Monday, 2 April 2012

The Circuit of Capital

This article is based on an essay I wrote more than 30 years ago. With some minor stylistic changes, a revised conclusion and some footnote updates I reproduce the original essay here as a contribution to the understanding of Marx’s Capital. There are many footnote references, in most cases referring both to particular pages in one edition of Capital and also to the location of a reference within a chapter. This is to assist the reader in finding references in other editions and via internet resources (especially the excellent Marxists Internet Archive).

Of the three volumes of Marx’s Capital, Volume 2 on the circulation process of capital is the most neglected. Where it has acquired some attention, as with the use of the reproduction schemes to analyse the ‘transformation’ of values into prices of production, it has often been misunderstood.[1] The first section of this essay outlines the methodological relationship between the three volumes of Capital; the second deals more extensively with the subject matter of Volume 2 and its relationship to Volume 1.

1.             Methodological distinctions

A concise formulation of the relationship between the volumes of Capital is found on the first page of Chapter One in Volume 3. Marx notes that Volume 1 analysed the immediate process of capitalist production ‘with no regard for any of the secondary effects of outside influences’ and that Volume 2 studied the circulation process of capital, which must be added to the immediate process of production to complete the ‘life span of capital’. Volume 3, on the other hand, went beyond this synthesis to ‘locate and describe the concrete forms which grow out of the movements of capital as a whole’. In contrast to the first two volumes, the third develops those forms of capital which

‘approach step by step the form in which they assume on the surface of society in the action of the different capitals upon one another, in competition, and in the ordinary consciousness of the agents of production themselves.’[2]

The analysis of the first two volumes is therefore conducted at the level of ‘capital in general’ and it only reaches the level of ‘many capitals’ and competition in the third. The forms of capital on the ‘surface of society’ are not examined immediately, and even in the third volume they are only ‘approached’.

Marx’s point was that a ‘scientific analysis of competition is not possible before we have a conception of the inner nature of capital’.[3] Capital can only exist as many capitals, and competition is a necessary feature of the capitalist world. However competition is the relationship of one capital to another, so an analysis that begins at the level of competition will already presuppose the existence of capital. It will tell us nothing essential about capital as a social relation, only about how this relation appears in a modified form, from the standpoint of the individual capitalist. Analysing the essential features of capitalism as a particular form of social production, including the wage-labour and capital relation and the role of surplus value as the driving force of production, can be done without reference to the competition between individual capitalists.[4] In this way, the essential relationships are developed and the analysis can proceed to show how they appear on the ‘surface of society’ in a contradictory form. This approach can account for the changing forms of competition, including the tendency towards monopoly.

The analysis of Volumes 1 and 2 shows that the essential relationships of capital are themselves contradictory. It is not only a question of the more complex forms (eg interest bearing capital) that develop alongside capital accumulation deceiving agents of production. The fundamental contradiction between the development of the forces of production under capitalism and the social relations within which this takes place is evident at every stage. With this in mind, it is even more important not to be misled by differences at the level of competition, where we see antagonism between rival groups of capitalists and states. Instead, a clear grasp of what is necessary for capital as a social relation is the foundation for building an opposition to it in all its forms.

Marx takes the simplest concepts, eg the commodity, and develops these into more complex forms, eg labour-power and capital. Within this general procedure, there is a methodological division between Volumes 1 and 2 on the one hand and Volume 3 on the other. The first is an analysis of ‘capital in general’, the second the analysis of ‘many capitals’. As a result, modifications of the relationships discovered in Volumes 1 and 2 that arise from competition are not dealt with. This is the case, for example, with the assumption in the first two volumes that commodities exchange (on average) at their values. There is no reason to assume otherwise at this stage. Only in Volume 3 does Marx examine how and why prices deviate from values, in the context of forming an average rate of profit among the different individual capitals. This modification – via ‘prices of production’ – does not overturn the previous analysis and conclusions, but develops them. The previous assumptions were not meant as a full description of concrete reality, but were methodologically necessary to examine the pure, fundamental forms.[5]

2.             Volume 2 and Volume 1 of Capital

An examination of the circuit of capital clarifies the relationship and distinction between Volumes 1 and 2. The circuit consists of three stages: firstly, the capitalist appears on the commodity market as a buyer and transforms his money capital into means of production and labour-power (M – C); secondly, these commodities, having fallen out of circulation, are consumed in the process of production and, as a result, the capitalist now possesses a value greater than the value of the elements of production he first purchased (C … P … C’); lastly, the capitalist returns to the market with the commodity-capital and converts it back into money so the circuit can begin again (C’ – M’).

