Chapter 3. The Circuit of Capital
(1) What is capital?
While I was reading Capital, I was worried incidentally and wondered. It is about the issue: "What is capital?" in Capital. This seems to be self-evident. But the entity and the definition are not clear when we give it a second thought.
① Is it cash?
② Does it also contain deposit?
③ Does it contain borrowing ?
④ Is it capital of a corporation?
⑤ What does it point at in case of the private industry?
⑥ There is not relevance with the capitalist as said commonly?
My idea did not take shape, and I became confused completely.
It is accounting theory that hit me then. Capital elucidated the economic structure of capitalistic society, and accounting theory is applied to the capitalistic society actually. Then both should include some commonness or, the greatest common divisor. Luckily enough I was able to come across a book which could help me understand "what is capital?" It is "Modern Times Accounting Theory," introduced in the following (Mr.Yamamasu, Keio University professor's work). As the introduction will become long, I will first describe the conclusion which I want to say.
In the first, "capital" of Capital has various aspects, and changes every moment. "The formula for the circuit of money-capital is: M----C…… P…… C'----M' ."(Vol. 2, P.31)
Namely capital turns into money form or commodity form, and self-expands. Therefore it can be said that Capital "discussed the movement of business capital in capitalistic society".
And the second is "the movement theory of capital." Accounting is just the theory which grasps movement of capital as calculation. Therefore we may know the contradiction or a jump of the logic if we examine carefully Capital with the precise accounting theory. It is the above-mentioned two points that I want to say.
(2) A viewpoint of "business capital movement" in Capital
I would begin, at once, the introduction of "Modern Times Accounting Theory." Mr.Yamamasu describes the general business capital movement before the explanation of accounting theory in this book. This is the business capital movement itself in Capital.
"Needless to say, enterprise is the business management form peculiar to capitalistic economy-society. Its aim of activity is self-expansion of capital or pursuit of profit. And the economic activity of enterprise can be seen as the purchase of material necessary for production, retention of labor-power, production of product or service, and their sale.
But once we are going to catch their various activities on the unified footing, we must grasp it as unified movement of business capital led by a given purpose. Even if having diversities, the economic activity in enterprise is essentially a reflection of functioning activity of business capital, and it is just nothing but concrete expression form of the self-expansion activity of capital itself." (Modern Times Accounting Theory P .6, by Tadahiro Yamamasu; translation by the author)
Professor Yamamasu begins first with explaining the peculiarity of economic activity in enterprise. Next I am going to mention on the movement of business capital in Capital.
"Movement of business capital begins with the inflow of the money that makes concrete activity of enterprise possible, becoming a source of revenue and a acquisition of profit. And the capital flown into an enterprise in the form of money is emitted under a constant plan one after another and comes to display power as capital.
For example, a part of it functions as productive capital by purchasing things such as raw materials / equipment / accommodation, and another part transforms into commodity capital. And it transforms into money-capital again so long as business performance changes smoothly. Here the self-expansion is achieved. This movement of business capital is explained in the next form.
MPM ─── C {……… (P) ………C' ─── M'
L
In other words, transformation of money as capital (M) into the means of production and labor-power, their inner movement, transformation of commodity produced (C') into money(M'). Moreover, it repeats endless circle while following such processes."(ditto P .7)
The form which came out here is the reproduction schem of Capital, Vol.2, part 1 "the metamorphoses of capital and their circuits." I want to pay continued attention to the part hereafter;
"If not caught by calculation one by one, movement process of business capital cannot expect to achieve sufficient management. And it naturally promoted the rise of profession of corporate accounting." (ditto P .7)
In other words, corporate accounting has developed in order to accurately manage business capital. Accounting will be the best theory as management through figures at the present.
(3) Different aspect of business capital flows
Then how is "the movement of business capital" caught in corporate accounting?
①Procurement part of capital
"So the mode of the purpose activity which business capital acts is traced concretely, and it will be surveyed from the viewpoint of corporate accounting.
As pointed out already, the movement of business capital begins mostly with the inflow of money capital. And the primitive form of those capital intake is nothing but new procurement from exterior. In other words it is commonly called the investment of capital or borrowing. Procurement by self-expansion is possible so long as those circuit-movement will go on smoothly after having started.
In other words reinforcement and repletion also become possible by the internal reserve of income through production and selling. And they will be added to circuit-movement gradually, too.
