 Welcome back folks, this is Dipankar Basu from the Department of Economics at UMass Amherst and you are listening to the course Marxian Economics. Let me quickly remind you we have looked at three modules so far. The first module gave an overview of the whole class. In the second module we looked at some methodological issues and in the third module we started an analysis of political economy by looking at the argument laid out by Marx in Volume 1 of Capital. The argument that we studied in the previous module helped us understand the processes related to the generation and accumulation of surplus value. When we looked at that argument we abstracted from an important issue which is related to the realization of surplus value. The simple issue is how does the capitalist system generate enough demand to buy all the commodities at prices which are necessary to realize all the surplus value. Today we are going to talk about that issue and that issue is the issue that is discussed by Marx in Volume 2 of Capital. So, this present module will give us an idea of the argument that Marx develops in Volume 2 of Capital and the main issue that we will study is the issue about realization of value. Now, realization of value and surplus value happens when commodities are sold in the market. The process of selling commodities happens in the sphere of circulation. So, therefore, in the first two parts of Volume 1 Marx studies the general circulation of capital the issues related to the general circulation of capital that is where we will begin. Once he lays out the framework of understanding the general circulation of capital he comes back with within that framework to understand issues related to the realization of value and surplus value and that is the plan we shall follow. In the first part of this module we are going to present a general analysis of the circulation of capital and in the second part of this module we will come back and look at issues related to the realization of value and surplus value through sale of commodities ok. So, let us begin with the circulation of capital. So, we are going to study the argument laid out by Marx in parts 1 and 2 of Volume 1 of Capital which looks at the process of circulation of capital in general. The starting point of our analysis will be the circuit of capital. So, let me write the circuit of capital once more for you and I will explain the parts of the circuit in a minute. So, this is the circuit of capital. This is something which we are already familiar with when we looked at the argument in Volume 1. So, this circuit has three stages or three parts. The first stage is this one. So, this is stage 1. This is the second stage. So, this is stage 2 and this is the third stage. This is stage 3. So, let us look a little bit at what these stages are. In the first stage which is represented by m c, what happens is the capitalist comes to the market with a sum of money represented here by m. So, he comes to the market as a buyer of commodities with that sum of money he purchases a bundle of commodities which is represented here by c. So, m c which is the first stage of the circuit is where the capitalist comes to the market with a sum of money as a buyer and purchases two types of commodities means of production and labour power. So, that is the first stage of the circuit. Once that stage is complete the capitalist withdraws from the market and comes to the production process. The second stage of the circuit is therefore, represented by this letter P within brackets. We put this letter P within brackets for two reasons. P represents the process of production. So, stage 2 represents the process of producing the commodity. We have put it in brackets because it is a process which goes on outside the market. We will see that stage 1 and stage 3 refer to processes that happen in the market and the process of production happens outside the market. To emphasize that we bracket out P and therefore, stage 2 which is represented here by P refers to the process of production. Once the process of production is over the capitalist returns to the market with the finished commodity bundle which is represented here by c prime. So, he comes back to the market, but now as a seller he wants to sell those commodities. So, the third stage of the circuit is represented by c prime m prime where the capitalist sells the finished products which is represented by c prime for a sum of money m prime. So, we can summarize this by saying the following. Stage 1 and stage 3 happen in the sphere of circulation. The sphere of circulation is where commodities are bought and sold. On the other hand the second stage of the circuit happens in the sphere of production. So, once we look at the circuit of capital carefully we realize that it is composed of 3 stages. The stages are arranged in a particular order. The first stage happens in the sphere of circulation followed by stage 2 which happens in the sphere of production followed by stage 3 which happens in the sphere of circulation again. So, at this stage let us pause and think a little bit about the difference between circulation and production. The key difference between the sphere of circulation and the sphere of production is the following. In the sphere of production value is created. In the process of production we know that workers who have sold their commodity labor power use the means of production the machinery to work on the raw material to produce the commodities. During the process of production the workers add to the the means of production more value than what the the capitalist paid to purchase the commodity labor power. So, therefore, in the sphere of production value is created because labor is involved in producing the commodities moreover not only value but also surplus value is created. So, the sphere of production is the sphere where value and surplus value is created. How is it different from the sphere of circulation? Let us come back to the sphere of circulation. Let us take stage 1. What is happening in stage 1 is the capitalist is coming with the sum of money and selling it for using it to purchase a bundle of commodities C. So, what is happening here is that value is merely transforming its form from the monetary form to the commodity form. So, in distinction in contra distinction to the sphere of production what happens in the sphere of circulation is merely a change in the form of value. So, let me write it down. What is happening in the sphere of circulation is merely a change in the form of value. In stage 1 the change in the form of value happens from the monetary form to the commodity form. In stage 3 the change in form of value happens from the commodity