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.
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