capitalist functions as a capitalist—that is, as a functionary of capital—he himself may think of this as saving; but it also appears to him as a necessary reserve fund.” (p 170)