Strictly speaking, this is the circuit of industrial capital, which, as Marx says, ‘is the only mode of existence of capital in which not only the appropriation of surplus-value, or surplus-product, but simultaneously its creation is a function of capital’. Industrial capital is, then, the most general and most important form of capital:

‘Its existence implies the class antagonism between capitalists and wage-labourers. To the extent that it seizes control of social production, the technique and social organisation of the labour-process are revolutionised and with them the economico-historical type of society. The other kinds of capital, which appeared before industrial capital amid conditions of social production that have receded into the past or are now succumbing, are not only subordinated to it and the mechanism of their functions altered in conformity with it, but move solely with it as their basis, hence live and die, stand and fall with this basis.’[6]

For these reasons, industrial capital commands almost exclusive attention until Volume 3.

In Volume 1, which deals with the immediate process of production, the second stage in the circuit is the object of analysis. The first and third steps, in the sphere of circulation, are only discussed in so far as this is necessary for an understanding of the second. In particular, Marx examines ‘the purchase and sale of labour-power as the fundamental condition of capitalist production’.[7] Otherwise, we simply find the assumption that the capitalist is able to obtain the elements of productive capital in the market and that he is able to sell his commodities at their value. On the other hand, Volume 2, dealing with the circulation process, examines explicitly the ‘various forms which capital takes in its different stages, and which it now assumes and now strips off in the repetition of its circuit’. Marx adds for the unwary that

‘In order to conceive these forms in their pure state, one must first of all discard all factors which have nothing to do with the changing or building of forms as such.’ [8]

Therefore it is assumed both that commodities exchange at their values and also that no changes in value occur during the movement in circuits.

The connection between the two volumes can further be traced by examining how those concepts and categories introduced in Volume 1 are modified when the circulation process of capital is accounted for explicitly. In doing this, I will follow the order of presentation in Volume 2.

2.1             Volume 2, Part 1

Volume 1 derived the result that surplus value is only created in the process of production by the capitalist’s exploitation of the wage labourer, and that the magnitude of the value added by the labourer is determine by the duration of the labour process (for a given level of skill and intensity of work). But we can see from the circuit of capital that time is also spent in the sphere of circulation, in buying and selling. How does this time affect the creation of surplus value? Before answering this question it is important to note that

‘The function of circulation of capital is only to transfer the right of ownership of a product from one person to another, only a transformation of value from a commodity form to a money form, or inversely, only a realisation of produced value.’ [9]

This changing of form has to be distinguished from the transport and packaging of commodities, which also occur within the sphere of circulation but which are extensions of the productive process and add value to commodities. Certain costs of storage can also be considered as productive in this way.[10] Otherwise, that capital which is engaged in the sphere of circulation, merely to change the form of commodities and money, is excluded from the process of production and can create neither value nor surplus value. It is clearly necessary for capital to pass through the sphere of circulation, to buy the elements of productive capital and also to sell the commodities produced so that money capital may be newly advanced. But the costs arising here, despite being necessary, are costs that do not add to the values of commodities.[11] Values can only be increased in a negative sense, by reducing the amount of capital tied up in this unproductive function and freeing it for the productive process.[12] It was important for Marx to distinguish between the spheres of production and circulation in order to refute the ideas of the political economists that the functions of buying and selling also added value to the product, and to show the barrier which circulation poses for the self-expansion of capital.

In addition to presenting the general problem of circulation in the first part of Volume 2, Marx sets out the three circuits of capital; those of money capital, productive capital and commodity capital. Marx shows how capital must exist simultaneously in each bodily form as a precondition for the continuity of capitalist production, and that the three circuits are inter-dependent both in terms of coexistence and succession.[13] These circuits play an important role in the exposition of the remainder of Volume 2. They have the following things in common: ‘The self-expansion of value as the determining purpose, as the compelling motive.’[14] This clearly brings out the fact that capital ‘can be understood only as motion, not as a thing of rest’,[15] and the specific forms this motion takes are studied with the aid of the three circuits.