form to the monetary form. The important point about the change in form is the following. In the sphere of production value is created. So, the content of value increases. In the sphere of circulation only the form of value changes. Therefore, there is no increment in the magnitude of value when it is in the sphere of circulation. So, that is the key distinction that Marx wants her to take away from this initial discussion that the circuit of capital is composed of three stages. The stages there stage 1 and stage 3 happen in the sphere of circulation in which there is merely a change in the form of value and therefore, value cannot be created or increased in the sphere of circulation. On the other hand, stage 2 happens in the sphere of production and it is precisely here that value and surplus value is created. Now, when we make this distinction between production and circulation we need to think about production a little more broadly. What do I mean by that? Well, what I mean is the following when we think of production in more concrete terms. Production of a commodity not only is the physical act of creating that commodity, but it also involves transporting that commodity from where it was produced to where it will be consumed. That change in location the physical change in location is essential because without that the commodity cannot be consumed. Therefore, Marx understands production broadly. So, production therefore, is composed of the physical act of production itself. So, the physical act of production, but it also includes transportation and the storage that is essential to facilitate the transportation. So, therefore, when we are thinking of production in the context of the circuit of capital by production we mean production in this broader sense which not only includes the physical act of producing the commodity, but also in the case when it is necessary the activities involved in transportation of the commodity from the location of production to the location of consumption and the storage the warehousing all of it that is necessary to facilitate the transportation. Therefore, when we distinguish production from circulation by circulation we will mean in more concrete terms only the pure act of buying and selling. So, the pure act of buying and selling is represented as MC what is happening is a commodity is sold for a sum of money. It is also represented by C prime M prime because there also what is happening is a basket of commodities, a bundle of commodities is sold for a sum of money. So, here is what we mean by the pure act of buying or selling all that is involved is a transformation of the form of value all that is involved is a change in the ownership of the commodities. When the commodity is sold by the merchant to the consumer all that happens is the ownership of the commodity gets transferred from the merchant to the consumer. So, this is the first important distinction that we should keep in mind the distinction between circulation and production with respect to the circuit of capital. The next question we want to ask using the circuit of capital is what is the sense in which the circuit of capital is a circuit. Now, by circuit we usually mean a movement which is circular in nature whereby the movement returns at the end to its beginning. So, is there a sense in which the circuit is a circular movement and the answer is yes. So, let us see how to understand what is the sense in which the circuit is a circuit. Let us look at the circuit of capital again and consider the beginning and end point of the circuit as we have written it here. The beginning point of the circuit is the sum of money M. So, the capitalist has a sum of money M comes to the market uses it to purchase a bundle of commodities which we know are of two kinds means of production and labour power then brings them together in the process of production. Once the process of production is over the finished commodities arise which is represented here by C prime and then in the final stage of the circuit the commodities are sold for a sum of money M prime. So, what has happened when we look at the whole circuit the beginning of the circuit M and the end of the circuit M prime are same in terms of the form of value. So, the form of value at the beginning was money and at the end is money. So, it is in considering the form of value that traverses the circuit that the circuit of capital is a circular movement and therefore, a circuit. The beginning point and the end point of the circuit has the same form of value and that is the sense in which Marx thinks about the circuit of capital as a circuit. Now, if you think about it you will see that in the circuit is embedded not one, but three circuits. We have already seen the first circuit which starts with money value in the form of money and ends with value in the form of money. Now, once the capitalist has gotten back the revenue from selling the commodities what does he do? Well, he uses it for making a further he uses it for making a further investment. So, we can write the next circuit of capital which comes right after this. So, if we do that we will see that this sum of money M prime is then used to purchase a new bundle of commodities which again will be means of power means of production and labor power which will again be brought into the process of production which will lead to finished commodities which will again be sold. Therefore, if we start the circuit not from M, but from the productive capital which is represented here by P then we can see that there is a circuit of productive capital also. If we consider the circuit from the perspective of productive capital then we see that as the circuit progresses through time at some point capital takes the form of productive capital and then it returns to it that form of course moving through different forms of commodity money commodity and back to productive capital. So, therefore, hidden within the circuit of capital is the second circuit which is the circuit of productive capital. There is a third circuit the third circuit can be understood if we look at the commodity bundle C prime. So, C prime represents the commodity bundle which is the finished commodities which is waiting to be sold. Now, this commodity form of value also returns if we look at the second stage the second circuit of capital and understand the finished commodities that will arise in that process of production. So, if we start the circuit from C prime which is the finished commodity bundle in the first circuit we see that value which is in the form of commodities returns back to its form of commodities at the end of the second circuit and therefore, we can see the point that