Process of Circulation of Capital

Date: Dec 10, 2019
Category: Informative

The circulation of capital within the economy plays a significant role in influencing the growth, cycle, and fluctuations that occur within the economic system. It is worth noting that the circulation of capital includes elements of intermediate goods and operating expenses. In essence, capital is a factor of production involved in the generation of goods and services. Capital circulates in the economy in three key stages, the first stage being M – C, the second stage involving the function of productive capital, and the third stage being C – M. The importance of capital circulation is directly derived from Marx’s explanation that the turnover of capital instrumentally influences the processes of production and self-expansion. Fixed capital includes all the capital assets that are held by a business for over a year, while circulating is used frequently within the economy for the production of goods and services. Modern economies, such as the United States, continue to rely on the effective circulation of capital to succeed in their productivity. Thesis: Smooth circulation of capital within the economy plays a vital role in boosting the level of production and consumption in the economic system.

 

The Circuit of Capital in the Economy

Capital has to undergo three key stages for effective production and consumption to be realized. These stages are explained below with effective illustration of this circulation.

  • First Stage: M – C

The first stage is M – C, which represents the manner in which a sum of money is converted into a sum of goods. Marx affirms that this stage involves purchasers converting their money into commodities and sellers transforming their commodities into money. In this regard, consumers take the produced goods for their own use, while the sum of money received by the seller could be continually used for the production of other products. This is a relevant stage because it plays a helpful role in offering the seller the opportunity to produce more and make it available to the buyer when needed. This is still a common feature in the contemporary capitalist economies where the seller takes this capital as a form of production. It ensures that producers meet their supply in the best ways possible, thus satisfying the increasing demand among consumers.

  • Second Stage: Function of Productive Capital

This is where the capital is put into work in the production of goods and services. The producer invests the money that is earned from the purchase of the goods and services to produce more. For effective productivity, the producer always has to hire laborers to assist in the productivity processes. The combination of labor, capital, and raw materials plays a critical role in the continued productivity. Heinrich affirms that in the performance of its functions, productive capital tends to consume its own constituent parts for the purpose of transforming them into mass products that exhibit higher value. Employees are always expected to put their best skills and knowledge to the productivity process, thus leading to these quality outcomes. The products of a higher value mean higher prices once they are taken to the market for consumers.

  • Third Stage: C – M

This stage is representative of the mass products that are in the hands of producers. They are always in their highest quality possible, and the producer takes them to the market to meet the rising demand of consumers on the market. Smith affirms that it is critical for producers to have these quality products in place to facilitate the process of capital exchange by first paying their employees, who later become consumers using their own wages. The payment of wages conforms to the level of productivity and becomes more interesting by turning around the earned money to the company in the form of goods purchases.

Importance of Capital Circulation in Modern Economies

Modern economies, especially the U.S and China, are only able to succeed in cases where capital is able to circulate effectively from consumers to producers, and vice versa. The World Bank indicates that negative issues in the economy, such as the Great Recession that hit the U.S. and the rest of the world between 2007 and 2008, tend to affect the efficiency of capital circulation within the economy, thus derailing the production process.

The first notable factor of capital circulation within the modern economy is that it facilitates the increase in the gross domestic product of the country through high-level economic activities. The gross domestic product of countries such as the United States and China has been on the upward movement because of the defined systems of capital circulation that exists. The World Bank highlights the view that the gross domestic product per capita in the U.S stood at 53,041.98 USD in 2013, and this could be clearly attributed to effective capital circulation and high level of consumption from the population. Moseley affirms that rampant and automatic exchanges within the economy make it easier for the gross domestic product to increase and grant the country with a better performance index. In a similar sense, countries such as China, despite wider adherence to communism, have experienced a sharp growth in their gross domestic product because of these exchanges. Accordingly, China’s GDP per capita stood at 6,807.43 USD in 2013, and this is still attributable to the circulation of capital in their economy. With clear capital circulation, GDP of the U.S. was recorded at 16.77 trillion USD, while that of China was 9.24 trillion USD. The best thing about this was the increase in the level of GDP, thus emphasizing the necessity of capital flows within the economy. It makes the economy smooth and running in the best way possible.

From the GDP graphs, both China and the U.S. seem to be enjoying their rising GDPs because of the vital capital flows within their respective economies. The increasing significance of capital distribution in the expansion of GDP has automatically led to increasing interest in industries that also create employment while paying their employees fair wages for the services delivered. This is not necessarily a comparison between China and the U.S. GDP, but it is a clear highlight of how the circulation of capital influences the overall growth of GDP in these large economies. It is just interesting to watch the rise in GDP with the increasing level of capital circulation.

Secondly, the circulation of capital is instrumental in boosting production within the modern economies. Modern economies have experienced a high rate of mass production because of the encouragement of capital circulation. Smith agrees that governments in countries such as the United States and China have been careful to encourage their companies to produce in large masses to meet the demand in their markets. For example, the average level of production within the United States economy stands at more than 107.2%, thus highlighting the significance of capital circulation. Heinrich explains that with industries receiving money from consumers, they become more stable and focused on the production process. They receive this money in the form of capital by purchasing raw materials that play a critical role in boosting the high productivity being enjoyed at the moment. Again, the same money is converted into labor through compensation mechanisms for workers involved in the use of their skills and knowledge to produce goods and services. The employment of skills and knowledge in the area of employment is indicative of the mass production within the economy. The cycle continues as these employees return to purchase these products, thus expanding the economy further.