2.2             Volume 2, Part 2

In Part 2 of Volume 2, Marx analyses the turnover of capital. The turnover time of an individual capital

‘is equal to the sum of its time of circulation and its time of production. It is the period of time from the moment of the advance of capital-value in a definite form to the return of the functioning capital-value in the same form.’ [16]

In the study of turnover, Marx uses the circuits of money- and productive-capital. The former enables the relationship between turnover and the formation of surplus value to be clarified; the latter the influence of turnover on the creation of the product. The third element, of commodity-capital, is not dealt with in this part since in this form capital-value does not begin as an advance, but as C’, value already expanded.[17]

The circulation process gives rise to a new categorisation of productive capital that enables the form of turnover to be studied. In Volume 1, Marx divided productive capital into its constant and variable parts, this being the important distinction from the point of view of the self-expansion of capital in the immediate process of production. Marx also distinguished there between constant capital as instruments of labour and constant capital as raw materials, where the former give up their use-value and value piecemeal in production and the latter transfer their value entirely to the product.[18] But this aspect is dealt with only insofar as it is necessary for an understanding of how the value of the means of production is preserved by the labourer.

In the circulation process, the elements of productive capital must be examined from another perspective. Marx makes the distinction between fixed and circulating capital, which is based on the manner in which the value of the capital circulates.[19] The distinction appears to be the same as that applied to the means of production – the constant capital – in Volume 1, since the instruments of labour are designated fixed capital and the raw materials circulating capital. However, circulating capital also comprises the capital invested in labour-power, the variable capital. This is because, despite the differences with regard to the creation of value, the value of the variable capital circulates in the same way as the value of the raw materials.[20]

A simple numerical example illustrates the effects of the two parts of capital on turnover.[21] If a capital consists of £10 000, of which £5000 is fixed and £5000 circulating, and if the former turns over once every five years, while the latter turns over once every year, then in 20 months the total capital value of £10 000 is turned over. Clearly, if the proportion of fixed to circulating capital rises (which is a tendency for advanced capitalism),[22] then the turnover time for the total capital value would also be extended. Such circumstances influence the amount of capital that has to be advanced to produce a given value in a given time.

The previous example also shows that, although the total capital value of £10 000 is turned over in 20 months, the fixed capital is not actually replaced for five years. Where fixed capital accounts for a high proportion of total productive capital, this lag in replacement is one of the factors explaining the periodicity of crises. Marx proposed that the average life of fixed capital, which he assumed to be 10 years, was the ‘material basis’ for the periodic crises of the 19th century.[23] This is an illustration of the possibility of crises arising out of the general nature of capital.

Another important point emerges in considering the turnover of circulating capital. Volume 1, from the standpoint of the immediate process of production, developed the category of the rate of surplus value. The circulation process modifies this. Circulating capital includes variable capital, so if the rate of surplus value is 100% and variable capital turns over once in a year, then the annual rate of surplus value is also 100%. But if variable capital is turned over 10 times per year, then the annual rate of surplus value is 1000%.[24] A reduction in turnover time may result from a shortening of the working period or increased efficiency in other parts of the circuit of capital, eg in selling the commodities produced. The capitalist can then have less of his capital tied up in the employment of labour-power over a given period and receive the same, or even a greater, mass of surplus value.

2.3             Volume 2, Part 3

Part 3 analyses the reproduction and circulation of the aggregate social capital. In this last part, Marx makes use of the circuit of commodity-capital, although not as a circuit applying to an individual capitalist but as a means of examining the consumption and reproduction of the total product of (industrial) capital. This can usefully be contrasted with the chapters on simple reproduction and accumulation in Volume 1.

In the chapter on simple reproduction in Volume 1 (Chapter 23), Marx shows that a certain portion of each year’s product is destined for productive consumption, while the remainder may be consumed individually. He notes that, in general, commodities serving one function will have a different material form from those serving the other.[25] However, at this point, Marx is not concerned with this aspect of the process, rather with the distinction between productive and individual consumption. The labourer is shown to consume in both ways, such that the wage-labour and capital relation is perpetuated.