Marx emphasizes that the circuit of capital which is a circular movement in terms of the forms of value hides within it not one, but three circuits. But most of our analysis will will involve considering the circuit as a circuit of money capital, but nonetheless we should keep in mind that within the circuit are embedded three different circuits. With that now let us consider the various forms that capital take as value moves through the circuit and here what will be important will be the distinction between flows and stocks. So, let me first wipe out the in essential details and focus on what we need. So, what we need for our argument is really one circuit of capital. Now, we know that the circuit of capital has three stages. So, this is stage one, this is stage two, this is stage three. Each stage of the circuit involves some flows. So, economists make distinction between two types of variables flows and stocks flows are quantities which can be meaningfully measured only over periods of time like your income. Stocks on the other hand can only be meaningfully measured at a point in time like the balance in your bank account. There is always a relationship between flows and stocks. It is the flows which lead to the creation of stocks either when there is excess flows the amount of stocks go down or when the flow slow down that leads to an increase in the amount of stocks that is precisely what we will see happens within the circuit also. Now, if we consider the three stages of the circuit we know that each of those flows take positive amounts of time to finish meaning they cannot be completed instantaneously. For instance, let us consider the second stage. The second stage of the circuit is the stage of production. Now, any item of production requires some time to produce. So, therefore, the flow of value that goes through the second stage completes itself only over a period of time. What does that mean? It means that as long as the flow has not completed itself, value shows up as a stock of value. So, therefore, because the flow represented by production the production of output takes over a period of time until it has completed value shows up in the form of what we call productive capital. So, this also represents a stock of productive capital. Now, we will see details of the productive capital stock in a minute, but let us first look at the other two types of stocks that are hidden in this circuit. Let us look at the third stage of the circuit. The third stage of the circuit involves the sale of commodities. So, in terms of flow what the third stage involves is the flow of revenue created by sales. Now, the flow of revenue only occurs over a period of time. So, commodities once they are produced cannot be sold instantaneously. Think of cars once a million cars have been sold it will take a lot of time to sell them maybe a month. So, for that period of a month value gets accumulated as a stock of commodity capital commodity capital meaning commodities which are awaiting to be sold. So, because the third stage of the circuit takes time to complete itself there is an accumulation of value in the form of commodity capital. And then if we now go back and look at the first stage of the circuit we will realize that this also gives rise to a stock of value. What is the first stage? The first stage is where the capitalist uses money capital to purchase commodities. This is what economists call capital outlay when money is used to purchase means of production and labour power. Now, if you think about it the process of capital outlay the flow represented by capital outlay the purchase of means of production and labour power also take time it is not a instantaneous process. Therefore, this stage because it takes time to complete itself gives rise to stock of money capital. So, therefore, in the circuit we have three flows and because those flows take time to complete themselves we have emergence of stocks of value. We can represent this relationship between the three flows and the three stocks in an interesting diagram which will allow us to conceptualize the capitalist economy and see the relationship between its important flows and stocks. So, let us construct this diagram. This diagram which you can think of also as a circuit representation of the circuit of capital instead of allowing time to flow horizontally looks at the flow of time in a circular process. This diagram has three nodes. The first node is composed of the stock of productive capital. So, this is what we have represented earlier as p. The second node represents the stock of money capital. This is what we have earlier represented as m and the third node is composed of commodity capital which we have earlier represented as c. Now, these three nodes are linked with each other through flows. So, let us start with money capital. We can think of this what we are constructing here as a diagram representing an individual capitalist enterprise or the whole capitalist economy. So, the whole capitalist economy you can think of as starting with the sum of money and using it to make capital outlays. Capital outlays remember are uses of money to purchase means of production and labour power. So, this is the capital outlay the flow which only is meaningfully measured over a period of time. This represents the stock of productive capital. What flows out of this node is output because the process of production leads to the production of output. Let us think of cars. So, every month let us say one million cars get produced in the US economy. If we think of the flow that emerges from this node what we have is the flow of output. So, this is the flow of output the flow of finished commodities which emerge from the process of production and then get accumulated in this node as commodity capital which is nothing but stocks of value awaiting to be sold in the form of commodity. This node in turn is connected to the next node through the flow of sales. So, sales is the flow that happens when these commodities are sold and revenue is generated. So, this we can call sales. So, you can think of this as the relationship between the three important forms of stocks and flows that can represent the totality of the capitalist economy. One interesting thing to realize is that out of the sales two different types of revenues emerge. One of one component of sales goes back to recoup the cost of production. But another part of sales emerges as surplus value that is the value created in excess of the cost of production. We know that happened here, but that gets realized only when the commodity is sold. Now, part of the surplus value is appropriated by the capitalist class and by the state to support