Constant capital
Encyclopedia
Constant capital is a concept created by Karl Marx
and used in Marxian political economy
. It refers to one of the forms of capital
invested in production
, which contrasts with variable capital (v). The distinction between constant and variable refers to an aspect of the economic role of factors of production
in creating a new value
.
Constant capital includes the outlay of money on (1) fixed assets, i.e. plant
, machinery, land
and building
s, (2) raw materials and ancillary operating expenses (including external services purchased), and (3) certain faux frais of production
(incidental expenses). Variable capital by contrast refers to the capital outlay on labour costs insofar as they represent workers' earnings.
The concept of constant vs. variable capital contrasts with that of fixed
vs. circulating capital
(used not only by Marx but by David Ricardo
and other classical economists
). The latter distinction corresponds to the very common distinction in economics, between fixed inputs (and costs) and variable inputs (and costs). It distinguishes inputs from the point of view of their user (the capitalist), in terms of the degree of flexibility that the user has in using them.
On the other hand, constant capital refers to the non-human inputs into production, while variable capital refers to the human input (the hiring of labor power
to do labor).
magnitude, i.e., the total value of means of production
in use at a specific point in time. It can also be measured as a flow
magnitude, i.e., the total value of raw materials and fixed means of production used up in an accounting period. Which measure is used depends on the purposes and assumptions of one's analysis, for example whether one is interested in the unit-costs of output or in the rate of return on capital invested.
The flow value divided by the stock value provides a measure of the number of rotations of the stock (the speed of turnover or turnover time) in an accounting period. It is strongly related to the actual depreciation rate of fixed capital. Alternatively, the stock value divided by the flow value is what Marx called the "turnover time."
The faster the turnover of constant capital (i.e., the shorter the turnover time), other things being equal, the higher the rate of profit
.
of equipment and materials being used in production is conserved and transferred to the new product by living labor.
It is true that the ruling market prices for constant capital inputs could change after they have been bought for use in production, but normally this cannot affect those inputs (having been withdrawn from the market for use in production), only the market valuation of the outputs created from those inputs.
. Marx argues that only living labour creates new value. The higher value of output, compared to input costs, is (other things being equal) attributable to the exploitation
of living labor-power only. Variable capital is "variable" because its value changes (varies) within the production process. Although most commentaries on Marx do not acknowledge this, these changes could be both positive or negative. A misapplication of labour, or the devaluation of types of labour activity by the market can mean the loss of part of the capital invested, or all of it. However, Marx does generally assume that labour will accomplish the valorisation
of capital.
object that labor is not the only source of value-added goods.
Examples of such arguments:
.
For Marx's critics, value, if it exists at all, is a technical feature of economic calculus or is simply another word for the price
of a product.
For Marx, however, economic value is a social
attribution, which expresses a social relation
between people that is specific to certain historical conditions. Inanimate objects can only feature in value relations as tokens of prior human effort, since they are not social beings. Thus, it is not the machine with which new outputs are produced that itself adds value to those outputs, but rather the people operating the machine who permit its value to be conserved and who operate the transfer of part of its value to the new outputs.
Another clarification is that Marx may have used the terms fixed and variable capital to emphasize the idea that the input cost of compensation can be varied by the enterprise, which sets the compensation levels of its workers, whereas the price of the other input factors sold to the company is "fixed," insofar as it is set by external vendors.
In other words, this stock of owned objects has, at best, an ideal price
which is estimated or hypothesized (the price it might have, if it was traded in the market).
Nobody however will say that because this stock of objects has no actual market price, that it has no value; everybody knows that its exchange value
could be expressed in money, within a certain range of probable prices; they may also know approximately that a quantity of one good is "worth" a certain quantity of another good.
This simple insight may help to clarify Marx's concept of value, because it shows that beyond prices there are also economic value relations referring to the changing relationships between objects of value which have no specific, defined or actual market price, and to the social outcome of the interactions between a myriad of prices. In turn, these value relations between objects reflect social relations between people.
as the productive force of capital
was for Marx an example of reification
of the relations of production
or of commodity fetishism
. In other words, property (a "thing") is given human
powers and characteristics which it does not truly have. Economists talk about the "productivity of capital" to describe the yield or return on capital, but capital itself "produces" nothing, people do that.
