Marx draws on his analysis of social reproduction, as originally set out by the Physiocrats in the Tableau Economique, and on his own reproduction schemas in Capital II. There, it was demonstrated that these social exchanges require one or both parties to initiate the process by advancing money. This is true whether the money is advanced as revenue or as capital. It has then been shown that this advance of money flows back to its origin.
Marx describes this in Theories of Surplus Value, where he makes the point that the amount of money that needs to be advanced depends upon the rapidity of these exchanges. For example, suppose, during the year, farmers sell £2000 of food and materials to manufacturers, and likewise buy £2,000 of manufactured goods from industry. Marx shows that there are a range of ways this can be effected.
For example, industry may buy £1,000 of food from farmers to feed its workers. It must then advance £1,000 of money. It may then buy £1,000 of materials, so now £2,000 of money has been advanced, and £2,000 of agricultural commodities have been exchanged. Farmers may now use this £2,000 and buy £2,000 of manufactured goods. So, £2,000 of money has been advanced to circulation, but £4,000 of commodities have been circulated.
Suppose, instead, that having sold £1,000 of food to manufacturers, the farmers buy £1,000 of manufactured goods, with the £1,000 of money they have received. Now, only £1,000 of money has been advanced to circulation, but has circulated £2,000 of commodities. The £1,000 of money originally advanced by manufacturers has flowed back to them. With this £1,000, the manufacturers buy £1,000 of raw materials from farmers. Now, the £1,000 of money that was advanced to circulation has enabled the circulation of £3,000 of commodities.
Finally, the farmers buy £1,000 of manufactured goods from industry with that £1,000. It has now circulated £4,000 of commodities, and having been initially advanced by industry has flowed back to it.
But, as Marx says, it could have been that industrialists bought £200 of food. Then farmers buy £200 of manufactured goods with it. Manufacturers may buy another £200 of food or raw material, with that £200, and so on. In that case, all of the £4,000 of commodities will have been circulated by the advance of just £200 of money, simply as a result of a larger number of smaller, more frequent exchanges.
In reality, as Marx sets out in Theories of Surplus Value, the basis of this is that every commodity is money. The farmers, in buying the £1,000 of manufactured goods, have not really bought them with £1,000 of money, but with the £1,000 of food they initially sold to the manufacturers. Money is only a means of circulation for the exchange of these equal values of commodities. Money only buys commodities to the extent that they are not bought by other commodities exchanged for them. In that case, the money acts not as means of circulation, but as means of payment.
“We have seen (Vol. II, Part III) in what manner the different component parts of production are exchanged for one another. For example, variable capital consists materially of the means of subsistence of the labourers, a portion of their own product. But this is paid out to them piecemeal in money. The capitalist has to advance this, and it is very greatly dependent on the credit system organisation whether he can pay out the new variable capital the following week with the old money which he paid out in the previous week. The same holds for exchange among various component parts of the total social capital, for instance, between means of consumption and means of production of means of consumption. The money for their circulation, as we have seen, must be advanced by one or both of the exchanging parties. It remains thereupon in circulation, but returns after the exchange has been completed to the one who advanced it, since it had been advanced by him over and above his actually employed industrial capital (Vol. II, Ch. XX). Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally, who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates.” (p 530-1)
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