consumption. So, we can think of two flows coming out of this node. One is what recoups the cost and another is what gives us surplus value. Part of the surplus value flows out of the circuit and that gets divided into three parts. One part supports consumption by capitalists. Another part comes to support the activities of the state, the bureaucracy, the police, the military all of which the incomes of all of which comes from the surplus value that has been generated in the process of production. And the third part goes to supporting unproductive activities meaning activities that do not generate surplus value. And we will come back to look at the logic and some examples of unproductive activities. Now, it is only a part of the surplus value that goes towards goes out of the circuit and supports consumption of the capitalist, the state and unproductive activities. The larger part of surplus value is reinvested back into the production process. So, it goes back and accumulates as money capital in the capitalist system out of which a fresh round of capital outlays take place which leads to the creation of productive capital. Since the process of production takes finite amounts of time to finish positive amounts not zero amounts not instantaneous some value accumulates in the form of productive capital and then out of that emerges the flow of output. Now, if we look at this in a little more detail what are the elements of productive capital? The elements of productive capital are unused machinery machinery which has not yet been totally used up and depreciated unused raw materials and unused labour power. So, all of this is what we can see if we look inside any capital's factory that is productive capital that is value accumulated in the form of productive capital. Once the flow of output happens then we come to this node and in this node what we have is finished products awaiting to be sold. So, commodity capital is just the inventories of finished products which have not yet been sold. Once those finished products are sold you have the flow of sales part of which seeps out of the circuit, but part of which comes back. There are two flows which comes back one is the recruitment of the cost of production another is a large part of the surplus value. Since that sales revenue will not be immediately committed to new and fresh capital outlay that accumulates as money capital. So, money capital therefore, is the cash and the net worth the financial net worth of the firms that is the loans it has made to other capitalists or to other entities minus the liabilities that it has to to the system. So, this gives us a complete picture of a functioning of a capitalist economy. It is captured by the relationship between three important flows and three important stocks and we can think of the capitalist economy as a system which is continuously generating more and more surplus value and therefore, more and more value and which is increasing the size of the flow of value through the system. So, this is what emerges from an analysis of the first few chapters of volume 2 of capital a very nice and comprehensive picture of the capitalist economy. With that now let us move on to considering the circuit of capital again, but now from the perspective of the flow of time. And here we will come up with some interesting concepts the concept of turnover of capital and the concept of and we will see how that concept can help us understand some key features of capitalist economies. So, let us go back to the circuit of capital once again. The circuit of capital is a key tool that we are going to be using over and over again. Now we know that the circuit of capital has two stages which are in the sphere of circulation and one stage in the sphere of production. If we consider the circuit from the perspective of passage of time how time flows we call the total amount of time that is required by an atom of value to traverse the whole circuit the turnover time of capital. The turnover time of capital is the total amount of time that is required by capital every atom of value every atom of capital to traverse the whole circuit from here to here. That we can break up into two parts the amount of time that value spends in the sphere of production is what we call production time. So, this is the time that is spent in the sphere of production by value. Now production time itself composed of two parts one is the physical process of creating the commodities, but sometimes there are other natural processes which we can club together under the title of waiting time. For instance think of the production of wine it takes time over that period labor is not constantly working on that sometimes you leave it alone for nature to take care of some certain processes. So, the total amount of time that value spends in the sphere of production is production time. The rest of it is what we call circulation time which is composed of the two segments that are this and this. So, the amount of time spent by an atom of value in stage one and stage three together is known as circulation time. So, turnover time is the sum of production time and circulation time. So, this is the total amount of time that capital requires to complete its circuit once. Now why is this important? Well it is important from the perspective of generation of surplus value why? Because if there is a finite amount of turnover time it means that for some period of that time capital is lying idle. It is lying idle in the sense that it is not participating at that point in the generation of surplus value in the process of valorization of capital that we have seen in the last module. Therefore, there is a structural incentive built into capitalism to reduce turnover time. Turnover time since it is composed of the sum of production time and circulation time can be reduced if either or both of production time and circulation time is reduced. Production time is reduced through technological change, through industrialization, through new methods of management which reduce the amount of time that is required for production. On the other hand circulation time is reduced by technological change in the sphere of communication, in the sphere of transportation, in the sphere of the financial industry. All of which reduce the amount of time that value has to spend either in circuit first either in the stage one or stage three of the circuit. So, all the innovations in the financial system, the banking system, the transportation industry, the communications industry, all of which suddenly make sense from the perspective of the circuit of capital because by reducing circulation time, the capitalist system is able to use capital more to generate