Monday, 13 January 2014

Advanced Capital

Advanced Capital is the value of capital advanced to production for one turnover period. A turnover period consists of the production time and the circulation time. Production-time is made up of the Working Period, which is the period during which labour is being actually expended in production, and the additional period during which labour is not being actually expended, but during which the production process continues. For example, labour is not being expended on wine whilst it is fermenting, but capital is still tied up in the production process during this time. The same applies to crops during the period after they have been planted, and whilst they are growing before being harvested. Circulation time consists of the time after the completion of the production process, when the capital-value assumes the form of commodity-capital and awaits sale, and also of the period after the commodity-capital has been sold, and assumes the form of money-capital prior to once more being converted into productive-capital.

The advanced capital can then be thought of as the advance of productive-capital during all of this period, because as Marx describes in Capital II, as a continuous process, capitalist production does not cease at the point that the production process ends, and the circulation process begins. Industrial capital must be able to advance sufficient productive-capital so that production can continue during the circulation period without waiting for the capital value to be realised, and converted once more into productive-capital.

For example, suppose the traditional production process for pottery consists of the production of 1,000 25 piece dinner sets. In other words this is the traditional amount produced before it is sent to market. It takes 4 weeks to produce these 1,000 dinner sets. Each week £1,000 is advanced as constant capital, in the form of clay, glaze, lithographs etc., and £250 is advanced as variable capital. There is a 100% rate of surplus value, so that each week, the labour creates £250 of surplus value.

At the end of 4 weeks, £4,000 has been advanced as constant capital, and £1,000 as variable capital, with £1,000 of surplus value being produced. The total value of the pottery produced is then £6,000, so that each set sells for £6. However, before this £6,000 can be used to buy constant-capital and labour-power once more, the pottery has to be sold, and the money raised has to buy the necessary means of production and labour-power. The means of production themselves may take some time to acquire, especially where they have to be transported from distant markets. Suppose this circulation time amounts to a further 2 weeks. During this period, production must continue, and so the productive-capitalist must have an additional amount of capital to cover this period.

In total, they will need to advance £6,000 of constant capital, and £1,500 of variable capital to production. Whether they pay for this capital in advance, and indeed, as will be demonstrated later, whether the market price they pay for these commodities is the same as the capital value advanced is irrelevant. This £7,500 of capital-value is all the capital they will require to ensure that production continues throughout the year, because, after the first 6 week turnover period, capital will flow back to the firm every 4 weeks, covering the capital that needs to be laid out for each production period. That is because production period 1 runs from week 1-4, period 2 runs from week 5-8 and so on, so that the value of production period 1 returns in week 6, of period 2 in week 10, of period 3 in week 14 and so on.

The rate of surplus value is then the proportion of surplus value produced as against the variable capital advanced during this turnover period. That is (s = £1500 / v = £1500) x 100 = 100%. But, if we assume a 48 week year, then with this 6 week turnover period, the advanced capital remains £7,500, but in a year the total surplus value produced is 48 x £250 = £12,000. So, the annual rate of surplus value is then (s = £12,000 / v £1,500) x 100 = 800 %.

Looking at this again, we can see that the same result is obtained if we take the rate of surplus value of 100%, and multiply it by the number of turnover periods during the year, in this case 8. This gives us Marx's definition of the annual rate of surplus value as (s x n/v) x 100, where s is the rate of surplus value, n is the number of times the variable capital turns over during the year, and v is the variable capital advanced, i.e. for one turnover period.

This demonstrates the significant effect that the rate of turnover has on the annual rate of surplus value, and therefore on the annual rate of rate of profit. It also demonstrates the difference between the advanced capital and the laid out capital. The advanced-capital is the productive-capital advanced for a single turnover period, whereas the laid-out capital is the total amount of capital consumed in production during the year. In the above example, £1,000 of constant capital is consumed each week, and £250 of variable capital per week is consumed. In a 48 week year then the total capital laid out is 48 x (£1,000 + 250) = £60,000.

