So, in other words, if we consider Department 1 here, as the producer of means of production, then it has to be remembered that these means of production do not physically have to be the same as their value equivalents at any one time. Here £200 represented wear and tear of the spinning machine, but rather than being spent to buy part of a spinning machine, it was used to buy additional cotton. Both are means of production bought from Department 1, but both physically different. The problem then seems to be, what happens when firm X needs to lay out the additional capital to replace its spinning machine, having spent the money set aside for that purpose instead on additional cotton? For this to work, X has to throw £200 of additional money into circulation.
“But the absurdity is only apparent. Class II consists of capitalists whose fixed capital is in the most diverse stages of its reproduction. In the case of some of them it has arrived at the stage where it must be entirely replaced in kind. In the case of the others it is more or less remote from that stage.” (p 468)
So, one group is essentially at that stage as companies just setting up in business. That is, in addition to having to lay out capital for all of the materials, and labour-power (circulating capital) it also needs to lay out capital to buy fixed capital. What we have here is essentially the situation that Marx referred to in Volume I, which is the distinction between the money hoard accumulated to replace fixed capital, and the accumulation of surplus value becomes blurred. Here, the money hoard to cover wear and tear has been used for the purchase of additional material (cotton) which thereby represents an accumulation of capital.
At the same time, the other group is made up of companies that are essentially building up money hoards to cover the cost of replacing fixed capital. Marx argues then that if half of the Department 2 capitalists, throwing in their £400 for means of production, do so to cover the purchase of circulating capital, and the other to cover that purchase plus the replacement of worn out fixed capital, it averages out.
“Hence, if we assume that half of the £400 thrown into circulation by capitalist class II for exchange with I comes from those capitalists of II who have to renew not only by means of their commodities their means of production pertaining to the circulating capital, but also, by means of their money, their fixed capital in kind, while the other half of capitalists II replaces in kind with its money only the circulating portion of its constant capital, but does not renew in kind its fixed capital, then there is no contradiction in the statement that these returning £400 (returning as soon as I buys articles of consumption for it) are variously distributed among these two sections of II. They return to class II, but they do not come back into the same hands and are distributed variously within this class, passing from one of its sections to another.” (p 463)
This assumption, however, is clearly false, but worse, there is a logical flaw in Marx's argument here. The assumption itself could only apply if the average life of the fixed capital is only two years. For example, if the average life of the fixed capital were ten years, then on average, in any particular year, it is only 10% of the fixed capital which is worn out and needs to be physically replaced, whilst the other 90% continues to function, and its replacement value continues to be accumulated in money hoards.
The fact that the assumption is false, however, does not change the basis of the argument. It simply means that in any single year, a greater proportion of Department 1 output can be allocated to the production of circulating rather than fixed capital. The real issue here, as I will set out later, arises with the consequences of the synchronisation of this replacement cycle.
The above explanation, however, seems to breach the requirement for simple reproduction, because the use of money hoards to cover replacement of fixed capital, to cover the purchase of additional material, implies expanded reproduction. If additional cotton were bought, this implies additional labour-power also has to be bought to process it. Marx's assumption that half the capitalists renew their fixed capital each year is a way around this. It means that a given amount of fixed capital (half the total) is replaced each year, so that each year, half of the Department 2 capitalists are responsible for buying the society's total production of fixed capital. In doing so, they provide the funds for Department 1 to buy Department 2 consumer goods. Within this process, the additional funds advanced by half the Department 2 capitalists, for this replacement fixed capital, flow back, but not necessarily to those that advanced it.
“One section of II has, besides the part of the means of production covered in the long run by its commodities, converted £200 in money into new elements of fixed capital in kind.” (p 464)
The fact that the assumption that fixed capital lasts only two years cannot be sustained, does not undermine this argument. It is merely a question of proportion as stated earlier. If the total output value of fixed capital, to be exchanged with Department 2, is £200 it does not really matter, in this context, whether this amounts to the physical replacement of half of a Department 2 total stock of £400, or a 10% replacement of a total Department 2 stock of £2,000. The point is that Department 2 capitalists spend £200 per year to purchase this total output of £200. Where it does matter, however, is in relation to the synchronisation of replacement cycles, and in relation to what orthodox economics calls the “accelerator” effect. I will deal with this later.
The logical flaw in Marx argument above, however, is that it is clearly not possible for “half of the £400 thrown into circulation by capitalist class II for exchange with I (to) come(s) from those capitalists of II who have to renew not only by means of their commodities their means of production pertaining to the circulating capital, but also, by means of their money, their fixed capital in kind, while the other half of capitalists II replaces in kind with its money only the circulating portion of its constant capital, but does not renew in kind its fixed capital...”
Logically, we have to assume that each section of Department II spends the same on circulating capital in any one year. Both have to buy the same amount of labour-power, and the same amount of material to process to ensure that production continues at the same level, and that this meets the requirement of simple reproduction. But, if both sections spend the same on circulating capital, whilst one section additionally buys replacement fixed capital, the total £400 to be made up of half from each section. The latter must clearly provide a greater proportion of the £400.
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