Circuit of Capital

Volume 2 – The Process of Circulation of Capital

Volume 1 started with an examination of the commodity and of the process of exchange, before turning to the study of production as the process of production of SV. In Volume 1, therefore, production and circulation were examined independently of one another, with circulation being treated in parentheses.

In Volume 2 Marx turns to the role of circulation in the capitalist society and examines the relationship between capitalist production and circulation.

Marx’s main concern is to show in a systematic and rigorous way that circulation is subordinate to production: that capitalist social relations are rooted in production rather than in circulation; that the role of circulation is to provide a mechanism that can, through the exchange of products and the operation of the markets, ensure that commodities of particular types (i.e. particular use-values) are produced in the quantities and in the proportions required for the reproduction of the system.

Thus the market serves to co-ordinate the different branches of capitalist production: it regulates the “social division of labour” in a capitalist society as in simple commodity production.

Part One: The Metamorphoses of Capital and their Circuit

Chapter 1 – The Circuit of Money Capital

In the first three chapters Marx looks at the circuit of capital from three different points of view.

The basic circuit under examination is the circuit of industrial capital.

This is composed of the purchase of labour power and means of production, the act of production, and the sale of the commodities produced in a constantly repeated cycle.

If we look at the cycle starting from the sum of money capital we have the circuit of money capital: M – C – L/MP …P…C’ – M’

M = money-capital

C = commodity-capital (composed of labour-power and means of production)

P = productive capital

C’ = commodity-capital (now composed of products)

M’ = money-capital (from the sale of the products)

Thus M, C, C’ M’ are the various forms of capital, appropriate to the various phases in the circuit of industrial capital.

Marx wants to show:

  1. That these different forms of capital are not inherently capital but only become capital because of their roles within the circuit as a whole.
  2. That the circuit as a whole is defined as a circuit of capital because it includes within it the capitalist process of production within which SV is produced. Thus it is through their functional relationship to the production of SV that money and commodities within this circuit function as capital.

The first stage is the purchase of commodities with money: M – C.

What makes this act capitalist is not “the form of the act but its material content” (p.24), the fact that C is made up means of production and labour-power in definite proportions appropriate for capitalist production.

Thus C here takes the form of productive-capital, capital that can produce SV.

In the transformation of money-capital into productive-capital the status of the two purchases M – L and M – MP is different.

MP have to be purchased in order to set the LP to work.

LP is purchased because it is productive of SV.

Thus M – L is the core of the circuit, the characteristic transaction of the capitalist mode of production.

(It is only when the purchase of LP becomes the means of producing SV [when LP appears characteristically as a commodity] that such a purchase converts the money involved in it into money-capital. Thus money does not become money-capital simply by virtue of employing somebody [e.g. a servant]).

M – L requires that the worker has been separated from the MP and subsistence, and “the class relation between capitalist and wage-labourer therefore exists, is presupposed from the moment that the two face each other in the act of M – L” (p. 29)

This is very important: it means that the exchange of money for LP is not a relation between two individual commodity owners; thus it does not have the form of exchange analysed in Volume 1. It is an exchange between individual members of two antagonistic social classes. The capitalist comes to market as a capitalist, not simply as an isolated individual, while the worker comes as a worker.

It is this class relation between capital and labour that is the basis of capitalist production and so makes possible the transformation of money into capital.

Thus the circuit of money-capital, in which money appears to generate SV, on examination presupposes the circuit of productive capital, within which the purchase of LP by money is subordinate to the production of SV (i.e. the role of money is simply to bring together the elements for the production of SV).

The circuit presupposes the development of commodity production on an extensive scale: the capitalist must have money-capital to start with and this must come from the prior sale of commodities.

The workers must be able to buy commodities with their wages if they are to reproduce their LP.

Hence capitalist production is also the generalisation of commodity production.

LP is simply a commodity in the hands of the worker, only becoming capital when bought by the capitalist, while MP only function as capital when combined with LP.

