The Economic Doctrines of Karl Marx

3. The Conversion of Money into Capital

(1) What is Capital?

Let us now take a step further. Under the simple circulation of commodities, the commodity owner sells his commodities, in order to purchase others. But in the course of time a new form of movement emerges from this form of the circulation of commodities: to buy in order to sell. As we know, the formula of simple commodity circulation is Commodity–Money–Commodity; the formula of the new form of circulation is Money–Commodity–Money.

Let us compare the two formulae.

The movement Commodity–Money–Commodity has consumption for its object. I sell a commodity, which is a non-use-value for me, in order to be able to obtain others which represent use-values for me. The movement Commodity–Money–Commodity is complete in itself. The money which is the proceeds of the sale is transformed into a commodity which is consumed, and thus falls out of circulation. The money itself is spent once for all, and in its course gets farther and farther away from its former owner. The commodity with which the circuit closed is equal in value to that with which the circuit began, that is, under normal conditions of simple commodity circulation, and only such can be discussed at this stage.

It is otherwise with the movement Money–Commodity–Money. The purpose of this is not consumption, and its final point is not a commodity, but money. The money thrown into circulation at its beginning is not spent, but merely advanced. It returns to its original owner. The movement is not one that is complete in itself; it keeps repeating itself. The money which was advanced returns, in order again to be thrown into circulation and to return. The movement of money which is set in motion by the circuit Money–Commodity–Money is illimitable.

What, however, is the driving -force of this movement?  The motive of the circuit Commodity–Money–Commodity is clear; on the other hand, does not the circuit Money–Commodity–Money appear senseless? If I sell a Bible, in order to buy bread with the proceeds, the commodity at the end of the movement is different from that at the beginning, although of the same value. The one stills my spiritual hunger, but it avails me very little if this hunger is stilled, even if I know the Bible by heart, unless I possess the means of satisfying my material hunger. If, however, I buy potatoes for 100s., in order to sell them for 100s., I am no farther advanced at the end than I was at the beginning; the whole procedure has neither object nor advantage. There would only be an advantage if the sum of money at the end of the transaction were different from that at the beginning. But one sum of money is distinguished from another only by its magnitude. The movement Money–Commodity–Money has a purpose then only if the sum of money with which it ends is larger than that with which it began. And this increase in the sum of money is in fact the driving motive of the movement. Whoever buys in order to sell, buys in order to sell dearer. The movement Money–Commodity–Money proceeds no more than normally if the sum of money at the end is larger than that at its beginning. On the other hand, the movement Commodity–Money–Commodity only proceeds normally, as we know, if the value of the commodity with which it closes is equal to that of the commodity with which it begins.

Every purchase is a sale, and vice versa. The movement Money–Commodity–Money seems therefore to run on the same lines as the movement Commodity–Money–Commodity. But we can already see that the two movements are essentially different.

To keep to our example. If I buy potatoes for 100s. in order to sell them again, I do so with the object of selling them dearer, perhaps for 110s., that is 100s. plus 10s., or a sum equivalent to the sum laid out, plus an increment. If we denote the commodity by C, the original sum of money by M, the increment by m, we may represent the complete formula in the following manner:–

M – C – (M + m).

This m, the increment value, which emerges over and above the originally advanced value at the end of this movement, is called by Marx surplus-value. It is not to be confused with its phenomenal forms, profit, interest, etc., any more than value is to be confused with price. So far our exposition has only been concerned with the foundations, not the phenomenal forms, of the economic categories. This is said to avoid misunderstandings.

Surplus value forms the determining peculiarity of the movement M – C – (M + m). The value which runs through the form of the circuit is invested by the surplus-value with a new character, it becomes capital.

In this movement consists the essence of capital. It is value that breeds surplus-value. Those who ignore this movement and try to conceive of capital as an inert thing will constantly involve themselves in contradictions. Hence the confusion in orthodox text-books concerning the idea of capital, and the question as to which things should be regarded as capital. Some define it as tools, which implies that there were capitalists in the Stone Age. Even the ape which cracks nuts with a stone is a capitalist; likewise the tramp’s stick with which he knocks fruit off a tree becomes capital, and the tramp himself a capitalist. Others define capital as stored-up labour, according to which marmots and ants would enjoy the honour of figuring as colleagues of Rothschild, Bleichroeder, and Krupp. Some economists have even reckoned as capital everything which promotes labour and renders it productive, the State, man’s knowledge, and his soul.

