However, in analysing this circulation of capital, Marx makes clear that this particular circuit of M – C … P … C' – M', is only the circuit of newly invested money-capital. In other words, it is the circuit of money-capital, for some new firm that has just been established, or it is the circuit of money-capital for a firm that is about to cease trading, all of whose capital will be metamorphosed into the money form. The other occasion when this circuit applies is for the realised surplus value, which is accumulated as additional capital.
“... it is the form of capital that is newly invested, either as capital recently accumulated in the form of money, or as some old capital which is entirely transformed into money for the purpose of transfer from one branch of industry to another.” (p 61)
But, it is not the circuit of industrial capital, either productive-capital or merchant capital. Marx's analysis of social reproduction, and the circulation of capital is based upon the Tableau Economique developed by the Physiocrats. In Theories of Surplus Value, Marx notes that they were the first to recognise that surplus value originates in production, but they were also more advanced than Adam Smith, he notes, in recognising that social reproduction begins, not as a clean slate, at the start of each period, but with the material production of the previous period – the genesis of capitalist production itself is premised upon the existence of an already existing mass of material production, and commodities. In their case, the circuit begins with the previous year's harvest, which provides both the constant capital, in the form of the seeds, livestock and so on, which will be consumed in this year's production, and also provides the variable capital, in the form of the food and other means of subsistence, which will be paid to workers as wages in the current cycle, and consumed again as part of this year's production process.
Marx analyses capital as it actually exists, in this same form. In other words, he assumes that the basis of each firm is that it intends to continue in business, and not to simply transform all of its capital into the money form, never to be invested productively again. By the same token, each existing firm starts the year not with a sum of money-capital waiting to be invested, but with a stock of fixed capital in the shape of buildings, machines etc.; with a stock of materials waiting to be processed, and some that are already in the production process, as work in progress, all of which constitute circulating constant capital; and it starts the year with a workforce already in the process of transforming those materials. In other words, it starts the year (or any other period of turnover of capital) with a physical quantity of productive-capital. Even if the variable-capital, required to pay wages, is held in the form of money-capital, rather than actual means of subsistence (as the kind of capitalist farm, analysed by the Physiocrats, would have had), this money-capital, is only the money form of the actual means of subsistence, which must already physically exist in the economy, as the commodity-capital of other firms, ready to be paid to these workers. Money wages only act to intermediate that underlying exchange of commodities – labour-power for means of subsistence.
In other words, the circuit of this productive-capital is P... C' – M'. M – C … P. The purpose of the productive-capital is not to produce a larger sum of money-capital, at the end of the circuit, but to produce a larger mass of productive-capital, or at the very least, in the case of simple reproduction, to physically reproduce that productive-capital.
“The circuit of productive capital has the general formula P ... C' — M' — C ... P. It signifies the periodical renewal of the functioning of productive capital, hence its reproduction, or its process of production as a process of reproduction aiming at the self-expansion of value; not only production but a periodical reproduction of surplus-value; the function of industrial capital in its productive form, and this function performed not once but periodically repeated, so that the renewal is determined by the starting-point.” (p 65)
In fact, Marx says the reason why the Physiocrats were the first to recognise this was that they defined value in terms of use value, and it was quite obvious that the purpose of production was to at least produce enough of these use values to replace those that had been consumed, and to produce as much of a surplus of these use values as possible, so that they could be accumulated, and production expanded. The reason that the Mercantilists and Monetary School, based in England, did not recognise it, was that they focussed on a concept of surplus value defined by the expansion of money profits, obtained via exchange.
The same is true for commercial capital. Its circuit is C' – C'.
“Consequently if simple reproduction takes place in this form, the C' at the terminal point is equal in size to the C' at the starting-point. If a part of the surplus-value enters into the capital circuit, C'', an enlarged C', appears at the close instead of C'. This is merely a larger C' than that of the preceding circuit, with a larger accumulated capital-value. Hence it begins its new circuit with a relatively larger, newly created surplus-value. In any event C' always inaugurates the circuit as a commodity-capital which is equal to capital-value plus surplus-value.” (p 90)
For both productive-capital and merchant capital, they can only continue to act as capital, if they are continually reproduced, in this form. Consequently, as Marx says later in Capital III, analysing the process of social reproduction, M or M' can never represent a termination point for capital, other than for interest-bearing capital, because it must continually be reproduced in kind. In other words, the physical use values that comprise the constant and variable capital, must be continually replaced.