Therefore the acquisition of this capital has two forms. We will name the former, management part of capital, and the latter, cultivated part of capital here. And if an above-mentioned thing is arranged, it will become as follows."(ditto P .12)
[Procurement part of capital]
(a) Management part of capital (paid-in capital and liabilities)
(b) Cultivated part of capital
(ⅰ) Accumulated part of capital (retained earnings)
(ⅱ) Earned part of capital (revenue)
Professor Yamamasu shows an answer to my question little by little by tracing the mode of business capital concretely. The question is "What is capital ?" that I brought up first. I will continue the introduction.
②Exercise part of capital
"Based on a given plan, capital flowing in an enterprise will transform into productive capital or commodity capital one after another. We will temporarily call them: practical-use part of capital. And practical use of capital means occurrence of cost. But the business capital which transformed into productive capital or commodity capital is nothing but the existence in process of circuit-movement as capital after all. Therefore the next two parts can always be found when observed at any point.
(a) The part which transforms into other things for self-expansion and disappears by oneself
(b) The part which does not reach that stage yet
So we will call the former, used-up part of capital, and the latter, appropriate part of capital temporarily, but the distinction of both is not essential.
Next, there is capital on loan outside. And it is neutral in profit and loss. We will call it dispatched part of capital temporarily here."(ditto P .13)
[Exercise part of capital]
(a) Practical-use part of capital
(ⅰ) Used-up part of capital (expenses)
(ⅱ) Appropriate part of capital (outlying assets)
(b) Dispatched part of capital (investment and receivable)
In Modern Times Accounting Theory, some things are explained furthermore thereafter. But as we accomplish our purpose if the outline of accounting theory is understood here, we will go on to the next.
③Waiting part of capital
"We tried to trace the movement of capital from the procurement part to exercise part. There was also the capital which waited for an opportunity to be used, keeping it as money-capital. Therefore, between the amounts of capital procured and capital exercised, some gap exists. And the next equation is formed.
"Amount of exercised part of capital" + "Amount of waiting part of capital" = "Amount of procurement part of capital"
In business accounting, in accordance with such a balance relation, the concrete change is made clear on the composition of business capital. Also, through it, the amount in hand of business capital and accounting of the increase and decrease are done so organically."(ditto P .14)
This is "mode of business capital movement."
We will go on to the next theme. In business accounting, how will the movement of business capital be grasped? For the people understanding accounting theory, what the movement of business capital is will become clearer.
(4) How to grasp business capital movement in corporate accounting
①Illustration of business capital movement
"I often described that business accounting is to catch the movement of business capital from calculation side. But campaign of business capital is endless, and is never over. Nevertheless, (a) In order to get the various index on management
(b) In order to make report or distribute to the offered of capital
Enterprise needs to check the next things at every certain period.
(a) Change of composition in business capital
(b) The amount of increase in business capital
Naturally therefore, the concept of the fiscal accounting year or accounting period was born, and we divide the continuing movement of capital artificially and then close all the units of accounts. Then we make arrangements on record and account of certain prescribed period and try to make a judgment on capital composition and calculate capital increase amount. This is nothing but accounting operations commonly called: settlement of accounts.
Now, we sum up daily records and accounts at temporary point and try to make an account of business capital itself. It will be like the next figure for example if we illustrate this."(ditto P .15)
This is also an illustration of "(3) Mode of business capital movement."
② Profit and loss statement
I will introduce next that profit and loss statement, and balance sheet which are led from this illustration.
"In the above table, used-up part included in the part of debit means capital sacrifice, which has already disappeared as capital in fact. But that used-up part did not disappear meaninglessly. Rather, the earnings of new capital in place of the part must have been achieved by this sacrifice. In other words the recovery of used-up part is done by the other earnings, and when earnings exceeds the used-up, even capital increase of the balance is accomplished.
Therefore in the net earnings part in capital, namely, the amount of increase part, a calculation becomes possible by the next work. In other words, from this account illustration, used-up part and earnings part are taken out, letting the amounts of both correspond.
In this way the capital earned in the current fiscal year is called revenue, that is even the increase of capital keeping causal relationship with the used-up instead of management from exterior or accumulation of the past financial year. And capital used-up for earnings is called expenses and the balance of both, or the increase part is called profit.
However, capital movement is not always followed by increasement. There can be a case where capital shrinks adversely. Negative balance appearing at such a time is called loss. The next table represents the former account with these technical terms again, which makes the original of profit and loss statement." (ditto P .16)
③ Balance Sheet
This chapter has been introducing a lucid explanation of business capital movement from Modern Times Accounting Theory by professor Yamamasu. Derivation of balance sheet will be introduced finally.
"Amount of profit confirmed in this way shows that business capital increased, passing through capital movement; means the increase of procurement capital, and the amount suitable for this must increase as waiting capital or exercising capital.
