Capital, Volume I - Part Two: The Transformation of Money Into Capital

Part Two: The Transformation of Money Into Capital

In Part II of Volume I of Capital, Karl Marx explains the three components necessary to create capital through the process of circulation: the first section of Part II, Chapter 4, explains the general formula for capital; Chapter 5 delves further by explaining the contradictions of the general formula; and the last section of Part II, Chapter 6, describes the sale and purchase of labor power within the general formula.

Money, as described by Marx, can only be transformed into capital through the circulation of commodities. Money originates not as capital, but only as means of exchange. Money becomes capital when it is used as a standard for exchange. The circulation of commodities has two forms that make up the general formula: C-M-C and M-C-M. C-M-C represents the process of first selling a commodity for money (C-M) and then using that money to buy another commodity (M-C): "selling in order to buy". M-C-M describes transacting money for a commodity (M-C) and then selling the commodity for more capital, (C-M).

The largest distinction between the two forms appears through the result of each. During C-M-C, a commodity sold will be replaced by a commodity bought. In this form money only acts as a means of exchange. The transaction ends there, with the exchange of use-values and the money has, according to Marx, "been spent once and for all." The C-M-C form facilitates the exchange of one use-value for another. On the contrary, during M-C-M, money is essentially exchanged for more money. The person who invested money into a commodity sells it for money. The money returns to the initial starting place, so the money is not spent, as in the C-M-C form of exchange, but instead advanced. The only function of this process lies in its ability to valorize. By withdrawing more money from circulation than the amount put in, money can be reinvested in circulation creating repeated accumulation of monetary wealth—a never ending process. Thus M-C-M' becomes the objective of M-C-M. M' stands for the money returned in the circulative process (M) plus the additional surplus value gained (M∆): M'=M+M∆. Capital can only be created once the process of M-C-M has been completed and money returns to the starting point to be re-entered into circulation.

Karl Marx points out that, "in its pure form, the exchange of commodities is an exchange of equivalents, and thus it is not a method of increasing value," and so a contradiction reveals itself. If the participating individuals exchanged equal values, neither of the individuals would increase capital. The needs being satisfied would be the only gain. The creation of surplus-value then becomes rather peculiar for Marx, because commodities, in accordance with socially assigned necessary values, should not create surplus-value if traded fairly. Marx investigates the matter and concludes, "surplus-value cannot arise from circulation, and therefore that, for it to be formed, something must take place in the background which is not visible in the circulation itself." According to Marx, labor determines the value of a commodity. Through the example of a piece of leather, Marx then describes how humans can, through the means of labor, increase the value of a commodity. Turning the leather into boots increases the value of the leather, because now more labor has been applied to the leather. Marx then explains the contradiction of the general formula. Capital cannot be created from circulation because equal exchange of commodities creates no surplus value, and unequal exchange of commodities changes the distribution of wealth, but still does not produce surplus-value. Capital cannot be created without circulation either, because labor creates value within the general formula. Marx writes, "It must have its origin both in circulation and not in circulation." A "double result" remains: The capitalist must buy commodities at their value, sell them at their value, and yet conclude the process with more money than at the beginning. The profit seemingly originates both inside and outside the general formula.

The intricacies of the general formula relate to the role of labor-power.

In the last section of Part II, Marx investigates labor-power as a commodity. Labor-power existing on the market depends on two fulfillment's: the workers must offer it for temporary sale on the market and the workers must not possess the means to their own subsistence. As long as the labor-power is sold temporarily then the worker is not considered a slave. Worker dependence for a means of subsistence ensures a large working force, necessary for the production of capital. The value of labor bought on the market as a commodity represents the definite amount of socially necessary labor objectified in the worker, or according to Marx, "the labor-time necessary for the production ," which means the food, education, shelter, health, etc., required to create and maintain a worker. The capitalists need workers to combine with their means of production to create a sell-able commodity, and workers need capitalists to provide a wage that pays for a means of subsistence. Within the capitalist mode of production it is custom to pay for labor-power only after it has been exercised over a period of time, fixed by a contract (i.e. the work week).