After Adam Smith has designated fixed and circulating capital as two particular ways of investing capital, each of which yields a profit by itself, he says: "No fixed capital can yield any revenue but by means of a circulating capital. The most useful machines and instruments of trade will produce nothing without the circulating capital which affords the materials they are employed upon, the maintenance of the workmen who employ them." (P. 188.)Here it becomes apparent what the previously used expressions "yield a revenue," "make a profit," etc., signify, viz., that both parts of capital serve as creators of product.
Adam Smith then gives the following illustration: "That part of the capital of the farmer which is employed in the instruments of agriculture is a fixed, that which is employed in the wages and maintenance of his labouring servants is a circulating capital." (Here the difference between fixed and circulating capital is correctly applied only to difference in circulation, to the turnovers of different constituent parts of productive capital.) "He makes a profit of the one by keeping it in his own possession, and of the other by parting with it. The price or value of his labouring cattle is a fixed capital" (here he is again correct when he says it is the value, not the material element, to which the difference applies) "in the same manner as that of the instruments of husbandry; their maintenance"(that of the labouring cattle) "is a circulating capital in the same manner as that of the labouring servants. The farmer makes his profit by keeping the labouring cattle, and by parting with their maintenance." (The farmer keeps the fodder of the cattle, he does not sell it. He uses it to feed the cattle, while he uses us the cattle themselves as instruments of labour.
The difference is only this: The fodder that goes for the maintenance of the labouring cattle is consumed wholly and must be continually replaced by new cattle fodder out of the products of agriculture or by their sale;the cattle themselves are replaced only as each head becomes incapacitated for work.) "Both the price and the maintenance of the cattle which are bought in and fattened, not for labour but for sale, are a circulating capital. The farmer makes his profit by parting with them." [Vol. II, pp.
255-56.] (Every producer of commodities, hence likewise the capitalist producer, sells his product, the result of his process of production, but this is no reason why this product should form a part of either the fixed or the circulating component of his productive capital. The product now exists rather in that form in which it is thrust out of the process of production and must function as commodity-capital. The fattened stock function in the process of production as raw material, not as instruments of labour like the labouring cattle. Hence the fattened cattle enter into the product as substance, and their whole value enters into it, just as that of the auxiliary material [its fodder]. The fattened cattle are therefore a circulating part of the productive capital, but not because the sold product, the fattened cattle, have the same bodily form as the raw material, the cattle not yet fattened. This is accidental. At the same time Adam Smith might have seen by this illustration that it is not the material form of the element of production but its function within the process of production that determines the value contained in it as fixed or circulating.)"The whole value of the seed too is properly a fixed capital. Though it goes backwards and forwards between the ground and the granary, it never changes masters, and therefore it does not properly circulate. The farmer makes his profit not by its sale, but by its increase." [Vol. II, p. 256.]
At this point the utter thoughtlessness of the Smithian distinction reveals itself. According to him seed would be fixed capital, if there would be no "change of masters," that is to say, if the seed is directly replaced out of the annual product, is deducted from it. On the other hand it would be circulating capital, if the entire product were sold and with a part of its value seed of another owner were bought. In the one case there is a "change of masters," in the other there is not. Smith once more confuses here circulating and commodity-capital. The product is the material vehicle of the commodity-capital, but of course only that part of it which actually enters into the circulation and does not re-enter directly into the process of production from which it emerged as a product.
Whether the seed is directly deducted from the product as a part of it or the entire product is sold and a part of its value converted in the purchase of another man's seed -- in either case it is mere replacement that takes place and no profit is made by this replacement. In the one case the seed enters into circulation as a commodity together with the remainder of the product; in the other it figures only in book-keeping as a component part of the value of the advanced capital. But in both cases it remains a circulating constituent of the productive capital. The seed is entirely consumed to get the product ready, and it must be entirely replaced out of the product to make reproduction possible.
"Hence raw material and auxiliary substances lose the characteristic form with which they are clothed on entering the labour-process. It is otherwise with the instruments of labour. Tools, machines, workshops, and vessels, are of use in the labour-process, only so long as they retain their original shape, and are ready each morning to renew the process, with their shape unchanged. And just as during their lifetime, that is to say, during the continued labour-process in which they serve, they retain their shape independent of the product, so too, they do after their death.
The corpses of machines, tools, workshops, etc., are always separate and distinct from the product they helped to turn out." (Buch I, Kap. VI, S.