Commodities are capital because of their role in the circuit of capital as the bodily form of valorised capital: capital plus SV.

The sale of the commodities that comprises commodity capital is a realisation of the capital-value and SV embodied in those commodities.

While capital is in the form of commodity-capital, awaiting a seller in the market, it is not creating new value and so is not creating SV.

Thus the amount of SV a capital can ‘produce’ in a certain time depends on the amount of time it is tied up as commodity-capital: the more rapidly a capital can be “turned-over” the more SV it can produce.

This introduces a determinant of the rate of SV other than the rate of exploitation.

The transformation of commodity-capital into money represents the realisation of SV in the form of money.

Thus the final money-capital M’ plays two roles: it restores the original capital to the money-form and it realises the SV.

If the circuit of money-capital is looked at as a whole, it looks as though it is the original capital that has given rise to the SV on its own.

Marx has tried to show that it is only in its relation to the production of SV in the circuit of capital that the original sum of money, the productive capital, the commodity and the final sum of money are all forms of capital.

It is only the process of production that is “a real metamorphosis of capital, as compared with the purely formal metamorphosis of circulation” (p. 47)

Because capital has to pass through all these functional forms (money-capital, productive-capital and commodity-capital) it can be blocked, e.g. in the form of a hoard of money, a stock of unsold commodities, or idle labour and means of production, with the result that the production of SV, and so accumulation of capital, is slowed. (p.48)

This is quite normal with regard to fixed capital: a certain amount of capital is immobilised in the form of machines.

Transport and communications, like gold production, are exceptional in that the product does not take an independent commodity form. (p. 52-5)

Looking at the circuit of industrial capital from the starting point of money-capital imposes a particular perspective on the circuit:

  1. It makes it clear that the purpose of production is exchange-value, and not use-value, so that the process of production appears “merely as an unavoidable intermediate link”
  2. Production itself is seen as merely the means of expanding value in between two phases of circulation
  3. SV is the basis of the circuit
  4. The circuit expresses “simply the process of self-expansion and accumulation” (p. 57)


Chapter 2 – The Circuit of Productive Capital

Within a capitalist society circulation is subordinate to production: it is within the sphere of production that SV is produced.

The circuit of productive-capital complements the circuit of money-capital in drawing attention to the two central features concealed by the latter:

  1. the role of production
  2. the character of the circuit as part of the constant reproduction of capital

Instead of production appearing as an interruption to circulation, circulation now appears simply as a means of reproduction.

If the capitalist consumes the entire SV this leaks out of the circuit and we have simple reproduction.

In this case it may appear that the purpose of production is the production of use-values (since its ‘product’ is capitalist consumption)

Money now appears simply as the converted form of productive capital, thus as a “money-expression of past labour” (p. 70)

In fact credit means that capital may never actually exist in the form of money, and the labourer may be paid not with money representing past labour, but with money representing a draft on future labour.

Money is simply the circulating medium of capital and it becomes clear that it has no power of self-generation – so long as capital remains in the money-form its reproduction and self-expansion is interrupted.

The consumption of commodities at some point is implied by the circuit of capital (e.g. workers must consume), but consumption is not a part of the circuit itself.

The capitalist need only sell the commodities produced, and it makes no difference to him whether they are sold for consumption, or are sold to a merchant to lie in a warehouse.

If, however, production is outrunning consumption a crisis will eventually break out (p. 75-6)

In fact capitalist reproduction takes the form of accumulation, or reproduction on an extended scale, in which the SV is itself, at least in part, converted into capital rather than being consumed by the capitalist.

The increase in magnitude of the productive capital at the end of the circuit in relation to the beginning now expresses not the production of SV (because that was completed in the initial process of production) but its capitalisation (p. 80)

Within the circuit the capitalist may need to hold money in the form of a hoard or in the form of a reserve fund. In both cases the money is functioning within the circuit as money-capital, but only in a potential or latent form.

While the Monetary School and the Mercantile School focused their attention on the circuit of money-capital, Classical Political Economy focused on the circuit of productive capital.


