What is Capital?
I’ve talked about capitalism. I’ve talked about capitalists. But I haven’t explicitly talked about capital itself. That’s the purpose of this video.
The term “capital” is often overused, allowed to describe any asset regardless of how this economic asset is used. In popular culture and in mainstream economics “Capital” has been used to describe everything from money to factories to cars to ideas to social connections.
I will be using the term “capital” here in a quite specific sense to refer to a flow between money and commodities which produces more value than it begins with.
Of course, in any debate over definitions we run into the claim that all definitions are somewhat arbitrary. A definition is useful if it helps us to explain the things we are looking to explain. The popular use of the word capital deprives it of any real meaning because it is over-used. But this is quite fitting within the aims of bourgeois economics because it is the function of mainstream economics, as the ruling ideology of a capitalist society, to obscure the social relations of value creation in a capitalist society. In my videos I am seeking to explain these social relations and that is why we need a more specific definition of capital than that used by bourgeois economy and popular culture.
My basic definition of capital is that capital is a flow or circuit through which money and commodities move in order to produce value. This circuit is the primary source of value creation in a capitalist society. Studying this circuit allows us to understand how value is produced and distributed throughout our economy.
Capital takes different forms as it moves through this circuit: it can be money in the form of cash, bank balances, credit, etc. It can be commodities in the form of tools, factories, raw materials, consumer goods, etc. But money and commodities are only capital when they area part of this circuit. Money sitting in your pocket or factories sitting unused are not capital because they aren’t part of the circuit of capital. But they can become capital if they enter this circuit.
In my video “what is capitalism” I presented this basic formula for capitalist circulation:
This is shorthand for Money-Commodities-Money, the basic circuit which capitalists engage in. A capitalist invests money in the production process in order to make commodities. At the end of the day he sells these commodities for more money than he started with. This extra money is his profit. We can represent this new quantity of money with: M1. So that
Thus, the total amount of value in society is expanded.
Now what do capitalists buy with their initial investment of money? What do they buy in order to begin production? They buy two different commodities: means of production and labor power.
Means of production can be all sorts of tools, workplaces and raw materials: hammers, workbenches and wood; steam drills, assembly lines and steel; kitchen knives, kitchens and tofu. Means of production just means “stuff you use to make commodities out of”. In a capitalist society the means of production are privately owned by capitalists and hence the vast majority of commodities produced in a capitalist society are produced by capitalists. Of course, many of us own drills, hammers, wood, etc. These commodities only become capital when they are being used as part of the circuit of capital, being used to expand the amount of value in society.
But capitalists need someone to work with those means of production in order to produce commodities. Means of production won’t turn themselves into commodities by themselves. And capitalists can’t do all that labor themselves (excepting for petty bourgeois capitalists.) And so capitalists must also purchase Labor Power in the form of workers.
When a capitalist buys Labor Power he isn’t buying the whole worker like a slave-owner would. He is buying the capacity of the worker to work for a given amount of time. That’s why we use the term “Labor Power”.
So now we can make a more specific circuit:
M- (MP+LP)- C – M1
In the beginning capital has taken the form of money. Once that money has been exchanged for MP and LP, they become the capital. The money itself goes to other capitalists to pay for the MP commodities and to workers in the form of wages. If those other capitalists use the money to reinvest in production it will become capital again. But if that money is used for consumption or saving it ceases to be capital. Similarly with money spent on wages. Once money ends up in the worker’s pocket it is no longer capital. So capital has taken a different form: it’s moved from money form to commodity form.
There is a reason why we notate LP as separate from MP. Labor power is a unique commodity with distinctive properties. (people are not machines.) This is because LP is the only commodity which can create more value than it costs thus making profit possible. It might be possible in instances of unequal exchange brought about through monopoly or other market anomalies to sell commodities above their value, but this isn’t a creation of value, it’s merely profiting from an inequality in exchange. When commodities are bought and sold in the marketplace no new value is being created- values are merely being traded for each other. It’s always possible to rip people off and thus realize profits, but this is not a source of value creation. And because competition makes it hard to rip people off through arbitrarily high prices (although we definitely see that in the case of oil companies, utilities and other monopolistic industries) we need a strategy which generates profit outside of exchange in the sphere of value creation itself.
This is where the unique properties of LP come into the picture. When a capitalist buys LP from a worker he is buying the ability of the worker to do work. The amount of work that is done, the amount of value produced, is not predetermined. This is where the theory of exploitation enters, something that I have talked about extensively in my Econ101 playlist. The difference between the cost of LP and the amount of value produced by that labor power is profit. And this profit is a result of exploitation- of paying workers less than the value they produce.
So what’s really happened is that we have replaced one set of commodities (MP+LP) with a new set of commodities with greater value (C1). This “magic” has happened in the production process (P). We can now present an updated version of the circuit of capital as:
Money capital is used to buy MP and LP. Through production workers turn the MP into commodities which have a greater combined value than MP+LP. These commodities are then sold at their new values. The capitalist ends up with more money (profit.) Capital has passed from money form into commodity form, been expanded in the production process and then passed back into money form. Some of that profit will become spending money for the capitalist class, leaving the circuit of capital. The rest will be used to start the circuit of capital over again.
Capitalists are always competing with each other. Whenever one capitalist takes a breather from chasing profit, there are ten other capitalists out there who are investing their tails off to increase their profit margins. So there is no time to rest. Money capital must constantly be thrown back into production in the search for more profit. Money and commodities have no use to a capitalist unless they are being used to create profit, that is, unless they are capital. So a capitalist must constantly be seeking to perfect the circuit of capital: to turn money into commodities and back again faster and more efficiently than his rivals.
But sometimes there are barriers to this circuit of M-C-M. Let’s trace each stage of the circuit and identify the obstacles at each stage.
Sometimes it’s hard for a capitalist to turn money into MP or LP. If resources dry up or become too expensive capitalists have to spend time and money looking for new inputs. Sometimes the price of LP is too high and capitalists must search out cheaper more exploitable labor.
Within the production process itself the main barrier is resistance to exploitation. Because the cost of LP is not related to the amount of value produced by workers there is a constant struggle to extract more value from workers. Workers resist this exploitation. This is the basis of class struggle.
Once commodities are produced capitalists must sell them. This is often the hardest part of the circuit to complete. Capitalism produces a huge amount of commodities everyday and it must constantly be finding people to buy them. In times of economic crisis consumers are less willing to spend money and commodities pile up on shelves.
In fact in a full-scale depression we see money and commodities frozen in all of the stages of the circuit of capital: money which can’t find any profitable investment; workers who can’t find jobs; factories with no workers; and commodities that can’t find buyers. The dynamics of what causes this breakdown will be the topic of a future set of videos on economic crisis.