The fetish
of capital is broken as soon as living labour is withdrawn; then it becomes clear that the constant part of capital produces nothing, and declines in value. Because of its role as a traditional money commodity some individuals give a reference display of this fetish by seeing gold
as the only 'real' money, even in the current time when most money is lacking any substantial form whatsoever, even paper.
Critics object however that without the supply of means of production
, labour also can produce nothing. That is, separated from means of production, workers are also nothing. This however raises the question of why and how workers come to be separated from the means of production which they have themselves created.
For Marx at least, the answer to this question is not "technical" but purely social
, i.e. a matter of property
relations which provides capital and its owners with a social power
over people. But ownership by itself creates no net addition to new value produced, other than, perhaps, profit from speculation
which redistributes existing asset values and claims to them.
.
As noted above, the distinction between constant and variable capital overlaps with the distinction between fixed capital
and circulating capital
. Constant capital has both fixed and circulating components: for example, the fixed constant capital would include a factory and the machinery in it, while the circulating constant capital would include the raw matericals used and the intermediate inputs produced by the factory.
Variable capital is almost exclusively a component of circulating capital. However, the salaries of some "overhead" employees (who have long-term security from being fired or laid off) are in effect, fixed elements of variable capital.
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...
and used in Marxian political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
. It refers to one of the forms of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
invested in production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
, which contrasts with variable capital (v). The distinction between constant and variable refers to an aspect of the economic role of factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
in creating a new value
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
.
Constant capital includes the outlay of money on (1) fixed assets, i.e. plant
Plant
Plants are living organisms belonging to the kingdom Plantae. Precise definitions of the kingdom vary, but as the term is used here, plants include familiar organisms such as trees, flowers, herbs, bushes, grasses, vines, ferns, mosses, and green algae. The group is also called green plants or...
, machinery, land
Estate in land
An estate in land is an interest in real property that is or may become possessory.This should be distinguished from an "estate" as used in reference to an area of land, and "estate" as used to refer to property in general....
and building
Building
In architecture, construction, engineering, real estate development and technology the word building may refer to one of the following:...
s, (2) raw materials and ancillary operating expenses (including external services purchased), and (3) certain faux frais of production
Faux frais of production
Faux frais of production is a concept used by classical political economists and by Karl Marx in his critique of political economy. It refers to "incidental operating expenses" incurred in the productive investment of capital, which do not themselves add new value to output...
(incidental expenses). Variable capital by contrast refers to the capital outlay on labour costs insofar as they represent workers' earnings.
The concept of constant vs. variable capital contrasts with that of fixed
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,...
vs. circulating capital
Circulating capital
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,...
(used not only by Marx but by 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 other classical economists
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
). The latter distinction corresponds to the very common distinction in economics, between fixed inputs (and costs) and variable inputs (and costs). It distinguishes inputs from the point of view of their user (the capitalist), in terms of the degree of flexibility that the user has in using them.
On the other hand, constant capital refers to the non-human inputs into production, while variable capital refers to the human input (the hiring of labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
to do labor).
Measurement
Constant capital can be measured as a stockStock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
magnitude, i.e., the total value of means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
in use at a specific point in time. It can also be measured as a flow
Stock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
magnitude, i.e., the total value of raw materials and fixed means of production used up in an accounting period. Which measure is used depends on the purposes and assumptions of one's analysis, for example whether one is interested in the unit-costs of output or in the rate of return on capital invested.
The flow value divided by the stock value provides a measure of the number of rotations of the stock (the speed of turnover or turnover time) in an accounting period. It is strongly related to the actual depreciation rate of fixed capital. Alternatively, the stock value divided by the flow value is what Marx called the "turnover time."
The faster the turnover of constant capital (i.e., the shorter the turnover time), other things being equal, the higher the rate of profit
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
.
Why "constant"?
Marx calls the constant part of the capital outlay "constant" because according to his labour theory of value, constant capital inputs - once produced, purchased, withdrawn from the market and used to create new products - do not by themselves add new value to output, or increase in value in the production process. Instead, the valueValue theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
of equipment and materials being used in production is conserved and transferred to the new product by living labor.
It is true that the ruling market prices for constant capital inputs could change after they have been bought for use in production, but normally this cannot affect those inputs (having been withdrawn from the market for use in production), only the market valuation of the outputs created from those inputs.