This demonstrates, as Marx describes, the falsity of bourgeois calculations of the rate of profit, because they are calculated on the basis of this annual figure of laid out capital rather than on the advanced capital. The Rate of Profit calculated on Marx's basis above is the surplus value, for one turnover period, multiplied by the number of turnover periods in the year, divided by the advanced capital, i.e. for one turnover period.

That is £1,500 x 8 = £12,000 surplus value.

£6,000 constant-capital + £1500 Variable Capital = £7,500 advanced capital.

Rate of profit (12,000/7,500) x 100 = 160%.

But, calculated on the basis of bourgeois accountancy and economics it is (12,000/£60,000) x 100 = 20%! 

The advanced capital here refers to the capital value of the productive-capital advanced to production, not to any advance of money-capital. Bourgeois economists like Adam Smith confused themselves with these two separate things in trying to understand the process of the circulation of capital, and the Temporal Single System Interpretation makes a similar mistake.

In fact, the advanced capital here refers to the advance of capital-value to the productive process not the advance of any money-capital. It does not matter whether workers are paid daily, weekly monthly, or whether they are paid in advance or in arrears. The capital value of variable capital advanced during a turnover period is equal to the value of the labour-power for that period, irrespective of whether the labour-power has been paid this amount in wages or not. In fact, if the workers are paid a month in arrears, then for any turnover period of less than a month, they will already have produced new value equal to the capital value of the variable capital, plus a surplus value, and it will have been realised and converted into new variable capital before the workers are even paid!

The circuit of industrial capital is:

This shows that the circuit begins with a quantity of physical capital - means of production and labour-power.  It engages in production, and creates new commodities whose value is incremented by the production of surplus value in the production process (C + c).  Because these new commodities are different from those that go into the production process, as inputs, a meaningful comparison can only be made by comparing the capital value of each expressed in money terms, and this is shown as M + m, (M`).  On this basis, the M is simply equal to the value of the consumed inputs, and goes to effect their physical replacement, whilst m is available to accumulate additional capital, m.

As Marx puts it,

“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.” (Capital II, p 187) 

Note Marx's terminology, here. Firstly he begins by making clear that what he is talking about is “the advanced productive capital”. To make clear it is not the advance of the money-capital used to purchase that productive capital, that Marx is talking of, he then says that what he is doing is only to “fix all its elements in the money-form”. Finally, to make clear that his analysis, here, is one based on the actual capital-value advanced, and not on the money-capital advanced, he makes clear that the use of money, here, is merely a convenience of calculation, and that he is using it essentially only in its role as “money of account”.

Variable Capital is not the same as wages even though Marxists often equate the two. Variable Capital is the capital value of the labour-power advanced to production, and as with every other value is objectively determined on the basis of the labour-time required for the production of that labour-power. But, wages are a phenomenal form of the value of labour-power, they are the market price of that labour-power, and like any other market price, it can vary considerably from the underlying value as a consequence of variations in demand and supply. At any one time wages in general may be above or below the value of labour-power, and in addition any particular individual capital may pay wages which are above or below that value. But, these variations do not change the value advanced to production in the form of variable capital.

Where a particular capitalist, or indeed capital in general pays wages below the value of labour-power, this means that the realised surplus value is greater than the produced surplus value, and vice versa. This is no different than where the market price of the commodity being sold is higher than the price of production of that commodity, because of similar variations in demand and supply. Under such conditions, the realised surplus value is similarly higher than the produced surplus value, and vice versa. Similarly, as Marx points out, sometimes the market price of materials rises sharply due to a sharp rise in demand. Yet, this higher price sometimes cannot be passed through into the market price of the end product, because of the elasticity of demand for the particular commodity. In that case, again the producers of that commodity have to absorb some of the increased cost of the materials from the surplus value, so that again the realised surplus value is less than the produced surplus value.

