Monday, 3 June 2013

The Circuits Of Money and Capital - Part 1

In Volume II of Capital, Marx says that because money is the first form adopted by capital – you have to use money to buy the elements of productive-capital, to engage in production to create surplus-value, to realise it from the sale of commodities that comprise the commodity-capital, and thereby recover money-capital – it leads people to confuse the two, and thereby make two related errors. They assign to capital what are really money functions, and assign to money what are really capital functions. It is also partly to blame for the one-sided approach of many Marxist economists, particularly in relation to crises of overproduction.

Many Marxists focus their attention on Volume I of Capital, where Marx analyses the production of capital at the level of “many capitals” i.e. at a micro-economic level, of individual firms, and on Volume III ofCapital, where, by contrast, he analyses capital at the level of “Capital in General”, and its division into specialised branches of Money-dealing Capital, Productive-Capital and Merchant Capital. Far less attention is paid to Volume II of Capital, where Marx analyses the circulation, rather than the production, of capital, and where he does so by moving from an analyses at the level of “many capitals” to one that analyses the circuit of social capital i.e. capital in general, as it arises from the relations between all of these many capitals. That analysis necessarily pays more attention to the circulation, not just of money-capital, and commodity-capital, but also of commodities and money.

In the same way that money is not capital and capital is not money, so commodities are not capital, and capital is not commodities. The circulation of money and of commodities is not the same things as the circulation of capital. By focusing on Volumes I and III of Capital, much Marxist analysis becomes one-sided, focusing on the objective value relations that flow from the Labour Theory of Value, and omitting the subjective elements of Marx's Theory that necessarily flow from any analysis of the circulation of money and commodities. In other words, for value to be realised, commodities must be bought, which requires that they are use values for consumers.  But, as Marx points out, the laws that determine demand, i.e. what consumers consider to be a use value, are totally different to those which determine supply/value.  That leads to necessary errors, for example, in relation to the theories of crisis that are founded on the thoroughly spurious basis of The Law of theTendency For The Rate of Profit To Fall.

As Marx says, under Capitalism, for the purpose of analysis, we can assume that money exists, and is there to enable circulation to occur, because money has been accumulated over millennia, and already exists for Capitalism to utilise. But, that does not eliminate our need to analyse where it comes from, or how it circulates, and Marx sets about that analysis in Volume II. But, although, for the purpose of analysis, we can assume its existence, it does not relieve us of the responsibility of analysing what happens when it does not exist in sufficient quantity, for example during a Credit Crunch, or when money tokens exist in superfluity resulting in hyperinflation! Nor does it relieve us of the need to analyse exactly how that money, as opposed to capital-value, flows around the system, and what happens when that flow breaks down, or why that flow might break down.

A defensive response of defending the “objectivity” of Marx's value theory, against the onslaught from bourgeois economics' subjective theory of value, has led to a one sided theory that fails to deal with the necessary subjective elements within Marx's own theory. For example, if we look at what Marx says about complex labour. The multiple of any complex labour to simple labour, Marx says, is only determinable post facto, as a result of the price that consumers are prepared to pay, for the product of one hour of that particular complex labour, compared to the product of an hour of simple labour. In other words, it is a function, pure and simple, of subjective consumer preferences. That does not change the “objectivity” of his value theory, of course. The value of the commodity produced by that complex labour is still determinable by the amount of abstract labour-time required for its production.  Value and market price are not the same thing.

The other obvious subjective element is what he says in terms of socially necessary labour. Firm A might produce a commodity X, that requires 100 hours of abstract labour to produce. The other firm in the economy, B, might produce commodity Y that similarly requires 100 hours of abstract labour to produce. In value terms, we can construct an “objective” model in which X simply exchanges for Y. But, the reality is that if consumers have no desire to purchase X, then its value is not 100 hours, but zero. To count the time spent on it, it must be socially necessary, and as Marx points out, if consumers do not want the commodity, the labour-time spent on it was not socially necessary. Just because in abstract value terms X can exchange fully for Y, does not at all mean it will.