Thirdly, it could also be noted that capital circulation in the economy is important in the creation of employment. In the modern economy, unemployment raises concerns because it increases the levels of dependency on the rest of the hard-working population who have to pay taxes to sustain the unemployed. Contemporary economies, such as the U.S and China, are taking full advantage of the capital circulation to create industries that offer employment to their citizens. For example, the World Bank affirms that the employment rate in the U.S. has already increased by 62.5% with the unemployment rate subsequently dropping to 5.83%. In China, the unemployment rate stands at 4.05%, meaning that the majority of the population is employed and actively participating in the job market. The positive influence of capital circulation on the employment rate within the modern economy indicates that it should be continuously encouraged with the view of leading to lesser dependency levels. Therefore, governmental systems have gone ahead through their economies to their active involvement in the whole processes of industry operations and their ability to create employment. In the views of Marx, the logic that has always been employed in this case is that with continued circulation of capital, companies have the chance to generate more opportunities for employment through the mass production approach. This means that many individuals would be required for the production process by employing their different skills and knowledge. Increased working opportunities in factories ensure that the goals of any modern economy is realized through balanced production and balanced earning among individuals within these countries, thus alleviating poverty levels.

Factors Influencing the Circulation of Capital in the Modern Economy

The modern economy as seen through the eyes of the United States and China has undergone a massive transformation that comes with different factors influencing the circulation of capital within the economic system. Every government wants to see capital circulating appropriately with market forces directing it. Numerous factors that impact the circulation in contemporary economic systems are explicated below.

The first notable factor that has influenced the circulation of capital in the contemporary economy is technology. Technology is in itself the key factor of production in the current economy in countries such as the United States. It has made it easier for existing industries to produce on a large scale as it supports the conversion of raw materials to finished products. Nevertheless, Heinrich notes that technology has slowed the level of employment because it does more than human labor is supposed to do. This argument might be valid to some extent, but not fully justified because technology boosts the level of information sharing and overall interaction between consumers and producers within the economic system. This means that they are in a better position to circulate capital in the easiest and most interesting ways possible. Through technology, consumers are made aware of the products on the market through avenues such as social media. With increased awareness, they are able to spend their money to acquire these goods, thus leading to the capital exchange. This is different from the past when consumers had to literary search for information about the existing producers and products. In essence, the role of technology in influencing capital circulation cannot be denied because of its trendy nature in the contemporary economy.

Another key factor influencing the process of capital circulation is the state of the economy. The level of economic performance plays an instrumental role in determining the rate and amount of capital circulation. Marx affirms that it is understood that the economy passes through three key stages including the boom, recession, and depression. The circulation of capital is always higher during the boom stage because many consumers in the economy can afford to purchase different products from industries. In a similar sense, industries can enjoy the economies of scale, thus producing at their best level. During the recession and depression, the circulation of capital drops because of the inability of many consumers to afford to purchase the products from the industries. Sum and McLaughlin explain that the Great Recession that happened in 2007-2009 in modern economies, such as the U.S., negated the circulation of capital by increasing the rate of unemployment to 10%. Most of these unemployed individuals would not afford to spend money on the goods produced, thus narrowing the circulation. The table below illustrates the drop in the economy and how it negated GDP of the country and the subsequent circulation of capital.

Quarter

Real GDP (in Billions)

2007 IV

$13,363 (cyclical peak)

2008 IV

$12,994

2009 II

$12,810 (cyclical trough)

2009 III

$12,861

2009 IV

$13,019

2010 I

$13,139

Time Period

Percentage Change in Real GDP

2007 IV – 2009 II

-4.1%

2007 IV – 2009 IV

-2.5%

2009 II – 2010 I

+2.6%

2007 IV – 2010 I

-1.7%

In light of these statistics, it could be affirmed that the level of capital circulation during the recession in 2007-2009 has decreased because of the inability of consumers to afford to purchase the available goods. Moreover, companies were not at their highest level of productivity, and inflation was at its best, thus increasing the overall costs of production. Moseley opines tht such factors led to increased retrenchment, and this was not good for the circulation process. This only improved after the recession as highlighted by the positivity in the growth of the economy. It moved upward because of the effective exchange coupled with supportive economic conditions in the country. Therefore, the best way to support the circulation process is to increase the level of employment in the economy and ensure that individuals are compensated in the fairest way possible to be able to purchase what the market offers.

Conclusion

In conclusion, the circulation of capital is one of the most interesting economic topics because of its practicality in terms of the contemporary economic systems operations of countries such as the United States of America. In any given economic order, capital moves from consumers to producers or sellers, who in turn offer their products to consumers. This is a natural exchange process on the market. Again, producers get this money and utilize it to convert their raw materials into more valuable products, using the available labor. They pay laborers who again purchase their products, thus completing this circulation. In the United States, China, and other global economies, the circulation process has undeniably played an important role in terms of expanding their GDPs. With exchanges, they are performing much better. Additionally, the level of productivity within the industries has reached remarkable levels because of the exchanges that happen within the economy. This has made factories more stable and focused on the attainment of the set goals. However, in monitoring the circulation of capital in the contemporary economic context, it is crucial that countries consider economic changes and technological forces in place. Inappropriate application of technology will lower the level of circulation because of inapplicability, while poor economic conditions make it just unaffordable for individuals to purchase products and facilitate the exchange process. An in-depth understanding of capital circulation is relevant for determining the interplay between market conditions.