Circulating Capital

The term circulating capital is often confused with circulation capital or capital in circulation. As Marx sets out in a series of chapters in Capital II, it certainly confused Adam Smith and David Ricardo. In fact, Marx shows, its because Smith based his analysis on fixed and circulating capital, which he often confuses with constant and variable capital, that he prevents himself, and his followers, from being able to understand the source of surplus value.

Capital in circulation refers to capital that has passed through the production process, and been transformed into commodity-capital, and subsequently money-capital, prior to once more being transformed into productive-capital. But, neither commodity-capital nor money-capital can be circulating capital. The terms fixed capital and circulating capital refer only to productive-capital. That is means of production (constant capital) and labour-power (variable-capital) engaged in the production process.

Fixed capital can only ever be constant capital, in other words, capital which only transfers its value to the end product. But, circulating capital comprises both constant capital and variable-capital. In contrast to fixed capital, a part of whose value remains fixed within it, after the production process has been completed, all of the value of circulating capital is used up during the production process, which means it has to be continually reproduced in its entirety, for production to continue on the same scale. The situation in respect of the circulating constant capital is fairly straightforward here.

The circulating constant capital can only transfer its value to the end product. It is circulating rather than fixed capital precisely because none of its value is left at the end of the production process. It has to be reproduced in its entirety. 1,000 kg. of cotton physically disappears, and so does its capital value as productive-capital when it is spun into yarn. The capital value of the cotton is transferred to the yarn and now exists as commodity-capital not productive-capital. If this value is say £1,000, then, when the yarn is sold, this portion of the capital-value is realised as money-capital, which is then used to buy another 1,000 kg. of cotton to replace that consumed. In this way, the capital value of the original cotton is reproduced. It has been circulated.

The situation as regards the labour-power is not so straightforward. The term variable-capital is frequently confused with wages, when, in fact, as Marx describes, at length, in Capital II, they are two completely different things. Variable-capital is capital employed productively by capital, in the form of labour-power, but wages are not capital at all. Wages are simply money received by workers in exchange for the sale of their labour-power. They are no different than the payment of money for the purchase of any other commodity. Indeed, when the worker buys the commodities they need for their own reproduction, what they hand over to the seller of those commodities is not wages, but simply money.

The capital-value of the variable capital, like the capital value of the circulating constant capital, is reproduced in the capital-value of the commodity-capital. But, unlike the circulating constant capital, whose use value is consumed in the production process, and whose value is transferred to the end product, this is not the case with the variable-capital. The use value of the variable capital resides in its ability to create new value. That is why it is variable capital, it is capital with a constant value that is transformed into a variable value, in the production process, a value which varies depending upon the length and intensity of the working day. That use value cannot be transferred. Similarly, it is not the value of the variable capital that is transferred. Rather, the labour-power that constitutes the variable-capital creates entirely new value equal to the time it performs labour.

The commodities labour-power and means of production are
purchased, and form productive-capital.  The labour-power is
variable-capital, and the means of production constant capital.
The value of these portions of the productive-capital expressed
in money terms for ease of calculation, is constantly changing for
the same reason the value of all commodities constantly changes.
It forms the cost price (k) of the commodities produced.  In the
production process (P) the constant value of the variable capital
(the value of the labour-power) becomes a variable value, as the worker
performs surplus labour, creating a surplus value.  The capital-value of
the productive-capital is reproduced, in the end product, along with
this additional surplus value, and assumes the form of the
commodity-capital, C'.  C' is realised in money form as M'.  The
circuit closes.  M' divides into M and m.  Under simple reproduction
in a new circuit M reproduces the quantities of means of production and
labour-power consumed in the previous cycle - the capital has
 been circulated.  

The capital value of the variable capital is reproduced in the end product, only because the labour-power purchased creates this new value. This new value, where the worker produces more value than the value of their labour-power, thereby reproduces the capital-value of the variable capital, as well as a surplus value. The new value is produced irrespective of whether wages are paid, or what the amount of wages might be. Variable-capital is the capital-value of the labour-power purchased, but the wages paid to the sellers of that labour-power may be more or less than this value. Indeed, the variable-capital value might be reproduced in the end product, long before any wages are paid, because wages are usually paid in arrears, whereas the capital value of the variable-capital is reproduced as soon as the capital is turned over, i.e. once the production process is completed, the produced commodities sold, and the money-capital one more used to buy new productive-capital. In other words, as soon as that capital value has been circulated.