To make that kind of assessment, an analysis of demand, of consumer preferences is required. Marx himself realised that. He not only talks about the fact that demand rises when prices fall or income rises, but also talks about the fact that demand does not rise proportionately when prices fall or income rises. In other words, he understood the principles of price and income elasticity of demand. Marx's Value Theory can explain the underlying value relations, and thereby explain one element of the allocation of capital, and consequent effect on supply, and production price but, it cannot explain demand, which is a function of subjective consumer preferences relative to price. Ultimately, objective value relations determine price, but subjective consumer preferences determine the level of demand at that price, and consequently the level of supply to meet it.

The starting point to analysing those relations, however, remains Marx's Circuit of Capital, to which must be added the circuit of money, and commodities. The diagram at the head of this article attempts to set that out. The diagram of the Circuits of Capital and Money (which are free to use, provided the source is accredited), describes this.

The circuit of capital begins at M. We can think of M as money already held in cash form by the productive capitalist, or else it can be thought of as money in a Bank deposit. The bank deposit may itself be in the form of a loan from the bank. The red line from Bank Deposit to M, indicates that although this is a flow of money to M, it is a flow of money-capital. In other words, it is a flow of capital value that necessarily has to adopt the money form. It is only capital in the money form that can buy the elements of productive capital that is the next stage of the circuit. M now purchases means of production and labour-power – C. The wages paid to these workers, and the receipts of the capitalists selling means of production, although they form parts of the money-capital of the capital being considered, are received simply as money. The Capital-value previously inhabiting the money-capital now abandons it, and is metamorphosed into Productive-Capital. It leaves behind it only the empty money shell it previously inhabited. This is indicated by the green money flow line from Productive Capital, K, to Bank Deposits. In other words, this represents the myriad of separate circuits of money and commodities that result from these payments. Workers deposit their wages in the bank, and from there make numerous purchases of commodities, to meet their needs. In fact, those purchases are themselves represented by the green line from Bank Deposits to C1, the commodity-capital.

But, also the capitalists selling means of production, put their money receipts into the bank, and from there pay for their purchases, be they for labour-power or for their own means of production, or for their own personal consumption. Given that C1 is equal to K plus the surplus value produced in the production process, we can now see that both an equivalent amount of value is created to be exchanged with it, and a sufficient amount of money equal to this value exists with which to purchase it. The wages paid to workers, and the receipts of capitalists that come out of K, are equal to the capital-value they transfer to the end product, in the form of constant capital, plus the new value created by labour, which resolves into variable-capital, and surplus value, so that the labour-power can be reproduced, as can the capitalist, themselves, who buys the necessaries for their personal consumption out of the surplus value. The money equivalent of that exists in Bank Deposits available to purchase commodities equal to that value.  Within the production process, P, the workers also add the surplus value to the commodity.  The money to purchase the commodities equal to this surplus value is thrown into circulation by capitalists, themselves, to cover their expenditure during the period prior to receiving payment from the sale of their own commodities.  How this returns to them will be described later.

The circuit of commodity-capital commences at C1 where the end product exists, and already embodies surplus value. In other words, it assumes capitalist production is already being undertaken. We can then make several assumptions. Money already exists, and is here depicted as sitting in Bank Deposits (though in reality, partly, also resides in cash boxes, wallets, purses and so on). We can also assume that capitalists not only have sufficient money-capital to advance for the purchase of productive-capital, but they also have sufficient money to cover their own consumption needs, to buy commodities for personal consumption, during the period until they receive payment for the commodities they sell. We can also assume that workers have not simply arisen from nowhere, but are the result of the long historical process discussed in Volume I of Capital, and so are able to offer their labour-power for sale as an advance to capital, prior to being paid for it, at the end of the day, week or whatever period. Similarly, capitalist producers have not simply arisen from nowhere, but are also the result of the same historical process, and so both means of production and consumption have evolved from being produced and provided by peasant and artisan producers, to now being produced and sold as commodities, capitalistically.

The consequence of these entirely reasonable assumptions is that the total value of commodity-capital at C1, can be bought with money resources held by workers and capitalists i.e. with existing money funds, or from wages or surplus value. These money funds flow from Bank Deposits, and as a money flow are indicated by the green line.

The result of the realisation of this commodity-capital (total national expenditure) is M1, which also includes the surplus value. That surplus value is equal to the additional money that capitalists threw into circulation to cover their own unproductive consumption in the period while they were waiting to sell their commodities. In conditions of simple reproduction the surplus value, now reproduces that money, enabling the capitalists to once more throw it into circulation, to cover their personal consumption in the next cycle. But, it could, likewise, go to finance accumulation, with a portion of the surplus product then being produced to meet the needs of expanding capital rather than consumption.