surplus value and therefore, to generate and realize more surplus value. Therefore, there is a structural necessity and incentive of the capitalist system to constantly improve the methods of communication, transportation and the financial system. Similarly, there is a structural need of the system to continuously bring about new methods of production which reduce the amount of time necessary to produce anything that happens both through technological progress and through changes in the management system. So, the circuit of capital looked at from the perspective of passage of time allows us to understand these key features of the capitalist system. The circuit of capital will also allow us to understand one another important distinction which is the distinction between fixed and circulating capital. So, let us go back and see what that means. Now, we have seen that in the circuit of capital there are three stages and each of those stage because they take some time to finish themselves leads to the accumulation of stocks of value. In the stage that relates to production since the process of production takes a few takes time to complete itself what emerges in the process of production are stocks of value which we have called productive capital. Now, productive capital can be broken up into two types. One is what Marx calls fixed capital and another is what Marx calls circulating capital or he often uses the term fluid capital. What is the difference? The difference is the following fixed capital transfers its value to the product over many production cycles. So, think of machines think of buildings what today economists call fixed assets which remain in the process of production for a long period of time. The amount of value that has been used to purchase the fixed capital returns to the capital in the form of money only over several periods. Think of a machine which lasts for 10 years and say each cycle of production is one of duration one year. The amount of money that is used to purchase the machine therefore can be thought of as giving up its value to the product one tenth every year so that only at the end of 10 years will the total value that was used to purchase the machine come back to the capitalist that is precisely an example of fixed capital. Circulation capital on the other hand gives up its value transfers its value to the product within one production cycle. So, think of the raw materials that are used up the raw materials that are used up to produce a car transfer their value to the car all once the car is produced on the other hand the machine that was used to produce the car will remain in the process of production for several production cycles. So, therefore, the raw material is an example of circulation capital. Think of auxiliary materials like the power or the electricity that was used to produce the car the value represented by that is transferred to the product immediately and lastly labor power. Labor power transfers its value not only its own value, but something in addition that is surplus value to the product. Now, this distinction between fixed capital and circulation capital should be should not be confused with another distinction we have made earlier which is the distinction between constant capital and variable capital. That distinction is important from the perspective of production the distinction between fixed capital and circulation capital is only important from the perspective of circulation the two should be kept separate they should not be confused. So, with that now we will be able to summarize our discussion of the circuit of capital by looking closely at the process of economic growth and trying to see what are the sources of economic growth in capitalism. Now, to do that let us go back to the circuit that we drew earlier the circuit drawn not horizontally, but the circuit that was drawn circularly. So, that circuit had three nodes one was P which represented productive capital another was M which represented money capital and another was C which represented commodity capital. These nodes in turn were linked together with flows this is the flow of capital outlay this is the flow of output and this is the flow of sales. Some of the surplus value of course gets removed from the circuit and supports the consumption of capitalists the state and unproductive activities. This figure is very important and useful to understanding key features of economic growth under capitalism. What do we mean by economic growth? Well this allows us to answer that question in a succinct way by economic growth we mean an increase in the magnitude of value that is flowing through the circuit. So, the magnitude of value that is flowing through the circuit gives us an idea of economic growth the amount of value that flows through the circuit round and round and round is precisely what we mean by economic growth. If that is the case then there are two important sources of growth. The first source is how much surplus value is extracted in the process of production for each unit of value that was used to start the production process. Therefore, the rate of exploitation of workers how much surplus value is extracted for each unit of capital invested in production that will be one of the key determinants of the size of value that is flowing through the circuit. The other important determinant is how quickly one atom of value traverses the whole circuit. Why? Because if an atom of value traverses the whole circuit quickly then it will be available in the form of money capital which can then be used for capital outlay for the generation of more surplus value. So, the rate of turnover remember what we have seen turnover is the amount of time that is required by value to traverse the whole circuit. So, the rate of turnover means how quickly value can traverse the circuit. So, if the rate of turnover increases then each atom of value will be used more frequently to generate more value and that will increase the total flow of value through the circuit. So, this gives us the two important sources of growth in the capitalist system. It rests finally, on how much surplus value is extracted for each unit of value invested which is captured by the rate of exploitation. Secondly, it is captured by the speed with which value traverses the circuit which is captured by the turnover time of capital. So, the circuit of capital which is a general analysis of the capitalist circulation process has allowed us to understand several important features of the capitalist system. With that now, we will be able to go to an analysis of the issues that are relevant to understanding the realization of surplus value that is what we will take up next.