The labourer consumes productively when ‘he consumes by means of his labour-power the means of production and converts them into products with a higher value than that of the capital advanced’. In this way he produces capital, ‘an alien power that dominates and exploits him’. [26] On the other hand, the labourer consumes individually when he ‘turns the money paid to him for his labour-power into means of subsistence’. The consumption of means of subsistence not only sustains the labourer (and his family), but it forces the labourer continually to return to the labour market to sell his labour-power. In Volume 2, productive and individual consumption are examined from the point of view of the circulation process.

It is important to recognise that although both Volumes 1 and 2 treat ‘capital in general’, it is only in Part 3 of Volume 2 that Marx analyses the aggregate social capital.[27] This is because the total process

‘comprises both the productive consumption (the direct process of production) together with the conversions of form (materially considered, exchanges) which bring it about, and the individual consumption together with the conversions of form or exchanges by which it is brought about.’[28]

Therefore the total process can only be dealt with after an examination of the categories presented in Volume 1 and the first two parts of Volume 2. This was why, in the first volume, accumulation and simple reproduction were considered ‘from an abstract point of view, ie as a mere phase in the actual process of production’.[29]

This point is further elaborated when Marx introduces the reproduction schemes. Here he says that ‘the merely formal manner of presentation’ in which it was assumed, for example, that an individual capital could find a market for its commodities and could find on the market those commodities it required for its own production, ‘is no longer adequate in the study of the total social capital and of the value of its products’.[30] The questions that have now to be considered explicitly are

‘How is the capital consumed in production replaced in value out of the annual product and how does the movement of this replacement intertwine with the consumption of the surplus-value by the capitalists and of the wages by the labourers?’[31]

The reproduction schemes are the tools with which Marx explores this question, and these show in a strikingly clear form the unity and opposition of the use-value and value of a commodity, first introduced in Chapter 1, Volume 1.

Marx divides the total product of society, and therefore total production, into two departments.[32] Department 1 furnishes those commodities ‘having a form in which they must, or at least may, pass into productive consumption’. Department 2 produces those commodities ‘having a form in which they pass into the individual consumption of the capitalist and the working class’. The sum total of exchange relationships in society is then reduced to the exchange between these two departments, an exchange represented not only in terms of value but also in terms of use-value. The division of the two departments is not arbitrary, but is based on the economic form and role played in reproduction by the use-values they produce.

Given certain assumptions – all commodities exchange at their values, all capitals in each branch of production have an equal turnover time (eg one year) and that there is no fixed capital – it is shown that simple reproduction may proceed smoothly. This occurs if the value of the constant capital of Department 2 (c2) is of the same magnitude as the sum of the values of the variable capital and the surplus value in Department 1 (v1 + s1). The two departments can then exchange equal portions of their respective commodity values and receive the particular use-values that they need. It is irrelevant to argue here that the assumptions are unrealistic, since the point is not to mirror the actual processes in the economy but to see them in their simplest form. In fact, even under a number of favourable assumptions for capitalism, if fixed capital is allowed into the reckoning, it can be shown that crises would occur even on the basis of simple reproduction.[33]

Simple reproduction in both Volume 1 and Volume 2 is considered separately from accumulation. As Marx says,

‘as far as accumulation does take place, simple reproduction is always a part of it, and can therefore be studied by itself, and is an actual factor of accumulation.’[34]

Once the relations arising out of this basic element have been examined, accumulation can be dealt with. Volume 1 treats accumulation from the point of view of the individual capitalist, although not distinguished from ‘capital in general’. Accumulation takes place, or ‘surplus value is convertible into capital solely because the surplus-produce whose value it is, already comprises the material elements of new capital’.[35] In Volume 2 we see how ‘what happened in the case of the individual capital must also show in the annual reproduction as a whole’.[36]

Again it is a question of examining the general possibility of accumulation on the basis of extremely restrictive assumptions, and the results of such an analysis should not be taken as directly conforming to the workings of the capitalist economy. The assumptions are justified insofar as accumulation does indeed take place and we are seeking to understand the character of this process. The conditions under which accumulation and reproduction on an extended scale can take place ‘smoothly’ are evidently more complex than those for simple reproduction, and will not be dealt with here.[37] Instead, it is worth concluding this section with an illustration that shows why the reproduction schemes cannot be used as a ‘growth model’, but how they also clarify the contradiction between use-value and value.