In a sense, all capital is circulating capital, and all capital is fixed capital. All capital is fixed capital in the sense that the production process is precisely that – a process. It has a start point and an end point. All of the capital used in this process is fixed for so long as it is taking part in that process. 1,000 kg. of cotton enters the production process as productive capital, but it does not all become yarn immediately. It may take a day for it all to be turned into yarn, and the value of that portion not yet processed remains fixed within it. The same is true of the variable-capital advanced to production.

Similarly, all capital is circulating capital. If a machine has a life of 10 years, then at the end of ten years, it will have transferred all of its value (less depreciation) to the products it helps create, via wear and tear. If the production process is taken as being a period of 10 years, then all of its value has been consumed and reproduced during that period. This means that capitalists are able to utilise this ambiguity in their accounting practices to manipulate profits, particularly for tax purposes.

But, in reality, the production process is an historically determined period or quantity of output. The production period for agriculture is essentially a year, and its on that basis that the Physiocrats provided the basic definition of fixed and circulating capital, used by Marx. The capital advanced to production that is fully consumed in the production process, and which has to be fully reproduced at the end of that process – such as seeds – they termed avances annuelles, and those which continue to exist beyond the production process – such as ploughs – they termed avances primitives. 

“The difference between these two kinds of advances does not arise until advanced money has been transformed into the elements of productive capital. It is a difference that exists solely within productive capital. It therefore never occurs to Quesnay to classify money either among the original or the annual advances. As advances for production, i.e., as productive capital, both of them stand opposed to money as well as the commodities existing in the market. Furthermore the difference between these two elements of productive capital is correctly reduced in Quesnay to the different manner in which they enter into the value of the finished product, hence to the different manner in which their values are circulated together with those of the products, and hence to the different manner of their replacement or their reproduction, the value of the one being wholly replaced annually, that of the other partly and at longer intervals.” (Capital II, p 193-4)

This highlights another difference, which is that for Marx advanced capital is capital advanced to production. Capital is required to be advanced during the circulation period, i.e. during the period when the commodity-capital is being sold, and when the resultant money-capital is being once more converted into productive-capital, but that is only because capitalist production is continuous. If production ceased during the circulation period, as it does with other modes of production, then no additional capital would need to be advanced during this circulation period. The productive-capital advanced is only the capital-value, not the money paid for the purchase of means of production or labour-power.

The period during which, the capital is advanced is the turnover time, which combines these two periods – the production time and the circulation time. But, the production time is determined by physical constraints, and historical precedents. The production time in agriculture was taken as being a year by the Physiocrats, because that was the limitation imposed by nature. The production time for wine is determined by the time required for the wine to ferment, and mature etc. as well as for the grapes to grow and be processed. The production time for timber is determined by the length of time required for trees to grow and so on.

But, even where these natural limits do not apply, there are other constraints that limit what constitutes the production process. For example, when pottery manufacturers sent their wares to market via pack horse, there was a fairly small quantity that could be shipped at any one time, so the amount that had to be produced as part of the production process was also, therefore relatively small. When they began to send their wares to market via canal barge, they could send much larger consignments, and because it made no sense to send only partly filled barges, the minimum quantity produced in the production process became correspondingly larger. Furthermore, as Marx sets out, when producers took their own wares to market they might only require a relatively small quantity, before they sold it, but when the task of selling is taken over by huge wholesalers, these wholesalers require correspondingly huge shipments. Similarly, where one producer sells their output directly to another producer as an input, the very fact that the scale of capitalist production expands massively means that the size of supplies from one to the other become larger also.

On the one hand, therefore, as productivity rises under capitalism, the production time for any given quantity of output declines, but that same expansion of capital means that the average quantity produced during the production process increases, which lengthens the production time. Generally, as Marx points out the rise in productivity outweighs the increase in the normal quantity of units within the production process, so that the production time tends to continually decline, shortening the turnover time. 

Whatever, the length of the production process, the capital that is fully consumed within it, and therefore has to be reproduced in full, is circulating capital, that which retains a portion of its value fixed within it at the end of that period is fixed capital.