Understanding Capital Volume II, John Fox, 1985

Chapter 10: Theories of Fixed and Circulating Capital
The Physiocrats and Adam Smith

"Political Economy subsequently went still farther by holding fast not to the antithesis between variable and constant capital but to the antithesis between fixed and circulating capital as the essential and sole delimitation." (p. 204 [278])

In this and the next chapter, Marx uses the material developed in Chapter 8 to examine and criticize the conceptions of fixed and circulating capital present in the work of other economists. Although these critiques are not central to the exposition of Volume II of Capital, they are of interest, for Marx reviews and illustrates his theory, and these sections help to place his contribution in its proper historical and intellectual context. Chapter 10 is devoted to an examination of the work of the physiocrats and of Adam Smith. Marx's textual analysis is quite detailed, and we shall merely outline the main points of his argument here.

The physiocrats were 18th Century French economists who maintained that all new value is created by nature in agricultural production. Quesnay, and the other physiocrats, were particularly interested in articulating the connections among the various parts of the economy and, therefore, made substantial contributions to an understanding of reproduction. Marx argues that the physiocrats correctly distinguished between fixed and circulating capital as components of productive capital, although their analysis was largely limited to agriculture. In Quesnay's work, fixed capital is called avances primitives (original, or basic, investment) and circulating capital is termed avances annuelles (yearly investment). The yearly period for circulating capital corresponds, of course, to the annual cycle of reproduction in agriculture.

Adam Smith's distinction between fixed and circulating capital is confused in a variety of ways. The primary confusion, upon which others are based, is the failure to distinguish circulating capital, as a component of productive capital, from capital in the sphere of circulation, that is, from commodity capital (and money capital). Smith further confuses analysis at the level of an individual capital with analysis at the level of social reproduction as a whole. Thus, he fails to realize that one capitalist's commodity capital can serve as means of production for another capitalist. As commodity capital, these articles are in the sphere of circulation; when they enter the sphere of production they become fixed or circulating capital depending upon their role in the productive process. Indeed, commodity capital also can pass into individual consumption after it is sold.

According to the physiocrats, labor creates no new value. The value of the means of subsistence of the worker, reflected in the wage, is merely transferred to the product along with the value of the means of production. Thus, the distinction between constant and variable capital is fundamentally at odds with the physiocratic theory of value creation. Adam Smith, however, adhered generally if not consistently to the labor theory of value. By adopting the physiocrat's conception of the laborer's means of subsistence as -a component of productive capital, Smith submerges the distinction between constant and variable capital beneath that between fixed and circulating capital. He therefore obscures the unique contribution of variable capital to the production of surplus-value. This is the most serious consequence of Smith's mistaken analysis of fixed and circulating capital.