The relationships of exchange between Departments 1 and 2 must be looked at both from the perspective of use-value and value. Each department can only secure those commodities it requires from the other by exchanging a value equivalent to that of its own commodities. However, the demand for a commodity is a demand for its use-value, not its value. In the case of the means of production, for example, this is determined in the first instance by technical factors – a planned level of output will consume a certain volume of raw materials, which in turn will need to be worked on by a certain number of machines, tools, etc. Yet these technical factors are not fixed – themselves being influenced by value considerations - and in the real process of capital accumulation any equilibrium in terms of value and use-value between the two departments could not persist. Accumulation characteristically involves technical change and productivity increases. Such increases would mean that a greater mass of use-values would embody the same value as before, and there is nothing to ensure that this greater mass will match the social demand. Disproportion is bound to occur, and the ‘correct’ proportions, the correct allocation of social labour under capitalism, will only be established by accident, or more likely through the operation of crises of varying intensities throughout the system of reproduction.

3             Conclusions

The analysis of Volume 2 completes Marx’s examination of ‘capital in general’. Capitalist production can now be seen as the unity of production and circulation: the extraction of surplus value from the labourers as the basis for the accumulation of capital, and the various forms assumed here, together with those taken on by capital in its process of circulation. The analysis of the circulation process clarifies many relations not dealt with in Volume 1. It shows how circulation is both a necessity for and a barrier to the self-expansion of capital, and how the period of turnover and the time spent by capital in each of its stages affects the form of motion of capital. The problem of realisation, of producing use-values on the relevant social scale, is clarified through the reproduction schemes.

Presenting these relations at an abstract level enables a correct theoretical understanding of the more concrete forms that ‘grow out of the movements of capital as a whole’. These can be seen as capital’s attempts to overcome the contradictions arising from its general nature. Examples include the role of credit in allowing individual capitals to continue to accumulate, and the specialisation of capital into merchant (commercial) and banking capital. The importance and role of foreign trade can also be deduced from the reproduction schemes. These issues, and many others, are dealt with in Volume 3, which analyses ‘the process of capitalist production as a whole’.

This essay has focused on Volume 2 and its relationship to Volume 1, but it would be a mistake to derive Marx’s view of crises and the barriers to capital accumulation from these two volumes alone. The ‘law of the tendency of the rate of profit to fall’ is critical to Marx’s theory on this question, and it is a further expression of the fundamental contradiction between capitalist relations of production and capital’s development of the forces of production. This law is nevertheless only dealt with in Volume 3. There are two important reasons for this. Firstly, because the analysis of the capital’s process of production and circulation are necessary preliminary steps in the analysis. For example, turnover time is important in determining the annual rate of profit for capital. Secondly, because the trend in the rate of profit has an impact on capitalist society as a social average, but this average can only fully be understood once the analysis has passed from the level of ‘capital in general’ to that of ‘many capitals’. It appears as if there is no relationship between the profits an individual capitalist earns and the surplus value he appropriates. The link can only be derived by examining the individual capitalist’s relationship to the whole system.

Unfortunately, for some radical, and not so radical, critics of capitalism, Volume 2 has provided arguments for focusing on ‘disproportions’ in capitalist production, realisation problems and so forth. This is ironic, since Marx discounted such evident troubles in order to focus on the more fundamental barriers that capitalism placed on the development of society.

