Thursday, 4 September 2014

Capital II, Chapter 19 - Part 6

4) Capital and Revenue in Adam Smith 

The capitalist advances variable capital in the form of wages to the worker. Those wages might be from the existing capital of the capitalist, obtained by credit, from the sale of products previously produced by workers etc. The value of these wages is reproduced in part of the product produced by the workers. Rather than paying the workers with that portion of their output, the capitalist pays them an equivalent in money. The worker now has wages, and the capitalist has the equivalent of these wages as part of his commodity-capital.

So, the variable capital appears as revenue, wages to the worker, which lasts only so long as to buy the necessaries they require. As a result, various processes of production and circulation are intermingled which Adam Smith does not distinguish.

In the process of circulation, the worker sells his labour-power, C(L) – M, to the capitalist, who advances variable capital as wages. The worker exchanges a use value and obtains its price as money wages. The capitalist buyer exchanges money (exchange value) for a use value (labour-power).

In the production process, the labour-power bought produces new value by adding value to the means of production. He reproduces for the capitalist, in the form of new commodities, the capital advanced, along with a surplus value. By reproducing the advanced capital, the worker enables the capitalist to advance it again.

As far as the process of circulation is concerned, it doesn't matter what happens after the exchange is completed. A seller is not concerned what a buyer does with the commodity they have sold them. A buyer is not interested what the seller does with the money they have paid them.

“Hence, so far as the mere process of circulation is concerned, it is quite immaterial that the labour-power bought by the capitalist reproduces capital-value for him, and that on the other hand the money received by the labourer as the purchase-price of his labour-power constitutes his revenue. The magnitude of value of the labourer’s article of commerce, his labour-power, is not affected either by its forming “revenue” for him or by the fact that the use of this article of commerce by the buyer reproduces capital-value for this buyer.” (p 384)

The worker is paid the value of their labour-power as wages, as revenue on which they must live.

“It is entirely wrong, when Adam Smith says (p. 223): 

'That portion of the stock which is laid out in maintaining productive hands ... after having served in the function of a capital to him [the capitalist] ... constitutes a revenue to them' [the labourers].” (p 384)

The capitalist pays out money to purchase labour-power. But, for the workers, the labour-power does not constitute capital. It is only a commodity, which they can continue to sell, provided it is reproduced, and the capitalist is enabled and prepared to buy. The labour-power, having been bought, by the capitalist, however, does then become capital – productive-capital – in his hands.

The labour-power functions twice, because the worker supplies it before the capitalist has paid for it. It acts as a commodity in his hands, and then as capital in the hands of the capitalist.

“Hence it is not the money which functions twice: first, as the money-form of the variable capital, and then as wages. On the contrary it is labour-power which has functioned twice: first, as a commodity in the sale of labour-power (in stipulating the amount of wages to be paid, money acts merely as an ideal measure of value and need not even be in the hands of the capitalist); secondly, in the process of production, in which it functions as capital, i.e., as an element, in the hands of the capitalist, creating use-value and value. Labour-power already supplied, in the form of commodities, the equivalent which is to be paid to the labourer, before it is paid by the capitalist to the labourer in money-form. Hence the labourer himself creates the fund out of which the capitalist pays him.” (p 385)

But, the worker then has to spend these wages to live, and thereby perpetuate the supply of labour-power for capital. So, the purchase and sale of labour-power not only reproduces it as an element of productive-capital, which appears as the producer of commodities, but also creates the fund for capital to pay the worker, and thereby purchase a portion of those commodities.

“And to this extent Smith is right when he says that the portion of the value of the product created by the labourer himself for which the capitalist pays him an equivalent in the form of wages, becomes the source of revenue for the labourer. But this does not alter the nature or magnitude of this portion of the value of the commodity any more than the value of the means of production is changed by the fact that they function as capital-values, or the nature and magnitude of a straight line are changed by the fact that it serves as the base of some triangle or as the diameter of some ellipse.” (p 385)

The labour-time expended by the worker is determinate of the value he creates, and this new value provides the basis, the source, of the revenue he receives as wages. But, that is quite different to saying that the revenues received by the worker, i.e. their wages, is determinate of the values they create.