Variable capital
Constant capital contrasts with variable capital, v, the cost incurred in hiring labor powerLabor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
. Marx argues that only living labour creates new value. The higher value of output, compared to input costs, is (other things being equal) attributable to the exploitation
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...
of living labor-power only. Variable capital is "variable" because its value changes (varies) within the production process. Although most commentaries on Marx do not acknowledge this, these changes could be both positive or negative. A misapplication of labour, or the devaluation of types of labour activity by the market can mean the loss of part of the capital invested, or all of it. However, Marx does generally assume that labour will accomplish the valorisation
Valorisation
The valorisation or valorization of capital is a theoretical concept created by Karl Marx in his critique of political economy. The German original term is "Verwertung" but this is difficult to translate, and often wrongly rendered as "realisation of capital", "creation of surplus-value" or...
of capital.
Criticism
Critics of Marxian value theoryValue theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...
object that labor is not the only source of value-added goods.
Examples of such arguments:
- devaluations or revaluations of types of assets in response to changing demand conditions, which are influenced by price inflation. In national accountsNational accountsNational accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
and business accounts, for example, the change in the value of inventories held is adjusted for changes in their current market prices, affecting the profit calculation.
- Steve KeenSteve KeenSteve Keen is a Professor in economics and finance at the University of Western Sydney. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics and Marxian economics as inconsistent, unscientific and empirically unsupported...
argues that "Essentially, Marx reached the result that the means of production cannot generate surplus value by confusing depreciation, or the loss of value by a machine, with value creation" . His argument is, that a machine can add a value to new output in excess of the value of economic depreciation charged
- Marxism asserts that capitalist production reduces all production to a combination of commodity inputs to complete the M...M' circuit. However, when one considers human labor to constitute a particular kind of activity among the many necessary to the production of goods, and when one considers that the price of other input factors like raw materials, machines, facilities, land or even other intermediate goods may vary based on the availability of such assets on a market, then the labor commodity is no more or less variable than any other, whether or not it is the sole source of surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
, and hence profit. The dichotomy "fixed" vs. "variable" is thus a specious mathematicization of the actual "labor" vs. "non-labor" dichotomy.
Marxist response
According to some Marxists, the first two types of objection above cut to the heart of the main dispute between Marx and mainstream economic theory—their different conceptions of valueLabor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
.
For Marx's critics, value, if it exists at all, is a technical feature of economic calculus or is simply another word for the price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
of a product.
For Marx, however, economic value is a social
Social
The term social refers to a characteristic of living organisms...
attribution, which expresses a social relation
Social relation
In social science, a social relation or social interaction refers to a relationship between two , three or more individuals . Social relations, derived from individual agency, form the basis of the social structure. To this extent social relations are always the basic object of analysis for social...
between people that is specific to certain historical conditions. Inanimate objects can only feature in value relations as tokens of prior human effort, since they are not social beings. Thus, it is not the machine with which new outputs are produced that itself adds value to those outputs, but rather the people operating the machine who permit its value to be conserved and who operate the transfer of part of its value to the new outputs.
Another clarification is that Marx may have used the terms fixed and variable capital to emphasize the idea that the input cost of compensation can be varied by the enterprise, which sets the compensation levels of its workers, whereas the price of the other input factors sold to the company is "fixed," insofar as it is set by external vendors.
Value and price
Other Marxian economists note that, at any time, most of the stock of objects of value in a society has no actual market price, because those objects are not being traded (i.e. they are withdrawn from the market); they are either being used in production or consumption activities, or else stored for later use. This can be easily verified by striking a ratio between gross product and the estimated total asset wealth of a country in money units.In other words, this stock of owned objects has, at best, an ideal price
Real prices and ideal prices
Real prices and ideal prices refers to a distinction between actual prices paid for products, services, assets and labour , and computed prices which are not actually charged or paid in market trade, although they may facilitate trade...
which is estimated or hypothesized (the price it might have, if it was traded in the market).
Nobody however will say that because this stock of objects has no actual market price, that it has no value; everybody knows that its exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
could be expressed in money, within a certain range of probable prices; they may also know approximately that a quantity of one good is "worth" a certain quantity of another good.
This simple insight may help to clarify Marx's concept of value, because it shows that beyond prices there are also economic value relations referring to the changing relationships between objects of value which have no specific, defined or actual market price, and to the social outcome of the interactions between a myriad of prices. In turn, these value relations between objects reflect social relations between people.