Tony Norfield


Kliman, Andrew 2007, Reclaiming Marx’s Capital: A Refutation of the Myth of Inconsistency, Lexington Books, 2007.
Marx, Karl 1974a, Capital, Volume 3, London: Lawrence & Wishart 1974.
Marx, Karl 1974b, Capital, Volume 1, London: Lawrence & Wishart 1974.
Marx, Karl 1974c, Capital, Volume 2, London: Lawrence & Wishart 1974.
·        Note that the three volumes of Capital are available on:
Rosdolsky, Roman 1977, The Making of Marx’s ‘Capital’, London: Pluto Press, 1977.
Rubin, I I 1972, Essays on Marx’s Theory of Value, Detroit: Black & Red, 1972.
Yaffe, David 1974, ‘Value and Price in Marx's Capital’, 1974

[1] See the coverage of this issue by Rosdolsky (1977) Chapter 30, ‘The Dispute Surrounding Marx’s Schemes of Reproduction’. My comments on Marx’s method follow Rosdolsky’s interpretation (see Chapter 2, ‘The Structure of Marx’s Work’). I do not want to add to the interminable debate on the so-called transformation problem, except to say that there is no logic in using Marx’s reproduction schemes for the circulation of capital in the analysis of the formation of prices of production. Marx considered capitals with different organic compositions in his analysis. However, each capital was looked upon as a portion of the total social capital when he derives prices of production. This important point was stressed by Yaffe (1974, Section 3.3.2). Hence, the ‘input/output’ relationships between the different capitals were not relevant to this analysis. If one insists on using the reproduction scheme approach, then Kliman (2007, Chapter 8) has shown that a consistent solution can be found, contrary to many critics of Marx’s theory of value.
[2] Marx (1974c, p25).
[3] Marx (1974a, Chapter 12, p300).
[4] Of course, the existence of many capitalists is not denied at this stage of the analysis, and, for the most part, it is developed using an individual capitalist. However, the individual capitalist is taken as a representative element of the total social capital.
[5] Note that even Volume 3 is not ‘concrete’. Although it deals with competition, it does not analyse the real movement of market prices, wages, the rate of interest, etc. For example, Marx merely notes that the depression of wages below the value of labour-power is a factor checking the tendency of the rate of profit to fall (Marx 1974c, Chapter 14, Section 2, p235).
[6] Marx (1974b, Chapter 1, Section 4, p57).
[7] Marx (1974b, Chapter 18, Section 1, p357).
[8] Marx (1974b, Chapter 1, Introduction, pp25-26).
[9] Rubin (1972, p270).
[10] This is true for those storage costs that do not arise out of the difficulty of realisation. See Marx (1974b, Chapter 6, Section 2.2, p151).
[11] Marx (1974b, Chapter 6, Section 3, p152).
[12] Marx (1974b, Chapter 5, p128).
[13] Marx (1974b, Chapter 4, p106).
[14] Marx (1974b, Chapter 4, p103).
[15] Marx (1974b, Chapter 4, p108).
[16] Marx (1974b, Chapter 7, p156).
[17] Marx (1974b, Chapter 7, p157).
[18] See Marx (1974a, Chapter 8).
[19] Marx (1974b, Chapter 8, Section 1, p163).
[20] Marx’s analysis of fixed and circulating capital allows him to show in Chapters 10 and 11 how Smith, Ricardo and their followers were able to blur the distinction between constant and variable capital.
[21] Taken from Rosdolsky (1977, pp362-3).
[22] Marx (1974b, Chapter 18, Section 2, p361-62).
[23] Marx (1974b, Chapter 9, p188-9).
[24] Marx (1974b, Chapter 16).
[25] Marx (1974a, Chapter 23, Section 1, p531).
[26] Marx (1974a, Chapter 23, Section 1, p535-6).
[27] This fact led Rosa Luxemburg to think that Part 3 marked the transition to a more concrete level of analysis. See Rosdolsky (1977, especially p65).
[28] Marx (1974b, Chapter 18, Section 1, p356).
[29] Marx (1974a, Chapter 23, Section 1, p530).
[30] Marx (1974b, Chapter 20, Section 1, p398).
[31] Marx (1974b, Chapter 20, Section 1, p397).
[32] Note that only the exchanges between industrial capitalists, and between industrial capitalists and workers are dealt with by the reproduction schemes. This is one more indication of their abstract character.
[33] Marx (1974b, Chapter 20, end of Section 12, p473).
[34] Marx (1974b, Chapter 20, end of Section 1, p399).
[35] Marx (1974a, Chapter 24, beginning of Section 1, p544-5).
[36] Marx (1974b, Chapter 21, opening of Section 1, p493).
[37] See Rosdolsky (1977, p446-450).

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