At M`, for the reasons Marx describes in Capital Volume II, the circuit of money-capital ends. Its circuit always starts with M never with M`. M – C – M`, is always the circuit of newly invested money capital, (including the money-capital, m, resulting from the production of surplus value that is accumulated) not the circuit of industrial capital in the process of reproduction, whether it is simple reproduction or expanded reproduction. Under expanded reproduction, Marx says, what we really have for money-capital is two circuits.

The first circuit M – C – M, the last part of which C- M, is shown on the top line, ensures that the productive capital consumed in the first circuit is physically reproduced, C - M - C. So, if the value of that productive-capital has changed, this is reflected in the values retrospectively. But, the surplus value accumulated forms a new circuit of money capital m – c – m, where this is not the case. This money capital buys the commodities that comprise productive capital at their current value. So, this m will buy a greater or lesser physical quantity of these elements, c, dependent upon whether their price has fallen or risen.

So, if £1,000 was paid for 1000 kilos of cotton, and £1,000 for labour-power, with a 100% rate of surplus value, we would have – C 1000 + V 1000 + S 1000 = E 3,000. But, if the price of cotton doubled, after it was bought, but before the completed yarn was sold, this would be retrospectively reflected in these values. So, C 2000 + V 1000 + S 1000 = E 4000. The yarn would now sell for £4,000, and, thereby, enable the same quantity of cotton and labour-power to be bought, as in this cycle. However, if all of S is accumulated, it is clear that this is not the case, for this new additional capital value. Previously, (M) £1,000 bought 1000 kilos of cotton, and now M (£2,000) still buys 1000 kilos of cotton, but the £1,000 of surplus value becomes m – c – m, and, here, in this new circuit of money capital, m only buys 500 kilos of cotton.

So, the circuit of money-capital ends at M`. It is deposited in the bank, awaiting its future destiny. Here Bank Deposits are a sort of Black Box. That is the true nature of what is inside is not determined. It is the equivalent of Heisenberg's Uncertainty Principle. Like Schrodinger's Cat, the condition of the money inside remains undetermined until it is observed. It exists in limbo as a money hoard, that might be money-capital, or else might be simply money to be used as revenue, i.e. to fund personal consumption.

Marx points out in Volume II, that although capitalism is characterised by expanded reproduction, simple reproduction remains at the heart of it. The same value of money-capital comes out of Bank Deposits, as was originally used as Money-capital at the start of the previous circuit of Money Capital, that started at M. By definition, this means that because M` = M + m, an amount of money equal to m, remains in Bank Deposits, and can once again be used by capitalists to purchase their own personal consumption needs.

So, sufficient capital value was created to exchange with that portion of C` equal to the value of the labour-power, and means of production used for its production. Similarly, money flows of an equal amount were created to provide the money resources required for the purchase of that value. That leaves those commodities that are equal to the surplus value produced, but an amount of money equal to that was deposited in the Bank at the start by the capitalist to cover his consumption needs during the period he was waiting to sell his commodities. The surplus value realised on that sale now returns to him an equivalent sum of money. That sum of money is also equal to the residual from M`. As a consequence the value relations are reproduced, and the necessary money resources are put in place to enable social reproduction to continue.

This circuit can be viewed both as the circuit of capital and money facing an individual capital, and social capital. The money flows from K, can be viewed as an aggregate flow behind which stands a myriad of exchanges between labour-power and capital, and between capital and capital. Similarly, the green money flow line from Bank Deposits to C` also reflects the same aggregate flows of purchases by workers of commodities from their wages, and of capital with its receipts. Those commodities may be, in both cases, for unproductive consumption, but also, for capital, will be for the purchase of commodities as means of production.

This indicates the flows of capital-value within the economy, and of the money flows used to mediate it. There are also money flows shown from Bank Deposits to Share Capital, and Bonds etc. These reflect money flows that constitute “fictitious capital”. There is also to be considered, in a similar way, the flows of credit-money from Bank Deposits to Commodity-Capital, be that in the form of consumer credit or commercial credit. These have consequences that require much further consideration, for example, in relation to interest rates.

I will look at these further flows in Part 2.

No comments: