Surplus, gross and net revenue

Smith took over the concept of surplus from his precursors, but introduced a novel element which is reflected in his ambiguous definition of gross and net revenue:

The gross revenue of all the inhabitants of a great country, comprehends the whole annual produce of their land and labour; the neat revenue, what remains free to them after deduct­ing the expense of maintaining...

Smith’s notion of “national revenue”, in both gross and net terms, refers to the income of “all the inhabitants” of a country. But Smith reckoned the wages of “productive” labour­ers as part of the capital so that his notion of “net revenue” can only comprise those wages which are destined to support either “unproductive” labourers or additional “pro­ductive” labourers. Smith’s treatment of wages in his social accounting scheme differed significantly from that of his precursors, most notably the French Physiocrats, whose conceptualization had been unambiguous: defining the “net revenue” (or “produit net”) as the annually produced wealth (“reproduction totale”) minus the advances required to repeat the process on the same scale, they included the workers’ subsistence, to which wages were assumed to be strictly confined, among the necessary production expenses, on the same footing as the feed of the cattle. Smith seems to have vacillated between adopting this treatment and dispensing with it in favour of a conceptualization of wages as a share in net income: he considered it adequate, when measuring the wealth and pros­perity of a nation, to include the workers’ wages in the national income. His measure of “wealth”, which he established definitely for subsequent economic analysis, was income per head.

The accumulation of capital was seen by Smith as a precondition for increasing the division of labour and raising aggregate wealth or income per head. It consists in re­investing part of the surplus in additional means of production and wage advances for “productive” workers. Smith’s distinction between “productive” and “unproductive” labour has given rise to much debate, because he offered several, and partly contradic­tory, definitions. Thus he defined “productive” labour as that labour which is paid from capital (and not from income), that which gives rise to physical goods (and not to serv­ices), and that which recoups the value of the capital advances and in addition generates profits (and rents). The latter definition perhaps captures best what seems to have been the main point Smith wanted to emphasize: productive labour is surplus-generating labour, whereas unproductive labour is surplus-consuming labour. In this reading, Smith’s concept of “net revenue” was meant to serve as a measure of the upper bound for net capital accumulation (Aspromourgos 2009: 196).

With regard to the question of the origin of the surplus Smith emphatically rejected the physiocratic idea that the agricultural sector alone is capable of generating a surplus, and in fact emphasized the “impropriety” of designating manufacturing and trade and transport activities as unproductive (^A IV.ix.29). However, Smith nowhere stated, and indeed did not properly perceive, that in a system of production of commodities by means of commodities it simply makes no sense to say that the surplus emanates from one sector alone. Because with a social division of labour manufactures are used as inputs in agriculture and vice versa, it is the economic system as a whole that either is, or is not, capable of generating a surplus. That Smith failed to understand this, and more generally did not succeed in liberating himself from physiocratic modes of thought, becomes apparent from his theory of rent, his statements on the “natural course” of eco­nomic development, and from his adoption of corn-ratio reasoning in determining the size of the surplus. Let us consider these in turn.