“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” (p 835)
and later.
“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness.” (Chapter 49, p 849)
In other words, if 100 kilos of cotton are consumed in production of yarn, the realised value of the yarn must contain, an equivalent amount of value to the current reproduction cost of 100 kilos of cotton. Suppose the 100 kilos of cotton required 10 hours of labour to produce, equal to £10. This £10 is transferred to the value of the yarn, provided productivity remains constant. If the yarn also comprises £5 of variable-capital, and £5 of surplus value, it will sell for £20.
If productivity rises, so that the cotton can now be produced in just 5 hours, its value falls to just £5. It is then this value, not the £10 originally paid, which is transferred to the yarn, which now sells for £15. This £15, however, is still capable of reproducing the capital in kind, because only £5, or 5 hours of labour-time are now required to physically reproduce the 100 kilos of cotton.
The same applies to Marx’s comment about “effectiveness”. If a producer replaces a machine costing £100, that is capable of producing 1000 units per day, with another machine costing £100 but which produces 2000 units per day, this is the same thing as if productivity had risen, so that the old machine now only required half the labour-time to produce, or had fallen in value to £50. It is the basis of what Marx calls “moral depreciation”.
But, in all these cases, the purpose is to reproduce the physical capital on at least the same scale – simple reproduction – and, in reality, on an expanded scale.
“In the reproduction process of capital, the money-form is but transient – a mere point of transit.”
The term M, in fact, only refers to the money equivalent of the current value of the capital, which must be reproduced, as his expanded formula for the circuit of productive-capital illustrates. As Marx makes clear, it is only money as unit of account, required in order to make rational calculations. The historic cost of the consumed cotton may have been £10 (because that reflected the previous amount of labour-time required for its production), but that is irrelevant to its current value, and the value it transfers to the yarn, as well as to the portion of the yarn (and similarly of social-labour-time) required to reproduce the cotton. That is apparent in Marx's analysis in Capital II, where he separates out the portion of the end product, of the commodity-capital, C', into C and c. C is the physical portion of the commodity-capital required to physically reproduce the commodities (that comprise the constant capital and labour-power) consumed in its production, whilst c, is the portion of the commodity-capital in excess of that. It is represented as its money equivalent, by M and m.
The fact that £10 was the actual historic price paid for the 100 kilos of cotton, therefore, becomes irrelevant, because the circuit here is based on the actual value of the commodities that take part in the production and subsequent circulation process, P £10 (£5 constant capital, £5 variable capital) … C' £15 – M' £15. M £10 – C £10 … P £10. If the output consisted of 90 kilos of yarn, then it would break down into 60 kilos (C), required to reproduce the cotton and labour-power consumed in its production, and 30 kilos (c) which constitutes a surplus product. The money equivalent of these would be £10 M plus £5 m.
The importance of this can be seen when considering not the M, but the m, the money equivalent of the surplus value. At its original price of £10 for 100 kilos of cotton, £5 would have bought 50 kilos of cotton, but it now buys 100 kilos. In other words, the rate of profit, the ratio of the surplus to the actual capital value required for its production, has risen, and it is for this reason that Marx bases his calculation for the rate of profit on the current reproduction cost of the capital, and not upon the historic prices paid for it.
Moreover, as Marx points out, even for the interest-bearing capital, whose circuit appears as simply M – M', this is an illusion, because it can only appropriate this interest, because a social surplus is created, out of which it appropriates a portion. In fact, no sooner has M itself returned to the money-lending capitalist, than they must lend it out once more, because it is only when it is being loaned out that it can act as capital at all. If the money lending capitalist simply keeps the returned money in their safe, it represents not capital, but merely a store of value, merely money in a barren state.
