Constant capital

Constant capital (c), 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 buildings, (2) raw materials and ancillary operating expenses (including services purchased), and (3) certain faux frais of production (incidental expenses).

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).

Measurement

Constant capital can be measured as a stock 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.

Why "constant"?

Marx calls the constant part of the capital outlay "constant" because according to his labour theory of value, constant capital inputs - once purchased, withdrawn from the market and used to create new products - do not by themselves add new value to output, or increase in value in the production process.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 value 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 power. 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.

Criticism

Critics of Marxian value theory object that this attribution of the source of value-added to labour only is arbitrary and political, not scientific. In various ingenious thought experiments, cases are presented in which constant capital appears as the only possible source of the variability of an entrepreneur's capital.

Examples would be devaluations or revaluations of types of assets in response to changing demand conditions, which are influenced by price inflation. In national accounts 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 Keen also argues for example 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" (Debunking Economics; The Naked Emperor of the Social Sciences, 2004, p. 294). His argument is, that a machine can add a value to new output in excess of the value of economic depreciation charged.

Marxist response

According to some Marxists, this type of objection cuts to the heart of the main dispute between Marx and mainstream economic theory -- their different conceptions of value.

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 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 which adds value to those outputs, but the people operating the machine who conserve its value and operate the transfer of part of its value to the new outputs.

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 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.

The fetish of capital

The fact that the productive force of labour appears within capitalism 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.

The fetish of capital is broken as soon as all human labour is withdrawn; then it becomes clear that the constant part of capital produces nothing and declines in value, ultimately leaving nothing but a situation similar to a ghost town.

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.

Different capital compositions

The ratio, c/v is one measure of the organic composition of capital.

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.

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