For example, steel as a raw material is circulating capital, whereas, a drill bit used in a machine is fixed capital. Yet, steel used in the production of a ship may be tied up for say two years, whilst the ship is constructed, before its value is realised in the sale of the ship, whilst a drill bit may be used up in a matter of days or weeks. What is determinant here is that the value of the steel is wholly transferred in the production process – construction of a ship – whereas the value of the drill bit is not. The drill bit may be used to drill holes in hundreds of different products, each constituting a separate production process, but only transfers a part of its value to each one, the remainder of its value remaining fixed within it.
This definition developed by Marx is distinctive compared to some of the other definitions of fixed capital. Those definitions have tended to focus on these secondary issues such as the length of time the capital is used, which is also connected to the durability of the physical capital. But, Marx shows that all of these other definitions are inadequate and lead to confusion and error. For example, diamonds are one of the most durable materials in existence, but diamonds are rarely fixed capital. They are normally circulating-capital, comprising the raw material of jewellers, for instance.
Other definitions of fixed capital have focussed on the size or physical fixedness of the capital. But, as Marx points out, a ship, a train, or an aeroplane is fixed capital, but they are not immobile. On the other hand, coal being fed into a boiler is fixed in one place, but is circulating-capital, because all of its value is transferred to the production process in one go.
Adam Smith was particularly confused over the definition of fixed and circulating capital, and his confusion was passed down to his followers. As a result of his confusion, Smith moved from one definition to another. In the process, he confused fixed and circulating capital with constant and variable capital. Smith uses a number of the definitions used above even though they contradict each other.
Smith also confuses circulating capital with capital in circulation. Marx makes clear that the definitions fixed and circulating can only apply to productive-capital. But Smith defines money-capital and commodity-capital as circulating-capital on the basis that they circulate, i.e. that they change masters. Indeed, for Smith it is the fact that they change masters, which gives rise to the production of surplus value. In other words, the production of surplus value arises from the process of exchange rather than from production. Marx demonstrates in detail why this cannot be the case, in Capital I, and in Theories of Surplus Value.