Circulating capital
Encyclopedia
Circulating capital refers to physical capital
and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal to Intermediate consumption
. It includes raw materials, intermediate goods, inventories
, ancillary operating expenses and (working capital
). It is contrasted with fixed capital
. The term was used by classical economists such as Adam Smith
, David Ricardo
and Karl Marx
.
Therefore, circulating capital is a component of the technical capital that participates in and is used up in a single cycle of production. It always needs replacing at every cycle (raw materials, basic and intermediate materials, combustible, energy…). In accounting, the circulating capital comes under the heading of current assets.
According to Karl Marx
(second volume of Das Kapital
, end of chapter 7) the turnover
of capital influences "the processes of production and self-expansion", the two new forms of capital, circulating and fixed, "accrue to capital from the process of circulation and affect the form of its turnover". In the following chapter Marx defines fixed capital and circulating capital. In chapter 9 he claims: "We have here not alone quantitative but also qualitative difference."
Conventionally, (physical) capital assets held by a business for more than one year are regarded in annual accounting statements as "fixed", the rest as "circulating". In modern economies such as the United States, roughly half of the intermediate inputs bought or used by businesses are in fact services, and not goods.
Physical capital
In economics, physical capital or just 'capital' refers to any already-manufactured asset that is applied in production, such as machinery, buildings, or vehicles. In economic theory, physical capital is one of the three primary factors of production, also known as inputs in the production function...
and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal to Intermediate consumption
Intermediate consumption
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
. It includes raw materials, intermediate goods, inventories
Inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
, ancillary operating expenses and (working capital
Working capital
Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
). It is contrasted with fixed capital
Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials,...
. The term was used by classical economists such as Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
and Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
.
Therefore, circulating capital is a component of the technical capital that participates in and is used up in a single cycle of production. It always needs replacing at every cycle (raw materials, basic and intermediate materials, combustible, energy…). In accounting, the circulating capital comes under the heading of current assets.
According to Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
(second volume of Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, end of chapter 7) the turnover
Turnover
-Business:*Turnover is sometimes a synonym for revenue , especially in European and South African usage.Services sold by a company during a particular period of time....
of capital influences "the processes of production and self-expansion", the two new forms of capital, circulating and fixed, "accrue to capital from the process of circulation and affect the form of its turnover". In the following chapter Marx defines fixed capital and circulating capital. In chapter 9 he claims: "We have here not alone quantitative but also qualitative difference."
Conventionally, (physical) capital assets held by a business for more than one year are regarded in annual accounting statements as "fixed", the rest as "circulating". In modern economies such as the United States, roughly half of the intermediate inputs bought or used by businesses are in fact services, and not goods.