None of these variations in prices change the objectively determined capital-value advanced to production. The same applies to particular capitalists who are inefficient, or incompetent, or on the contrary are more astute than their competitors. Such individual capitalists may as a consequence be able to purchase the means of production or labour-power they require more advantageously, or vice versa. As Marx describes in Capital 1, in determining such values, what is used as the yardstick is the average. If some particular capitalist chooses to use spindles made out of gold rather than steel, they will not be able to advance a capital-value based upon gold, even though that is what they have used. They will only be able to advance a capital-value based upon steel spindles.

The same applies to whatever money price was paid for the particular means of production and labour-power advanced to production. It is not this money-capital advanced that is relevant in determining the value of the commodities produced, or calculating the rate of profit arising from that production. As Marx puts it,

“The rate of profit must be calculated by measuring the mass of produced and realised surplus-value not only in relation to the consumed portion of capital reappearing in the commodities, but also to this part plus that portion of unconsumed but applied capital which continues to operate in production. However, the mass of profit cannot be equal to anything but the mass of profit or surplus-value, contained in the commodities themselves, and to be realised by their sale.”

Capital III, Chapter 13

This brings us to another element of the advanced capital, and that is this "unconsumed part".  The unconsumed part refers to the fixed capital.  If we continue with the example provided above, we have £1,000 of circulating constant capital (materials) advanced each week along with £250 of variable capital.  In a six week period, £7,500 of circulating capital is then advanced, and £1,500 of surplus value is produced.  The total value of output during this period is then £8,000, and the rate of profit is 20%.  It was seen that the annual rate of profit was 160%.  However, we must now consider the question of fixed capital in the form of buildings and machinery.

As Marx says above, this fixed capital is not fully consumed during the six week turnover period.  The Turnover Period is always determined by the circulating capital, because it is only that which must be physically reproduced, in order that a new turnover period can begin.  The fixed capital loses only a part of its use value, and this does not stop the production process from continuing.  However, in order for production to take place, all of the fixed capital must be physically present, and that means when considering the total capital advanced, the total value of this fixed capital must be included.

So, if we assume that £7,500 of fixed capital is employed, the total capital advanced for the turnover period now rises from £7,500 to £15,000.  The annual rate of profit falls to 80%.  But, this also indicates a further difference with the rate of profit/profit margin, which is calculated on the laid out capital rather than advanced capital.  Previously, we saw that the laid out capital for the year was £60,000.  Now we must take into consideration the fixed capital.  The laid out-capital is also equal to the cost of production, which Marx designates as k.  If we deduct the cost of production from the total value of output we get the profit p, and p/k is the rate of profit or profit margin.

However, now, we must take account of the fixed capital.  Clearly, not all of the value of the fixed capital constitutes the cost of production.  It is only the wear and tear of the fixed capital that constitutes a cost of production.  Again this is why it is only the circulating capital that determines the turnover time.  With each turnover, the value of this wear and tear is itself returned to the capitalist in the value of the output.  They can then put this money into a reserve ready to replace the fixed capital only when it is actually worn out.  If we assume that the fixed capital has an average lifespan of 5 five years, it loses £1,500 of value in wear and tear each year.  So, now the value of output becomes £73,500, the cost of production having risen to £61,500.  The same £12,000 of surplus value is produced, and so now, the rate of profit/profit margin falls to 19.51%.

Again, this illustrates the point that the annual rate of profit - basis of the annual average rate of profit, and so of Marx analysis of the long-term tendency for the rate of profit to fall - is calculated on the actual value of the capital advanced, and not on the historic prices paid for it.  In Theories of Surplus Value, Chapter 23, Marx describes this.  He points out that, because of this factor of wear and tear, the value of the fixed capital advanced each year, must fall, and so, as a result of this fall in the advanced capital, the annual rate of profit must rise.