It is obvious that such general definitions only lead to commonplaces which are quite elevating to read about in children’s fables, but which do not in the least advance our knowledge of human social forms, their laws and driving-forces. Marx was the first to banish completely from political economy the commonplaces which, prior to him, had reigned almost absolutely in many of its provinces. This applies especially to the branch which purported to describe the peculiarities of capital.

We have seen that capital is value that breeds surplus-value, and its general formula is: M – C – (M + m). The implication of this is that the money form is the form in which every new sum of capital begins its movement. The facts support this assumption. It is also apparent from this formula that the movement which it represents necessarily determines the conversion of capital from the money-form into the variegated forms of the commodity world, as well as the re-conversion of these forms into money.

We discern further from this formula that not every sum of money, and not every commodity are capital, and that they only become capital if they execute a certain movement. But this movement is dependent, for its part, upon certain historical conditions, with which we shall become acquainted. The money that I spend in order to buy an article of consumption, bread or a coat, for myself no more functions as capital than the commodity which I myself have produced and sell functions as capital in this transaction.

Means of production, accumulated labour, etc., certainly constitute the material of capital, but only under certain circumstances. In so far as the latter are ignored, the peculiarities of the modern mode of production are lost sight of and a dark cloak is spread over it, whence it comes about that all the learned and unlearned representatives of capitalism refuse to be taught either by the Marxian theory of capital, or the theory of value on which it is based.

(2) The Source of Surplus-value

We now know the general formula of capital: M – C – (M + m). We do not yet know the origin of m, the surplus-value. The given formula seems to indicate that the act of buying and selling creates the surplus-value, and that consequently the latter springs from the circulation of commodities. This is the current opinion. It is, however, based on a confusion of commodity-value with use-value. This is especially true of the assertion that both parties gain in an exchange, because each gives what he does not need and receives what he needs. This may be expressed: “I give away something which possesses little value for me, and receive therefore something which possesses more value for me.” This view of the origin of surplus-value is only possible where ideas about value are still nebulous. In order to adhere to this view, it is necessary, on the one hand, to forget that, whilst the exchange of commodities is based on the unlikeness of their use-values, it is also based on the equality of their commodity-values. On the other hand, one must be as complaisant as are most of the readers of the vulgar economists and accept all their stories at their face value, really believing that the business operations of a modern merchant, for instance, stand on the same level as barter amongst savages.

We know, however, that a surplus-value originates not at the stage of barter, but at that of commodity circulation, which is effected by money, and that the surplus-value appears in the form of money. “Profit,” in the sense of obtaining something which has use-value for me in exchange for something which has no use-value for me, is quite irrelevant to a transaction which is expressed by the formula: M – C – (M + m).

Here we encounter a manoeuvre of vulgar economy, to which the latter is fond of resorting in order to impede the recognition of modern economic conditions, which is its chief task. It relegates the modern phenomena of production in a remote period of time.

We have to do here not with barter, but with the circulation of commodities. Under normal circumstances, the latter no more than the former can produce surplus-value, if equal commodity-values are always given for equal commodity-values.

Let us assume that the laws of commodity circulation are violated. This would, for example, confer on commodity owners the privilege of selling their commodities at a price increment of 10 per cent, above their original value. The tailor sells his coat for 33s. instead of 30s. But to his chagrin he finds that the cask of wine which he used to buy for 30s. now cost him 33s. He has therefore gained nothing.

We might still make an attempt to explain the origin of surplus-value by the fact that not all, but a number of commodity owners have discovered how to buy commodities below their value and to sell them above their value. For 90s. a merchant buys from a farmer 4 tons of potatoes which are worth 100s., and sells them to the tailor for 110s. At the end of the process the merchant finds in his hands a larger value than was there at the beginning. But the sum total of existing values remains the same. At the beginning we had values of 100s. (the farmer) plus 90s. (the merchant) plus 110s. (the tailor) = 300s. At the end 90s. (the farmer) plus 110s. (the merchant) plus 100s. (the tailor) = 300s.

The greater value in the hands of the merchant is therefore not derived from an increase in values, but from a diminution in the values in the hands of the others. If I call this greater value surplus-value, I might as well call surplus value the value which a thief steals from the pockets of another.