“This portion of the value of a commodity neither consists of revenue as an independent factor constituting this value-part nor does it resolve itself into revenue. While this new value constantly reproduced by the labourer constitutes a source of revenue for him, his revenue conversely is not a constituent of the new value produced by him. The magnitude of the share paid to him of the new value created by him determines the value-magnitude of his revenue, not vice versa. The fact that this part of the newly created value forms a revenue for him, indicates merely what becomes of it, shows the character of its application, and has no more to do with its formation than with that of any other value. If my receipts are ten shillings a week that changes nothing in the nature of the value of the ten shillings, nor in the magnitude of their value.” (p 386) 

It is the category 'revenue' that causes Smith all his problems, says Marx. At one time, Smith has the different revenues being the components, or sources of the value of commodities. At another, it is the value of commodities that itself resolves into these revenues. The two are not the same.

“If I determine the lengths of three different straight lines independently, and then form out of these three lines as “component parts” a fourth straight line equal to their sum, it is by no means the same procedure as when I have some given straight line before me and for some purpose divide it, “resolve” it, so to say, into three different parts. In the first case, the length of the line changes throughout with the lengths of the three lines whose sum it is; in the second case, the lengths of the three parts of the line are from the outset limited by the fact that they are parts of a line of given length.” (p 387) 

If commodity value is determined by the value of these revenues, the question also arises how are these revenues themselves determined? The value of wages can be determined. It is the value of labour-power, but how is the value of the surplus value to be determined?


davidjc said...

Thanks for this series.

On the Kaiser Report just now, they had a graph showing the velocity of money in the US economy has been slowing for the past several years. How does this velocity of money affect turnover rates?

Boffy said...

Thanks David,

I can't remember now, whether I've actually covered this previously, or if its in a post I've written that's yet to appear (I'm somewhat ahead in my reading of capital, and summarising of it, than the blog posts).

Anyway, the basic point is that an increase in the rate of turnover will act to increase the velocity of circulation of money, because the higher rate of turnover of capital means that the various acts of exchange (capital against revenue and capital against capital) occur more frequently, and as these transactions are effected via the use of money (including bank money) this means the velocity of circulation must thereby rise.

An increase in the velocity of money does not, however, necessarily result in an increase in the rate of turnover of capital. It may do so, in so far as the increase in the velocity of circulation is a reflection of more efficient payments systems, so that the circulation time for capital - the time here required between a commodity having been produced and sold, and it actually being paid for, and the money being deposited in the bank account of the seller ready for use to buy productive-capital again - is thereby reduced. Things such as the introduction of Paypal, or the current introduction of payment using mobile phones etc. are means by which both the velocity of money may be increased and the circulation time of capital reduced.

I have a reference somewhere, I think in a future post, but I think I've also referenced it in my book, about the complaints in the US, about the slowness of their payments system, compared to the situation in Europe and elsewhere.

Boffy said...

Can I also stress an important part of what Marx is saying here, because its often misunderstood. He is attacking Smith's "cost of production" theory of value, whereby the value of the commodity is determined by adding together the various 'costs' (wages, profits, interest, and rent) involved in its production, and which are paid out as revenues to workers, capitalists, money lenders, and landlords.

Marx's point is that this is the wrong way round. The length of the line is not determined by the lengths of the other lines into which it can be divided. Rather it is the length of the complete line that sets the limit of the combined lengths of the lines into which it is divided.

In other words, the value of the commodity is determined (by the labour-time required for its production), and this sets the limit to what can be paid out as wages etc.

So, the value of the commodity is not determined by the amount of value of the constant capital (still less the historic price paid for it) plus the value paid out as wages, but the value of the constant capital (current reproduction cost) plus the new value added by labour.

So, if workers perform 8 hours of labour, and add 8 hours of new value to the value of the constant capital, but this will only produce a surplus value, if the value of the labour-power they provide, and which is paid to them as wages is less than 8 hours. Under certain conditions, that may not be the case.

Suppose, for example, there is a crop failure, so that the price of food sky rockets. In that case, the food that the workers require for their own reproduction may require 10 hours to produce. That doesn't change the fact that the workers have produced 8 hours of positive new value by their labour. But, the fact that the capitalist must pay them the equivalent of 10 hours in wages, to reproduce their labour-power, means he makes a loss equal to 2 hours!

davidjc said...

Apologies for the confusion but I meant to put that question under the Maito reply post! Thanks for the indulgence.

