Chapter 10: Theories of Fixed and Circulating Capital. The Physiocrats and Adam Smith.
Adam Smith confused capital of circulation, i.e. capital in that phase of its cycle when it is in circulation rather than in production, with circulating capital, i.e. that portion of the capital in production which has its value transferred to the product instantly as distinct from fixed capital, which has its value transferred only bit by bit.
In fact, Marx argues, commodity capital is no part of productive capital. It is neither fixed nor circulating (p.283). The same for money-capital. It is a phase of the cycle of industrial capital, but not a subdivision of the capital operating in the production phase of that cycle [p.283].
Smith’s confusion gives him a vague idea of profit arising through exchange. “It is only by means of… successive exchanges that [capital] can yield any profit…” [p.271]. This is a version of the “everyday idea that, because surplus-value is only realised by the sale of the product, by its circulation, it therefore arises from its sale, from circulation” [p.277].
That becomes his main idea of how profit arises. Alongside that, somehow, fixed capital can “yield a revenue or profit without changing masters” [p.272].
Actually, in industry the material inputs don’t “change masters” either. They are consumed in the production of outputs which are different things.
Maybe Smith is misled by the everyday mental picture. In factories and workshops of his day the output was often a more or less recognisable transformed version of the inputs. It is much less often so in modern industry. It was not generally true even in Smith’s day. Cattle fodder bought by a capitalist farmer does not then “change masters”: the farmer uses it up in his production processes, and sells something completely different from what he buys [p.279].
A machine is fixed capital, and labour power is part of circulating capital, not because “the machine is bought once and for all (which is not in fact the case when it is paid for by instalments, for example), while the worker is not, but rather that the labour that the worker expends enters entirely into the value of the product, while the value of the machine enters bit by bit” [p.275].
A question here: do merchants have fixed and circulating capital? To an extent yes, if we consider storage to be productive labour, so that all merchants are also and secondarily productive capitalists. But what of the equipment which the merchant capitalists buy purely for “transaction-cost” activities? Cash registers? Constructions for advertising such as shop signs and displays much more elaborate than required for storage? Their value is covered by revenue only bit by bit, so they are similar to fixed capital, although they are never part of productive capital. By contrast, capital advanced for wages, stock, cleaning materials, heating and lighting, running repairs to shops and warehouses, etc., is akin to circulating capital for merchants.
Smith’s idea that circulating capital generates profit just by changing hands leads him to occlude the distinction between variable and constant capital, and thus to occlude the real source of surplus value.
Smith also assumes that some things are fixed capital by their material nature, and some things circulating capital. But it is not so. Cattle are fixed capital if raised as dairy capital or used as working animals; circulating capital if raised for slaughter [p.282].
When enumerating the elements of what he calls circulating capital – under which term he conflates commodity-capital and money-capital with the circulating portion of capital functioning in the labour process – Smith omits labour-power. Why?
This is partly because labour-power is not sold by capitalists. [Except marginally, I guess, by employment agencies, who extract a slice of the surplus-value produced by the companies they hire out to, in return for taking on the overheads of recruiting and selecting workers who will be hired just for short periods]. Smith “sees” as an input to production only the means of subsistence bought by workers, though in fact those means of subsistence are not inputs to production at all. This perception occludes the source of surplus-value again, since those means of subsistence do not yield surplus-value.
In contrast, Marx stresses that:
“It is only within the production process that the value laid out on labour-poower is transformed (not for the worker, but for the capitalist) from a definite, constant quantity into a variable one, and the value advanced in capital value, in capital, is thereby transformed for the first time into self-valorising value” [291].
This passage underlines that for Marx it is not the downward variability of wages, but the upward variability of production, that originates surplus value. In everyday socialist discourse we tend rather to emphasise the downward variability of wages. Compare, again, p.298: “surplus value… arises from the exchange of value for value-creating power, from the conversion of a constant quantity into a variable one”.