So, this time the part except used-up part or earnings part, is picked up from the illustration of business capital account. Amount of the earnings part is larger than amount of used-up part so long as the former virtual illustration is premised. Similarly, total of waiting part, and unused-up part in exercise part, is larger than total of the foreign procurement part and accumulated part of the past financial year.
Moreover, the balance is equal to the amount of increase part that otherwise calculated. In other words, if the earnings exceeds the used-up with proceeding of capital movement, new capital is secured, and the debit side is reinforced with the same amount, too.
Therefore, with the exclusion of used-up and earnings part from the previous account illustration, capital balance as a result of capital movement is summed up therein if the balance is appropriated in the credit side to keep balance between debit and credit. And they describe composition of business capital at a temporary point, and, through the process of comparison of balance, the increased part of capital, namely profit is calculated.
Furthermore, in business accounting, waiting part of capital is called monetary asset, unused-up part: outlying asset, dispatching part: receivables and investment, and they are summed up broadly and called assets.
And management part from exterior is classified roughly into liabilities and paid-in capital among procurement part according to difference of resource if the terms of business accounting are used. In addition to the above, among profit of the previous year, the part not distributed but reserved inside; namely accumulated part, will be called retained earnings.
The next table expresses balance composition and increase conditions of the business capital at a temporary point in terms of business accounting. And this makes the original of balance sheet."(ditto P .17)
(5) Circulation of capital and recovery theorys
A quotation from Modern Times Accounting Theory ends here, but I would like you to see the illustration of business capital movement once again. Overall, business capital moves counterclockwise as shown in the next figure.
In other words, capital is carried on the flow of [management → waiting → exercise → earnings → accumulation → management] and change slowly or fast. This is explained as "recovery theory" of business accounting compared with "consumption theory" of nonprofit accounting.
"If consumption does not go ahead, recovery is impossible. Consumption in this case premises assets invested beforehand. Under this condition, capital takes the following movement form.
Liabilities/capital → assets →expenses → revenue → liabilities/capital
This does a gyrating movement of counterclockwise as shown in the table below, and profit is added, and at every term a bigger arc will be drawn. It is spiral circuits movement. It is in the same direction as the left gyrating movement where tangible fixed asset turns into expense through depreciation. Therefore this recovery theory will roll up movement of depreciation without contradiction." ( Nonprofit Accounting, P .152, by Torazo Sakamoto; translation by the author)
If circuit of capital described in Capital (reproduction schema) and recovery theory of business accounting are compared here, the next thing can be understood.
① M of reproduction schema is equivalent to waiting part of recovery theory.
② The part shown below of reproduction schema is equivalent to exercise part of recovery theory.
Mp
C {--------- (P)---------C '
L
And "exercise part" is developed to dispatched part + practical used-part (unused-up part + used-up part). Used-up part is developed furthermore to the "factory cost report" which is supplementary statement of financial statements.
③ C'------ M' of reproduction schema is equivalent to earnings part and accumulated part of recovery theory.
A Marxian economist says that reproduction schema should not be utilized in the theory of price level because it is the theory of value level. But it is described as follows in Capital.
"For the purposes of the following analysis we may leave out of consideration the distinction between price of production and value, since this distinction disappears altogether when, as here, the value of the total annual product of labour is considered, i.e., the product of the total social capital."(Vol. 3 Chapter 49, P .840)
"Secondly, after the abolition of the capitalist mode of production, but still retaining social production, the determination of value continues to prevail in the sense that the regulation of labourtime and the distribution of social labour among the various production groups, ultimately the book-keeping encompassing all this, become more essential than ever." (Vol.3, Chapter 49, P.859)
In this chapter, depending on this description of Capital, reproduction schema of value level and accounting theory of price level are discussed at the same level. Reproduction schema mainly appears in Capital Vol. 2. Next two points became clear in this chapter.
① What is capital?
② In practical used-part of business capital, used-up part is completely different from unused-up part. That is: the former is balance sheet item (stock), and the latter is profit and loss statement item (flow).
When two laws, especially the second law is examined in the following chapter, these results will display their effects. "Basic proposition of Capital" of chapter 2 is vertical pillar of Capital, and "circuit of capital" of this chapter is the horizontal pillar of Capital.
If this is compared to a drawing plan, Capital Vol. 1 and Vol. 3 where production of surplus-value, accumulation of capital, conversion to profit, etc, were discussed, are elevation plans, and Vol. 2 discussing circuit of capital and its turnover are floor plans.
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