The particular fetish of the money commodity as capital
The fact that the productive force of labour appears within capitalismCapitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
as the productive force of capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
was for Marx an example of reification
Reification (Marxism)
Reification or Versachlichung, literally "objectification" or regarding something as a separate business matter) is the consideration of an abstraction, relation or object as if they had human or living existence and abilities, when in reality they do not...
of the relations of production
Relations of production
Relations of production is a concept frequently used by Karl Marx and Friedrich Engels in their theory of historical materialism, and in Das Kapital...
or of commodity fetishism
Commodity fetishism
In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...
. In other words, property (a "thing") is given human
Human
Humans are the only living species in the Homo genus...
powers and characteristics which it does not truly have. Economists talk about the "productivity of capital" to describe the yield or return on capital, but capital itself "produces" nothing, people do that.
The fetish
Commodity fetishism
In Marx's critique of political economy, commodity fetishism denotes the mystification of human relations said to arise out of the growth of market trade, when social relationships between people are expressed as, mediated by and transformed into, objectified relationships between things .The...
of capital is broken as soon as living labour is withdrawn; then it becomes clear that the constant part of capital produces nothing, and declines in value. Because of its role as a traditional money commodity some individuals give a reference display of this fetish by seeing gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
as the only 'real' money, even in the current time when most money is lacking any substantial form whatsoever, even paper.
Critics object however that without the supply of means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
, labour also can produce nothing. That is, separated from means of production, workers are also nothing. This however raises the question of why and how workers come to be separated from the means of production which they have themselves created.
For Marx at least, the answer to this question is not "technical" but purely social
Social
The term social refers to a characteristic of living organisms...
, i.e. a matter of property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
relations which provides capital and its owners with a social power
Power (sociology)
Power is a measurement of an entity's ability to control its environment, including the behavior of other entities. The term authority is often used for power perceived as legitimate by the social structure. Power can be seen as evil or unjust, but the exercise of power is accepted as endemic to...
over people. But ownership by itself creates no net addition to new value produced, other than, perhaps, profit from speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
which redistributes existing asset values and claims to them.
Different capital compositions
The ratio, c/v is one measure of the organic composition of capitalOrganic composition of capital
The organic composition of capital is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. Marx first...
.
As noted above, the distinction between constant and variable capital overlaps with the distinction between 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,...
and circulating capital
Circulating capital
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,...
. Constant capital has both fixed and circulating components: for example, the fixed constant capital would include a factory and the machinery in it, while the circulating constant capital would include the raw matericals used and the intermediate inputs produced by the factory.
Variable capital is almost exclusively a component of circulating capital. However, the salaries of some "overhead" employees (who have long-term security from being fired or laid off) are in effect, fixed elements of variable capital.
See also
- capital accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
- division of labourDivision of labourDivision of labour is the specialisation of cooperative labour in specific, circumscribed tasks and likeroles. Historically an increasingly complex division of labour is closely associated with the growth of total output and trade, the rise of capitalism, and of the complexity of industrialisation...
- factors of productionFactors of productionIn economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
- faux frais of productionFaux frais of productionFaux frais of production is a concept used by classical political economists and by Karl Marx in his critique of political economy. It refers to "incidental operating expenses" incurred in the productive investment of capital, which do not themselves add new value to output...
- organic composition of capitalOrganic composition of capitalThe organic composition of capital is a concept created by Karl Marx in his critique of political economy and used in Marxian economics as a theoretical alternative to neo-classical concepts of factors of production, production functions, capital productivity and capital-output ratios. Marx first...
- productive and unproductive labourProductive and unproductive labourProductive and unproductive labour were concepts used in classical political economy mainly in the 18th and 19th century, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis...
- surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
- surplus productSurplus productSurplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
- surplus labourSurplus labourSurplus labour is a concept used by Karl Marx in his critique of political economy. It means labour performed in excess of the labour necessary to produce the means of livelihood of the worker . According to Marxian economics, surplus labour is usually "unpaid labour"...
Further reading
- Karl Marx, "Constant capital and variable capital", in Capital Vol. 1, Chapter 8 http://www.marxists.org/archive/marx/works/1867-c1/ch08.htm
- Karl Marx, "Fixed capital and circulating capital", in Capital Vol. 2, Chapter 8