The advanced capital can then be thought of as the advance of productive-capital during all of this period, because as Marx describes in Capital II, as a continuous process, capitalist production does not cease at the point that the production process ends, and the circulation process begins. Industrial capital must be able to advance sufficient productive-capital so that production can continue during the circulation period without waiting for the capital value to be realised, and converted once more into productive-capital.
For example, suppose the traditional production process for pottery consists of the production of 1,000 25 piece dinner sets. In other words this is the traditional amount produced before it is sent to market. It takes 4 weeks to produce these 1,000 dinner sets. Each week £1,000 is advanced as constant capital, in the form of clay, glaze, lithographs etc., and £250 is advanced as variable capital. There is a 100% rate of surplus value, so that each week, the labour-power creates £250 of surplus value.
At the end of 4 weeks, £4,000 has been advanced as constant capital, and £1,000 as variable capital, with £1,000 of surplus value being produced. The total value of the pottery produced is then £6,000, so that each set sells for £6. However, before this £6,000 can be used to buy constant-capital and labour-power once more, the pottery has to be sold, and the money raised has to buy the necessary means of production and labour-power. The means of production themselves may take some time to acquire, especially where they have to be transported from distant markets. Suppose this circulation time amounts to a further 2 weeks, during this period, production must continue, and so the productive-capitalist must have an additional amount of capital to cover this period.
In total, they will need to advance £6,000 of constant capital, and £1,500 of variable capital to production. Whether they pay for this capital in advance, and indeed, as will be demonstrated later, whether the price they pay for these commodities is the same as the capital value advanced is irrelevant. This £7,500 of capital-value is all the capital they will require to ensure that production continues throughout the year, because after the first 6 week turnover period, capital will flow back to the firm every 4 weeks, covering the capital that needs to be laid out for each production period. That is because production period 1 runs from week 1-4, period 2 runs from week 5-8 and so on, so that the value of production period 1 returns in week 6, of period 2 in week 10, of period 3 in week 14 and so on.
The rate of surplus value is then the proportion of surplus value produced as against the variable capital advanced during this turnover period. That is (s = £1500 / v = £1500) x 100 = 100%. But, if we assume a 48 week year, then with this 6 week turnover period, the advanced capital remains £7,500, but in a year the total surplus value produced is 48 x £250 = £12,000. So, the annual rate of surplus value is then (s = £12,000 / v £1,500) x 100 = 800 %.
Looking at this again, we can see that the same result is obtained if we take the rate of surplus value of 100%, and multiply it by the number of turnover periods during the year, in this case 8. This gives us Marx's definition of the annual rate of surplus value as (s x n/v) x 100, where s is the rate of surplus value, n is the number of times the variable capital turns over during the year, and v is the variable capital advanced, i.e. for one turnover period.
This demonstrates the significant effect that the rate of turnover has on the annual rate of surplus value, and therefore on the rate of profit. It also demonstrates the difference between the advanced capital and the laid out capital. The advanced-capital is the productive-capital advanced for a single turnover period, whereas the laid-out capital is the total amount of capital consumed in production during the year. In the above example, £1,000 of constant capital is consumed each week, and £250 of variable capital per week is consumed. In a 48 week year then the total capital laid out is 48 x (£1,000 + 250) = £60,000.
This demonstrates, as Marx describes, the falsity of bourgeois calculations of the rate of profit, because they are calculated on the basis of this annual figure of laid out capital rather than on the advanced capital. The Rate of Profit calculated on Marx's basis above is the surplus value, for one turnover period, multiplied by the number of turnover periods in the year, divided by the advanced capital, i.e. for one turnover period.
That is £1,250 x 8 = £12,000 surplus value.
£6,000 constant-capital + £1250 Variable Capital = £7,250 advanced capital.
Rate of profit (12,000/7,250) x 100 = 165.5%.