But, this also puts the money-capital in its rightful, subordinate role. Not only does money-capital itself increase in mass only as a consequence of the actual increase in mass of the surplus value, which is a function of the increase in the mass of the productive-capital, and of the mass of labour-power employed, but it becomes clear that this increase in money-capital is itself only a reflection of the fact that there is an increased requirement for money to mediate exchanges, and to act as a store of value, for example, as a money hoard for the realised value of wear and tear of fixed capital, and that portion of surplus value, which any individual productive or merchant capital, cannot immediately accumulate.
At the same time, it is precisely because this money-capital forms only a moment, and not any kind of termination point in the circuit of capital, that means simultaneously its role is diminished. Individual capitalist firms can conduct the commercial relations between each other on the basis of commercial credit, and the use of bills of exchange rather than money. Money is only required as a means of payment to cover the balance of these various transactions. Today, in a highly banked economy like the UK, even that becomes redundant, because the necessary payments are effected not by the use of money, but merely by electronic transfers from one bank account to another. Money here is reduced increasingly to being only a unit of account, and store of value. This is an important point when considering the role of money-capital, for example, in the case of what happened in Greece. The Greek economy, for a variety of reasons, relied a lot on actual money transactions, which made it susceptible to a cessation of the supply of currency. Had it been an entirely banked economy, the question of the ECB cutting off the supply of currency, would have been irrelevant, because all transactions could simply have been effected by electronic transfers, which require no currency whatsoever.
The fact that £10 was the actual historic price paid for the 100 kilos of cotton, therefore, becomes irrelevant, because the circuit here is based on the actual value of the commodities that take part in the production and subsequent circulation process, P £10 (£5 constant capital, £5 variable capital) … C' £15 – M' £15. M £10 – C £10 … P £10. If the output consisted of 90 kilos of yarn, then it would break down into 60 kilos (C), required to reproduce the cotton and labour-power consumed in its production, and 30 kilos (c) which constitutes a surplus product. The money equivalent of these would be £10 M plus £5 m.
The importance of this can be seen when considering not the M, but the m, the money equivalent of the surplus value. At its original price of £10 for 100 kilos of cotton, £5 would have bought 50 kilos of cotton, but it now buys 100 kilos. In other words, the rate of profit, the ratio of the surplus to the actual capital value required for its production, has risen, and it is for this reason that Marx bases his calculation for the rate of profit on the current reproduction cost of the capital, and not upon the historic prices paid for it.
Moreover, as Marx points out, even for the interest-bearing capital, whose circuit appears as simply M – M', this is an illusion, because it can only appropriate this interest, because a social surplus is created, out of which it appropriates a portion. In fact, no sooner has M itself returned to the money-lending capitalist, than they must lend it out once more, because it is only when it is being loaned out that it can act as capital at all. If the money lending capitalist simply keeps the returned money in their safe, it represents not capital, but merely a store of value, merely money in a barren state.
But, this also puts the money-capital in its rightful, subordinate role. Not only does money-capital itself increase in mass only as a consequence of the actual increase in mass of the surplus value, which is a function of the increase in the mass of the productive-capital, and of the mass of labour-power employed, but it becomes clear that this increase in money-capital is itself only a reflection of the fact that there is an increased requirement for money to mediate exchanges, and to act as a store of value, for example, as a money hoard for the realised value of wear and tear of fixed capital, and that portion of surplus value, which any individual productive or merchant capital, cannot immediately accumulate.
At the same time, it is precisely because this money-capital forms only a moment, and not any kind of termination point in the circuit of capital, that means simultaneously its role is diminished. Individual capitalist firms can conduct the commercial relations between each other on the basis of commercial credit, and the use of bills of exchange rather than money. Money is only required as a means of payment to cover the balance of these various transactions. Today, in a highly banked economy like the UK, even that becomes redundant, because the necessary payments are effected not by the use of money, but merely by electronic transfers from one bank account to another. Money here is reduced increasingly to being only a unit of account, and store of value. This is an important point when considering the role of money-capital, for example, in the case of what happened in Greece. The Greek economy, for a variety of reasons, relied a lot on actual money transactions, which made it susceptible to a cessation of the supply of currency. Had it been an entirely banked economy, the question of the ECB cutting off the supply of currency, would have been irrelevant, because all transactions could simply have been effected by electronic transfers, which require no currency whatsoever.
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