Smith divides the whole social wealth into fixed capital, circulating capital, and consumption fund. But this is a false division of a falsely-conceived whole. Commodity capital and money capital are neither fixed nor circulating. Also, everything (or almost everything) in capitalist society is drawn from commodity capital, i.e. the stock of commodities capitalistically produced. (There are exceptions, such as “elements of productive capital which are given by nature, and are not products”, such as copper ore for a copper mine, or wind for a wind-farm. [And such as the products of housework, e.g. meals cooked at home].)
We see here that Smith, too, has trouble being clear about stock and flow.
Marx criticises Smith for confusion when Smith writes: “Not only [the farmer’s] labouring servants, but his labouring cattle, are productive labourers” [292].
Why is Smith wrong? After all, sometimes exactly the same job may be done either by humans or by animals. In the era when most ploughs were drawn by animals, some were drawn by human hand. In the great days of canals in England, sometimes barges would be drawn by horses, and sometimes by women or men. Small passenger vehicles have often been drawn by animals, but sometimes (and still even today, in London) by humans. Sometimes, when a labouring animal and a human worker are working together, the labouring animal could be said to have the more “intelligent” part of the work (e.g. a security guard, or a quarantine inspector, with a sniffer dog).
The basic answer, I think, is that political economy is an analysis of human society, in which human labour functions as the social bond by virtue of the common humanity of the different labourers. “Humanism” is an axiom of the whole analysis.
“It is because labor is the social bond uniting an atomized society, and not because labor is the matter most technically relevant, that labor is the principle of value and that the law of value is endowed with reality” (Rudolf Hilferding: “Böhm-Bawerk’s Criticism of Marx”).
Or again:
“The first premise of all human history is, of course, the existence of living human individuals. Thus the first fact to be established is the physical organisation of these individuals and their consequent relation to the rest of nature. Of course, we cannot here go either into the actual physical nature of man, or into the natural conditions in which man finds himself – geological, hydrographical, climatic and so on. The writing of history must always set out from these natural bases and their modification in the course of history through the action of men.
Men can be distinguished from animals by consciousness, by religion or anything else you like. They themselves begin to distinguish themselves from animals as soon as they begin to produce their means of subsistence, a step which is conditioned by their physical organisation. By producing their means of subsistence men are indirectly producing their actual material life.
The way in which men produce their means of subsistence depends first of all on the nature of the actual means of subsistence they find in existence and have to reproduce. This mode of production must not be considered simply as being the production of the physical existence of the individuals. Rather it is a definite form of activity of these individuals, a definite form of expressing their life, a definite mode of life on their part”. (Marx and Engels, “The German Ideology”).
If the farmer’s horses were so clever that they could harness themselves, decide where and when to plough and sow seed, tend the crops, recognise when they
are ripe, do the harvesting, and so on, then these “horses” would in fact be people, wage-workers like those employed by the other farmer.
In fact, however, humans are the only species to have invented agriculture and industry. The use of horses and other animals on farms depends on human
labour to domesticate, train, maintain and direct them.
The crops also depend on the work of worms, nitrogen-fixing bacteria, and so on, but for economic analysis we can consider that work as a free gift
like the rays of the sun. The horses demand special consideration, and the farmer has to budget for their upkeep, only because, unlike the worms and
the bacteria, they have become the consciously-directed instruments of human labour.
Marx explains further [Capital volume 1 chapter 7]:
“We are not dealing here with those first instinctive forms of labour which remain on the animal level… We presuppose labour in a form in which it is an exclusively human characteristic. A spider conducts operations which resemble those of the weaver, and a bee would put many a human architect to shame by the
construction of its honeycomb cells. But what distinguishes the worst architect from the best of bees is that the architect builds the cell in his mind before he constructs it in wax”.
The material basis presupposed is a human species which gets the main items of its subsistence by conscious, purposeful labour and not just by instinctive activities.
Marx's Capital, volumes 1, 2, and 3 