The historical beginning of the appropriation of surplus-value, at any rate, occurred in this manner, in the appropriation of alien values, either by means of the circulation of commodities through merchant’s capital, or quite openly without this intervention, by means of usurer’s capital. But these two types of capital were only possible by violating the laws of commodity circulation, by a manifest and brutal violation of its basic law, that values are only exchanged for equal values. So long as capital assumed the form of merchant’s or usurer’s capital, it occupied a position of antagonism to the economic organisation of its time, and was also in conflict with contemporary moral conceptions. In Antiquity and likewise in the Middle Ages, trade and especially usury were in bad repute; they were denounced by the ancient heathen philosophers as well as by the Fathers of the Church; by Popes and by Reformers.

If we wanted to indicate a type of marsupial we should not put forward the egg-laying duckbill. Similarly, if we want to understand the capital which determines the economic structure of modern society, we should not start out from its, so to speak, antediluvian forms, usurer’s and merchant’s capital. It was not until another and higher type of capital was formed that intermediate types arose which bring the functions of merchant’s capital and interest-bearing capital into harmony with the laws of the prevailing mode of commodity production. Henceforth capital ceased to wear the character of simple extortion and direct robbery. Merchant’s capital and usurer’s capital can only be comprehended after the basic form of modern capital has been investigated.

It is therefore understandable why Mary excluded merchant’s capital and interest-bearing capital from the first two volumes of Capital; these books are devoted to an analysis of the basic laws of capital.

Consequently, we need not concern ourselves any further with the two first-mentioned forms of capital. What is to be remembered as the result of our investigation is the fact that surplus-value cannot arise from the circulation of commodities. Neither buying nor selling creates surplus-value.

But, on the other hand, surplus-value cannot arise outside the sphere of circulation. A commodity-owner may transform a commodity through his labour and thus add new value to it, which is determined by the measure of the socially-necessary labour which would have to be expended, but the value of the original commodity is not thereby augmented; no surplus-value adheres to the latter through this process. If a silk weaver buys silk to the value of 100s. and works it up into silk material, the value of this material will be equal to the value of the silk, increased by the value which the labour of the weaver has created. The value of the silk as such is not augmented by this labour.

Thus we are faced with a peculiar enigma: surplus-value is not created by the circulation of commodities. It is not created outside the sphere of circulation.

(3) Labour Power as a Commodity

Let us consider the general formula of capital more closely. It runs: M – C – (M + m). It consists of two acts: M – C, purchase of commodity, C – (M + m), sale. According to the laws of the circulation of commodities, the value of M must be equal to C, and C equal to M + m. This is only possible if C itself is increased, if C happens to be a commodity which creates during its consumption a greater value than it itself possesses. The enigma of surplus-value is solved as soon as we find a commodity whose use-value possess the peculiar property of being a source of value, whose consumption is the creation of value, so that in relation to it the formula M – C – (M + m) reads M – C ... (C + c) = (M + m).

Now we know that commodity values are only created by labour. The above formula can therefore only be realised if labour-power is a commodity.

“Under the name of labour-power,” says Marx, “we include the entire collection of those physical and intellectual faculties which dwell in the human frame and constitute the living personality, and some of which the individual puts into operation whenever he produces any kind of use-value.”

Labour-power has to appear in the market as a commodity. What does this mean? We have seen above that the exchange of commodities is based on the absolute right of commodity owners to dispose of their commodities. The owner of labour-power, the worker, must therefore be a free man, if his labour-power is to become a commodity. His labour-power must remain a commodity; consequently he must not sell it outright, but only for definite periods, else he would become a slave, and be transformed from a commodity owner into a commodity.

Yet another condition must be complied with before labour-power can become a commodity. We have seen that, in order to become a commodity, a use-value must be a non-use-value for its owner. Labour-power must also be a non-use-value for the worker, if it is to appear in the market as a commodity. The use-value of labour-power consists, however, in the creation of other use-values; this process presupposes access to the necessary means of production. If the worker has access to the means of production, he does not sell his labour-power, but employs it himself, and sells his products. If labour-power is to become a commodity, the workers must be divorced from the means of production, above all, from the most important of them, the land.