Chapter 3 – The Circuit of Commodity Capital

Unlike the previous two circuits, SV already exists at the beginning of the circuit (p. 87-91)

Reproduction is also implied.

While the circuit of productive-capital implies accumulation and is thus a critique of the circuit of money-capital, it at the same time does not indicate that the object of the whole process is the self-expansion of value (valorisation), which was the advantage of the circuit of money-capital.

Thus classical political economy tended to see the circuit as a circuit whose aim was the production of use-values, and so to ignore the capitalist social form of the process.

They also could not understand money and money-capital because they saw money only in its role as means of circulation.

The circuit of commodity-capital includes both reproduction and the capitalist character of production.

The circuit of commodity-capital, because it starts off with capital plus SV, includes consumption within it.

The circuit of commodity-capital implies at each stage the existence of other commodities outside this individual circuit: e.g. to provide the means of production for the circuit.

For these reasons the circuit of commodity-capital “clamours to be considered not only as the general form of the circuit…but simultaneously also as a form of movement of the sum of the individual capitals” (p. 96)

Thus the circuit of commodity-capital leads us to look at the interconnections between the circuits of individual capitals which form interdependent parts of the total social capital, i.e. to look at the system as a whole in order to bring out the interdependence of individual capitals as buyers and sellers of commodities.

Thus it is only through the circuit of commodity-capital that we can progress from the individual capital to the total social capital.

The starting point of the commodity-capital circuit is a particular bundle of commodities. For the individual capitalist this presumes that there are others who will:

  1. purchase his commodities
  2. sell him the commodities he needs: L and MP

For the total social capital the circuit of capital is only possible if the commodities in the bundles are just those commodities required for production and consumption in the next period, e.g. must comprise foodstuffs, MP, luxury goods in appropriate proportions.

Thus in examining the reproduction of the total social capital this is the appropriate formula to use (as Quesnay did, and Marx will in part III of Volume 2).


Chapter 4 – The Three Figures of the Circuit

Marx now turns to look at the circuit as a whole.

The total circulation process of capital comprises:

  1. the unity of the processes of production and circulation: each is necessary to the other
  2. the unity of the three forms of the circuit (capital does not now take the form of money-capital, now the form of productive-capital and now commodity-capital. The process is continuous, therefore a given capital always exists in all three forms, in definite proportions)

Hence capital can only be understood as motion.

Hence if the process is blocked by a crisis, money and commodities cease to act as capital.

The circuit of the total social capital is made up of the movements of a whole series of interconnected individual capitals.

But the interdependence of the individual capitals within the process means that each individual is subordinate to the process as a whole.

It is possible that the circuit of capital encompasses precapitalist forms of production, e.g. some MP may be produced by peasants or slaves, but this doesn’t affect the form of the circuit because once they enter the circuit they still function as commodities.

On the other hand, by integrating precapitalist modes of production into the circulation of capital, these modes are transformed into forms of commodity production.

Marx argues that production dominates exchange: in a capitalist society exchange is an aspect of circuits of capital, it is inappropriate to characterise societies by their mode of exchange: such a characterisation leads to confusion of commodity production with capitalist production.


Chapter 5 – Circulation Time

While a capital is tied up in circulation it cannot be employed in the production of SV.

Thus capitals seek to reduce the circulation time in order top reduce the period for which capital is unproductive, and thereby increase the rate of profit (since the same capital can now produce more SV).

Thus the amount of SV produced by a given capital no longer simply corresponds to the rate of exploitation.


Chapter 6 – The Costs of Circulation

Transport is a circulation cost, but it also involves a genuine transformation of the product as a use-value and can therefore add value.

Other costs, such as storage, do not change the product as a use-value and so cannot increase value (because a commodity that has been stored is indistinguishable from one which has not).

The labour employed in the sphere of circulation (storekeepers, bookkeepers, shop workers, advertising agents, sales reps, etc) is unproductive labour.

And the outlay on that labour is a drain on capital, reducing rather than creating SV.


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