Understanding Capital Volume II, John Fox, 1985

Chapter 2: The Circuit of Productive Capital

"The transformation of money-capital into productive capital is the purchase of commodities for the production of commodities." (p. 76 [p. 155])

While the circuit of money capital reveals the motive underlying capitalism (the expansion of value), the circuit of productive capital is useful for examining the reproduction of an individual capital. The abbreviated form of the circuit is P . . . C'-- M'--C . . . P. Capital functioning in the sphere of production (P) gives rise to a commodity product containing surplus-value (C'). This commodity capital is changed for money (M'), part or all of which is exchanged, in turn, for new elements of productive capital (C), which once more enter the sphere of production (P).

From the perspective of the circuit of productive capital, the time spent by capital in the sphere of circulation is regarded as an interruption of the productive process, but an interruption that is necessary to reproduction, for the conversion of commodity capital back into the form of productive capital. This part of the circuit of productive capital, C'--M'--C, has the apparent form of the simple circulation of commodities (C--M--C, i.e., selling in order to buy). What distinguishes this movement from simple circulation is not the form of the acts of exchange themselves, but the function of the exchanges within the circuit of capital.

As was explained in the first volume of Capital, if all of the surplus-value is expended by the capitalist as revenue for personal consump-tion, no expansion of production takes place. Marx calls this process simple reproduction. Alternatively, the expenditure of part of the surplus-value for new elements of productive capital represents capital accumulation, reproduction on an extended scale.

Marx's diagram of simple reproduction is shown in Figure 2.

Figure 2. Simple Reproduction

Here (as in the previous chapter), the commodity product C' is divided into two parts: C, representing the value of advanced capital; and c, representing surplus-value. The money capital M' for which commodity capital is exchanged is similarly divided into M and m. M is once more advanced for new elements of productive capital, C< LMP , which function in the sphere of production on the same scale as before (P). Realized surplus-value m is used to purchase the capitalist's means of consumption, commodities c; m, therefore, serves not as capital advanced for the purpose of value expansion, but as money spent for personal, as opposed to productive, consumption. The capitalist's personal consumption, c--m--c, originates in the circuit of industrial capital, but becomes separated from it. In this sense, the capitalist's consumption is similar to that of the worker, represented by the circulation of labor-power, L--M--C.

The circuit of productive capital makes clear how the continued functioning of capitalism depends upon the class relation between workers and capitalists: the money capital advanced by the capitalist to purchase means of production and labor-power is a converted form of commodity capital, which in turn is the product of the worker's labor. Money capital loses its apparently independent status, and is placed within the context of the reproduction of industrial capital.

As mentioned above, extended reproduction takes place when a portion of surplus-value is advanced for new elements of productive capital, rather than being expended as revenue for the personal consumption of the capitalist. For simplicity of analysis here, Marx assumes that all of surplus-value is employed in this manner, while in reality, even under extended reproduction, some surplus-value is necessarily spent as revenue.

Surplus-value that is to be used to extend the scale of production is accumulated in the form of money. This money must be saved by the capitalist until it is sufficient to purchase new elements of productive capital, either in the capitalist's original enterprise, or in some other business. Money that is removed from circulation is placed in a hoard. Surplus-value hoarded for the ultimate purpose of extending the scale of production is termed latent money capital. It is latent because, while it remains in the form of money, it cannot function as capital, value that expands in the capitalist process of production. Surplus-value accumulated in money form can also serve as a reserve fund -- a supply of money capital available to the capitalist to be used when the normal course of the circuit of capital is interrupted. For example, if the conversion of commodity capital to money is delayed, money in reserve maybe used to purchase the means of production and labor-power necessary to continue the productive process.

At a number of points in Volume II of Capital, Marx takes up the topic of the business cycle and capitalist economic crises. This pattern is repeated in the other volumes of Capital: although he often deals in passing, and sometimes at length, with the issue of crises, nowhere does Marx present an integrated treatment of the nature, causes, and effects of economic crises.

In the present chapter, Marx points out that the commodity form of the product separates the acts of production and consumption. This separation is especially characteristic of large-scale capitalist production, where several merchants may intervene serially between the industrial capitalist who produces a commodity and the ultimate purchaser who consumes it. (Consumption here refers to either productive or individual consumption.) Overproduction of a commodity -- production in excess of demand -- may therefore not become apparent for some time: the process of reproduction appears to continue normally while, in reality, produced commodities are not absorbed by the market.

The crisis that results has as its ultimate cause a disturbance in the relationship between -production and consumption, but the crisis is manifest in the market, and is exacerbated by the intermediary role performed by the merchant. The problematic character of commodity circulation for the process of capitalist reproduction is a theme that echoes throughout the second volume of Capital.