Kaiser and his guest seemed to be implying that a lowering velocity of money was a sign of a stagnating economy, which makes common-sense sense. For that to work, lower money velocity implies lower rate of turnover, as you say above, I think.

But the evidence you've outlined before suggests a rising turnover rate. Is it that this fall in velocity is an anomaly related to the peculiar circumstances of the post credit crunch, or a run of the mill temporary movement in a longer run rise, or have I simply made some daft category error? Thanks again for the answers.

Boffy said...


I would say that the low and falling velocity of circulation is due to QE. In the Contribution to a Critique of Political Economy, Marx gives an extensive account of money. He describes the situation as regards precious metal.

If too much gold money is put into circulation, some of the gold coins do not circulate, they remain in bank accounts and so on. In other words their velocity of circulation slows down. The excess coins tend to get melted down into bullion and sold to make jewellery etc.

That can't happen with paper money, because the paper itself has no value, you can't melt it down! So paper money stays in circulation. To the extent that this paper money circulates, and is in excess of requirements, its value falls, which means other prices rise.

But, the question here is the extent to which this excess money does then circulate. because of the way QE works, the additional money goes first into the banks. velocity only rises, if those banks get that additional money into circulation.

There are lots of reasons why the banks are not doing that. Firstly, the banks are bust. They are surviving on the back of balance sheets that are a fiction based on grossly inflated asset prices - shares, bonds, and property - sitting on their balance sheet.

So, the banks try to buy time by using the cheap money provided to them by the central bank as a substitute for actual capital, rather than lending that money to companies. At the same time, the banks do not want to compound the problem they help create by lending to countries, companies and individuals that may not pay them back. Meanwhile, big companies have lots of available cash on their balance sheet, and so do not need to borrow this money from banks.

So, lending does not increase, the money does not go into the economy, and so remains stored in various hoards and reserves. The velocity of circulation slows down. I would also suggest that over the last 25 years, particularly in the first 10 years of that, a lot of the excess money went into pumping up huge bubbles in shares, bonds and property. I think that this process has reached its limits.

The additional money being pumped into the economy is having much less of an effect in blowing up those bubbles. It is barely preventing them from bursting. So, again, that money that would have gone into circulation as speculation is not doing so to the same extent, because speculators guess that these asset prices are due for a huge fall.

The fall in the velocity of circulation is then a monetary phenomenon, the other side of excess money printing. It is not an indication of a reduced rate of capital turnover. As I said yesterday, an increase in the rate of turnover of capital will cause the velocity of circulation to rise, but a rise in the velocity of circulation does not mean the rate of turnover will rise, or that it has risen. Similarly, a slow down in velocity does not mean the rate of turnover will slow down, or has slowed down.

The velocity of circulation can change for reasons related to the demand and supply of money, quite independently of the rate of turnover of capital, as described above, i.e. print too much money, and it may just sit in banks rather than go into circulation.

Boffy said...

I should add, as I wrote recently in my post "Flation", that when this velocity does rise, and I think it will, because the demand for money-capital is likely to rise for structural reasons, and because the annual rate of profit is likely to begin to fall, so companies need to borrow money to invest rather than financing from their own resources, countries need to rebuild shattered social capital, infrastructure etc., and the message coming out is increasingly that austerity in Europe has failed, so fiscal stimulus is required, which means the demand for money-capital by states rises, that is without the need for banks to actually rebuild their balance sheets with real money-capital, rather than fictitious capital, the consequence will be that inflation will rise rapidly. Probably far more rapidly than central banks anticipate.

In some places like the Us that is already being seen, and is likely to result in very rapid rises in inflation. They probably do not mind that, as inflation liquidates debt. In Europe and the UK, unless they scrap austerity it may result in a rapid shift from disinflation to stagflation, as prices rise, without the economy growing rapidly.

Governments may not mind that because again it liquidates their debts, but workers will do badly from it, as it means their wages and savings become worthless as prices rise, but their incomes do not, on a far greater scale than has happened till now.

I still beleive that ultimately that is limited, because the long wave boom remains in tact, as I forecast, the current slow down is the effect of the three year cycle. It will intensify industrial struggles several years down the line from here, as that plays out.

davidjc said...

Great. Thanks for clearing that up.