Marx takes the example of a coal producer who has £50 of variable capital and £50 of fixed capital, which loses £5 per year in wear and tear.  They have £50 of surplus value.  In the first year, the rate of profit is then 50%.  But, Marx notes,

"In the second year, the fixed capital of the coal producer would amount to 45, variable capital to 50 and surplus-value to 50, that is, the capital advanced would be 95 and the profit would be 50. The rate of profit would have risen, because the value of the fixed capital would have declined by one tenth as a result of wear and tear during the first year. Thus there can be no doubt that in the case of all capitals employing a great deal of fixed capital—provided the scale of production remains unchanged—the rate of profit must rise in proportion as the value of the machinery, the fixed capital, declines annually, because wear and tear has already been taken into account."

In fact, however, this fall in the value of capital due to wear and tear is not the only form of devaluation. All capital can fall in value due to changes in productivity, or in the case of fixed capital new technological developments. This depreciation is completely separate to the loss of value due to wear and tear. For fixed capital these improvements in productivity or changes in technology bring about large-scale moral depreciation, and the consequence is that this results in large rises in the rate of profit, for the reasons Marx describes, here. Such large scale moral depreciation of fixed capital, and resultant sharp rise in the annual rate of profit arose from the technological revolutions of the 1980's, and 90's.

These falls in the value of capital means that there also arises a release of capital, which creates the illusion of additional profit, but also makes available capital as revenue, which can be utilised for additional capital accumulation. As Marx notes, in TOSV, Chapter 22, where he deals with these illusions created by the use of historic prices rather than values, to calculate the rate of profit, the additional profit is an illusion, but the rise in the rate of profit is real.


GrahamB said...

Great explanation Boffy! Particularly the difference between advanced capital and capital laid out.

One thing. To get the rate of profit in one year (of 48 weeks) as 165.5%, you have used 1,250 for the advanced variable capital. Earlier it had been 1,500 for the single turnover period of 6 weeks?


Boffy said...


Thanks, good to hear from you. You are quite right about the mistake in relation to variable-capital. Having read through, I have some other editing to do to put links into terms I've since included in my glossary. So, when I have time, I will make the necessary correction in relation to that error.

GrahamB said...

Cheers Boffy.

The next piece of the jigsaw is how to handle fixed capital or means of production, rather than circulating capital, in calculating a rate of profit (and the composition of capital). In other words, what constitutes advanced fixed capital.

Have you an article specifically on this?


Boffy said...


When I re-read the post to look at what I needed to edit I also immediately saw that I hadn't dealt with fixed capital. I will remedy that along with the other required items.

I do indeed, have specific posts dealing with fixed and circulating capital. I also have specific posts dealing with calculation of Turnover Time, Working Period, Production Time, Circulation Time, and of the annual rate of profit (which includes the calculation in relation to fixed capital), s x n/C, where s is surplus value per turnover, n is number of turnovers per year, and C is total capital advanced (fixed and circulating) for one turnover period, as against the calculation of the rate of profit (profit margin (s/c +v). I also have posts on the technical composition, value composition and organic composition of capital. These posts are all listed under those headings in my Glossary of Marxist Terms, which is in the side bar and provides links to al those posts.

All those concepts are vital in understanding Marx's Law of The Tendency for The Rate of Profit to Fall, and his analysis of Crises of Overproduction, both of which are also included in the Glossary. The former is comprised of a large number of posts, because it deals extensively with the confusion over that term that has been created, along with its use by the monocausalists as an explanation of crises. The posts on Crises of Overproduction are fewer, because I could explain it more succinctly, and also I have a book on Marx and Engels' Theories of Crises, which deals with that in much greater length, and is available on Kindle at a very reasonable price.

I have, however, provided an Executive Summary in relation to both the LTRPF, and Crises of Overproduction, which the Glossary links directly to. There is a similar Summary for the Long Wave, which is also inextricably linked to these issues.