“The only condition which the act C' — M' stipulates for capital-value to continue its circuit and for surplus-value to be consumed by the capitalist is that C' shall have been converted into money, shall have been sold. Of course, C' is bought only because the article is a use-value, hence serviceable for consumption of any kind, productive or individual. But if C' continues to circulate for instance in the hands of the merchant who bought the yarn, this at first does not in the least affect the continuation of the circuit of the individual capital which produced the yarn and sold it to the merchant. The entire process continues and with it the individual consumption of the capitalist and the labourer made necessary by it. This point is important in a discussion of crises.” (p 77)
It can easily be seen why. Having been sold to the merchant, the money from its sale, M1, goes to buy yet more productive capital, which is used to produce even more commodities of the same type. But, although the original commodities are now in the hands of the merchant, there is no guarantee they will find an ultimate consumer. Still less is there a guarantee that these even greater quantity of the same commodities, now being produced, to replace them, will find a buyer.
“The quantity of commodities created in masses by capitalist production depends on the scale of production and on the need for constantly expanding this production, and not on a predestined circle of supply and demand, on wants that have to be satisfied. Mass production can have no other direct buyer, apart from other industrial capitalists, than the wholesaler. Within certain limits, the process of reproduction may take place on the same or on an increased scale even when the commodities expelled from it did not really enter individual or productive consumption.” (p 77)
It is this fact that the consumption of commodities takes place outside the circuit of capital, that means that this circuit may not be completed. The commodities produced may not find an ultimate consumer, the labour-time expended on their production was not socially necessary, and, therefore, the productive capital (means of production and labour power) used for their production was over accumulated, and was in reality, therefore, not capital at all i.e. was not self-expanding value.
As Marx describes it,
“So long as the product is sold, everything is taking its regular course from the standpoint of the capitalist producer. The circuit of capital-value he is identified with is not interrupted. And if this process is expanded — which includes increased productive consumption of the means of production — this reproduction of capital may be accompanied by increased individual consumption (hence demand) on the part of the labourers, since this process is initiated and effected by productive consumption. Thus the production of surplus-value, and with it the individual consumption of the capitalist, may increase, the entire process of reproduction may be in a flourishing condition, and yet a large part of the commodities may have entered into consumption only apparently, while in reality they may still remain unsold in the hands of dealers, may in fact still be lying in the market. Now one stream of commodities follows another, and finally it is discovered that the previous streams had been absorbed only apparently by consumption. The commodity-capitals compete with one another for a place in the market. Late-comers, to sell at all, sell at lower prices. The former streams have not yet been disposed of when payment for them falls due. Their owners must declare their insolvency or sell at any price to meet their obligations. This sale has nothing whatever to do with the actual state of the demand. It only concerns the demand for payment, the pressing necessity of transforming commodities into money. Then a crisis breaks out. It becomes visible not in the direct decrease of consumer demand, the demand for individual consumption, but in the decrease of exchanges of capital for capital, of the reproductive process of capital.” (p 78)
Its important what Marx says here about “This sale has nothing whatever to do with the actual state of the demand”. In other words, Marx is not saying that this situation arises due to an inadequacy of demand, or under consumption. This situation can arise even if demand remains constant or even rises! In fact, as Marx describes elsewhere, a crisis may arise precisely at a time when wages are rising, and consumption along with it. As he says here, “this reproduction of capital may be accompanied by increased individual consumption (hence demand) on the part of the labourers” as well as the capitalist. The point is, as Marx again describes elsewhere, consumers only have a certain requirement for any particular commodity, and once it is satisfied, they have no need for more. In fact, the more wages and living standards have risen, the more likely it is that workers have reached that stage for a greater number of commodities. If the price of these commodities falls, they may or may not buy more of it. The example Marx gives elsewhere is of Sheffield cutlery. If wages rise, he says, workers may buy it, but having done so, they will not buy more, if their wages rise further. To use the terminology of orthodox economics, beyond a certain level, consumers would experience diminishing Marginal Utility, from additional purchases of such goods. Demand for them would become elastic so that even large reductions in their prices bring about only small increases in demand and revenue, or may even result in falling revenue.
Law of Value. The more Capital raises its productive power, the more it accumulates, the more likely it is that such a crisis will occur, because the level of production will continue to increase inexorably, thereby exceeding the ability of the market to consume it. Elsewhere, Marx describes the crisis of the 1840's, for example, where British textile production rose so much that it flooded world markets with its products. It took three years, before all of the excess production sitting in the market could be cleared.
The consequence of this failure of the circuit to complete is that money-capital is then not wholly thrown back into the production process. It might be that it is only a portion of m, i.e. of the surplus value, so that expansion is reduced, or it may be that a portion of M itself is withheld representing an actual contraction. The latter can transform a partial crisis into a generalised crisis, precisely because it does mean that then the level of aggregate demand in the economy is reduced.
Under these circumstances, the money-capital not thrown back in assumes the form of a hoard. In fact, if we look at the current situation that is what we see. Firms continue to make large profits, demand continues to rise, but only modestly outside China and other rapidly growing economies. There is no point then in firms throwing back all of these large profits into increased production that could not be sold, which is why that money-capital has built up in large money hoards on balance sheets, in bank deposits, and sovereign wealth funds, also contributing to low interest rates via Financial Repression.
“This part is only temporarily withheld from circulation, in order to go into action, perform its function, in due time. This storing of it is then in its turn a function determined by its circulation and intended for circulation. Its existence as a fund for purchase and payment, the suspension of its movement, the interrupted state of its circulation, will then constitute a state in which money exercises one of its functions as money-capital. As money-capital; for in this case the money temporarily remaining at rest is itself a part of money-capital M (of M' minus m, equal to M), of that portion of the value of commodity-capital which is equal to P, to that value of productive capital from which the circuit starts. On the other hand all money withdrawn from circulation has the form of a hoard. Money in the form of a hoard therefore becomes here a function of money-capital, just as in M — C the function of money as a means of purchase or payment becomes a function of money-capital. This is so because capital-value exists here in the form of money, because the money state here is a state in which industrial capital finds itself at one of its stages and which is prescribed by the interconnections within the circuit. At the same time it is here proved true once more that money-capital within the circuit of industrial capital performs no other functions than those of money and that these money-functions assume the significance of capital-functions only by virtue of their interconnections with the other stages of this circuit.” (p 78-9)
M does not become transformed into M1 as a result of being money-capital, but only because commodity-capital has been transformed from C to C1, that is a consequence of the production process.
“If the continuation of the process of circulation meets with obstacles, so that M must suspend its function M — C on account of external circumstances, such as the conditions of the market, etc., and if it therefore remains for a shorter or longer time in its money-form, then we have once more money in the form of a hoard, which happens also in simple commodity circulation whenever the transition from C — M to M — C is interrupted by external circumstances. It is an involuntary formation of a hoard. In the case at hand money has the form of fallow, latent money-capital. But we will not discuss this point any further for the present.