But, calculated on the basis of bourgeois accountancy and economics it is (12,000/£60,000) x 100 = 20%! The slight difference between this figure multiplied by the number of turnovers in a year, and the figure of 165.5% is because not all of the surplus value produced is realised in the year, as production periods overlap turnover periods.
The advanced capital here refers to the capital value of the productive-capital advanced to production, not to any advance of money-capital. Bourgeois economists like Adam Smith confused themselves with these two separate things in trying to understand the process of the circulation of capital, and the Temporal Single System Interpretation makes a similar mistake.
In fact, the advanced capital here refers to the advance of capital-value to the productive process not the advance of any money-capital. It does not matter whether workers are paid daily, weekly monthly, or whether they are paid in advance or in arrears. The capital value of variable capital advanced during a turnover period is equal to the value of the labour-power for that period, irrespective of whether the labour-power has been paid this amount in wages or not. In fact, if the workers are paid a month in arrears, then for any turnover period of less than a month, they will already have produced new value equal to the capital value of the variable capital, plus a surplus value, and it will have been realised and converted into new variable capital before the workers are even paid!
As Marx puts it,
“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.” (Capital II, p 187)
Note Marx's terminology here. Firstly he begins by making clear that what he is talking about is “the advanced productive capital”. To make clear it is not the advance of the money-capital used to purchase that productive capital, that Marx is talking of, he then says that what he is doing is only to “fix all its elements in the money-form”. Finally, to make clear that his analysis here is one based on the actual capital-value advanced, and not on the money-capital advanced, he makes clear that the use of money here, is merely a convenience of calculation, and that he is using it essentially only in its role as “money of account”.
Variable Capital is not the same as wages even though Marxists often equate the two. Variable Capital is the capital value of the labour-power advanced to production, and as with every other value is objectively determined on the basis of the labour-time required for the production of that labour-power. But, wages are a phenomenal form of the value of labour-power, they are the market price of that labour-power, and like any other market price, it can vary considerably from the underlying value as a consequence of variations in demand and supply. At any one time wages in general may be above or below the value of labour-power, and in addition any particular individual capital may pay wages which are above or below that value. But, these variations do not change the value advanced to production in the form of variable capital.
Where a particular capitalist, or indeed capital in general pays wages below the value of labour-power, this means that the realised surplus value is greater than the produced surplus value, and vice versa. This is no different than where the market price of the commodity being sold is higher than the price of production of that commodity, because of similar variations in demand and supply. Under such conditions, the realised surplus value is similarly higher than the produced surplus value, and vice versa. Similarly, as Marx points out, sometimes the market price of materials rises sharply due to a sharp rise in demand. Yet, this higher price sometimes cannot be passed through into the market price of the end product, because of the elasticity of demand for the particular commodity. In that case, again the producers of that commodity have to absorb some of the increased cost of the materials from the surplus value, so that again the realised surplus value is less than the produced surplus value.
None of these variations in prices change the objectively determined capital-value advanced to production. The same applies to particular capitalists who are inefficient, or incompetent, or on the contrary are more astute than their competitors. Such individual capitalists may as a consequence be able to purchase the means of production or labour-power they require more advantageously, or vice versa. As Marx describes in Capital 1, in determining such values, what is used as the yardstick is the average. If some particular capitalist chooses to use spindles made out of gold rather than steel, they will not be able to advance a capital-value based upon gold, even though that is what they have used. They will only be able to advance a capital-value based upon steel spindles.
The same applies to whatever money price was paid for the particular means of production and labour-power advanced to production. It is not this money-capital advanced that is relevant in determining the value of the commodities produced, or calculating the rate of profit arising from that production. As Marx puts it,
“The rate of profit must be calculated by measuring the mass of produced and realised surplus-value not only in relation to the consumed portion of capital reappearing in the commodities, but also to this part plus that portion of unconsumed but applied capital which continues to operate in production. However, the mass of profit cannot be equal to anything but the mass of profit or surplus-value, contained in the commodities themselves, and to be realised by their sale.”
Capital III, Chapter 13