The worker must be free in every respect, free from any personal dependence, but also bereft of all the necessary means of production. These conditions must exist before the money owner can transform his money into capital. They are not provided by Nature, nor do they characterise, all social forms. They are the result of a protracted historical development, and it is only comparatively lately that they have assumed such dimensions as to exercise a decisive influence upon the formation of society. The modern story of capital begins with the sixteenth century.

Now we know the commodity which creates surplus-value. What is the extent of its own value?

Its value is determined like that of any other commodity by the labour-time socially necessary for its production, and therefore for its re-production.

Labour-power presupposes the existence of the worker. This existence, on its part, needs a certain quantity of the means of life for its maintenance. The labour-time necessary for the production of labour-power is therefore equal to the labour-time which is socially necessary to produce this particular quantity of the means of life. A series of circumstances determines the magnitude of this quantity. The more labour-power the worker expends, the longer and more intensively he works, the more of the means of life he requires in order to replace the energy expended, and to be able to work on the next day in the same way. On the other hand, the needs of the working classes of various countries differ according to the natural and cultural peculiarities of every country. A Norwegian worker requires a larger quantity of the means of life than an Indian; the nourishment, clothing, dwelling, firing, etc., which the former requires to be able to exist necessitates a longer labour-time for their production than the means of life of the Indian worker. Further, in a country where the workers run about barefooted, for example, or read nothing, their needs will be slighter than in those countries where boots are worn and books and newspapers read, even when climatic or other natural differences are absent. “In contrast to other commodities,” says Marx, “a historical and moral element enters into the determination of the value of labour-power.”

Moreover, as everybody knows, the worker is mortal. Capital, however, aspires to be immortal. For this it is necessary that the working class should be immortal, that the worker should propagate his species. The quantity of the means of life necessary for the maintenance of labour-power therefore includes the means of life necessary for the maintenance of the workers’ children and under certain circumstances their wives.

Finally, in the production costs of labour-power are also to be reckoned its educational expenses, the expenses incurred in acquiring a certain dexterity in a particular branch of labour. For the majority of workers these expenses constitute a diminishing quantity.

As a result of all these factors, the value of the labour-power of a particular working class in a particular country and at a particular period is of a particular magnitude.

So far we have not dealt with price, but with value; not with profit, but with surplus-value. Therefore it must be borne in mind here that we are dealing with the value of labour-power, not with wages.

Reference must now be made to a peculiarity which marks the payment for labour-power. In the view of vulgar economy, the capitalist advances wages to the worker, because in most cases the capitalist pays the worker before he has sold the products of the latter’s labour. In reality, it is the worker who credits the capitalist with the work he has performed.

Let us assume that I buy potatoes in order to distil whisky from them. I pay for the potatoes after I have distilled the whisky, but before I have sold it. Would it not sound absurd if I should assert that I advanced to the farmer the price of his potatoes because I paid for them before I had sold the whisky? No, it is rather the farmer who credits me with the price of his potatoes until I have distilled whisky from them. If I say that I pay cash, I only mean that I pay for the commodity as soon as I buy it. Merchants would be very much astonished at the economic wisdom which asserted that those who only pay for their commodities after they have used them not only pay cash, but even pay in advance. But the vulgar economists do not hesitate to parade nonsense of this kind before the workers. If the workers sold their commodity labour-power for cash, they would have to be paid the moment this commodity passed into the hands of the capitalist, and therefore at the beginning, and not at the end, of each week. Under the prevailing system of payment, the workers not only risk their wages, but are also obliged to live upon credit, and therefore have to endure without protest all the adulterations of the means of life practised by the traders. The longer the period of wage payment, the worse the workers fare. A fortnightly or a monthly payment of wages is one of the most oppressive burdens for the wage-workers.

Whatever may be the system of paying wages, the worker and the capitalist always confront each other, under normal conditions, as two commodity owners who mutually exchange equal values. Capital now operates no longer in contradiction to the laws of commodity circulation, but on the basis of these laws. Worker and capitalist confront each other as commodity owners and therefore as free and equal persons, personally independent of each other; as such they belong to the same class, they are brothers. Worker and capitalist exchange equal values with each other; the empire of justice, of freedom, of equality and brotherhood, the thousand years kingdom of happiness and peace, seems therefore to have dawned with the advent of the wage system. The misery of servitude and of tyranny, of exploitation and of club-law, now lies behind us.

So we are told by the representatives of the interests of capital.