Constant Capital, Variable Capital, and Surplus Value

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Constant Capital, Variable Capital, and Surplus Value

Introduction

Constant capital is the total cost of a production process at a given time that does not change, referred to as the fixed costs of production. This could cover the costs of machinery, setting up the plant, equipments, new technology, computers, fixed assets like furniture, etc. These costs do not change whether production has taken place or not. On the other hand, variable capital is the costs that change with the level of production. This could include cost of raw materials, electricity, fuel, employee wages, etc. Surplus value can be defined as the new value created by workers in excess of their own labour cost or simply referred to as gross profit. This surplus value is the basis of capital accumulation. Thus, capital accumulation is the gathering or amassing of objects of value that increases wealth through concentration. Capital accumulation is the creation of wealth or financial asset which is later invested for the purpose of making more money. Human capital is another form of capital where one can invest to improve his or her abilities through education.

Capitalism from an economic viewpoint is the economic activity that is structured around capital accumulation. Factors of production are those variables that enable inputs to be put in place with the ultimate result of finished goods or services. Therefore, input determines the quantity of output. In economics, factors of production are the inputs into the general production of other useful products, they include, land, capital, labour and the entrepreneur organizing the factors together. Stocks like land and labour and capital goods are referred to as primary factors of production because they facilitate production, but neither becomes part of the product, e.g., Raw materials or become significantly transformed by the production process such as fuel or electricity. Other factors of production include include natural recourses, human capital (Stock of knowledge), state of technology, entrepreneurship, etc.

Role of Constant Capital on Capital Accumulation

Combining certain materials, tools, machines, and labour produces goods and services that people wish to purchase since they consider these goods and services essential. Some economist refers this attribute of commodities as use value, i.e., The production process of combining these different factors of production to make something useful. Therefore, labour power, tools, and machinery are all indispensable factors that can not be made. The problem is how can these factors of production be most efficiently combined by using the fewest input factors. Efficiency is using all the available factors of production to produce the highest possible output. Sometimes the level of unemployment prevails to contain workers’ demand for higher wages, fewer working hours, and better working conditions. Labour power is also wasted workers who are able and willing to work cannot find jobs. This implies that unemployment is foregone production, and cannot be referred to as efficiency. Labour power can be used in a way that it harms the health of workers who will need medical services. This can be averted if higher standards of occupational safety and health are put in place.

Efficiency can be defined economically as the costs a company must incur without considering the side effects the effects the business might have on the environment, health of workers, and the society. The neglect of social costs in mainstream economics leads to aspects of the process of production that will go beyond the minimum input. All companies are concern with profit maximization; therefore, costs must be as low as possible. Economists define profit as the difference between between company revenue and the cost of buying materials, machines, hiring workers, etc. Is labour the ultimate source of a company’s profits? To answer this question, a basic distinction must be made between the working class and the capitalists.

Alot of the money goes to speculating in land, financial assets, and commodities, but these speculations do not produce items of value. So they do not generate profit. It just involves moving existing values amounts from one pocket to another. It is important to note that, money is used to purchase a means of production and hiring employees who produces sellable goods and services can create value. Only when the original value of capital is smaller than the value of the commodities produced, and then revenue a company receives by selling these commodities can be termed as profit. Therefore, the difference between the revenue and the original capital is called the surplus value. Thus, the profit accumulation process begins when with money spent on markets, i.e., labour power and other means of production, and ends with money earned when a firm sells these commodities, i.e., goods and services. A company pays for the means of production and labour power according to the exchange value of these factors. Labour power is quite crucial as the value of raw materials is determined by the time and labour required to extract and process them.

Capitalists force workers to work more hours, and considering the principle of equal exchange, the worker is paid according to the value of his or her labour power (Wage Goods). If they work for more time than are needed to make those wage goods, additional wealth, surplus value is produced.

Rosefielde, (2001), argue that the production of surplus value is the principle reason to hire workers. A company realizes this wealth when it sells all the goods and services that are made within a given time. This labour that produces a value that is higher than the money invested originally, and that portion of the outlay is termed as variable capital. It should be noted that only constant and variable capital represents the cost of buying the means of production. Hiring labour power and the surplus value represents the additional value. Companies use this surplus value to pay dividends for shareholders, interest to creditors, rent to land owners, and salaries to managers, who are the capitalists’ class. The capitalists’ class lives off the surplus value that is produced by the working class. What the capitalist’ class do with the surplus value is up to them, as they own the means of production and the labour power, as well as the commodities produced by their companies. They can hire more managers, live in luxury, invest in additional means of production and labour power, and keeps the process of capital accumulation going. The only factors that can limit this process of capital accumulation and disposal by the capitalists’ are competition from other capitalists’ enterprises and certain technologies.

Neoclassical economic theories analyses inequality, underemployment, poverty, and wages as objectively, yet they are wrong. Inequality manifests differences in productivity. It is imperative to note that minimum wages, and union negotiated wages cause job losses. Welfare and social welfare programs drive people out of the labour force. People are poor and underemployed because they are unproductive. Poor nations will become rich if they accept the neoliberal programs such as free markets, deregulation, privatization, foreign investments, and free trade.

Capitalists’ economies are expansionary in nature, and the rule of the market will always follow. Capitalists will put everything everywhere for sale so long as it brings in profits, and commoditisation of everything, everywhere is as natural, inevitable and good. Neoclassical economics made people believe that it is the system that maintains capitalism. Capitalist economies are engines of economic growth, even the industrial revolution occurred among the capitalist, not in feudalists. Capitalism paved way for technological innovations and rapidly rising output. Growth is uneven among nations, with most of the growth concentrated in few rich capitalist countries. The output produced in capitalist economies could be harmful to human beings and the natural world.

According to Keen,(2004), Compared to other economic systems, capitalism can deliver lots of goods and services. What makes the growth of output possible in capitalists’ societies is the difference between radical economics and neoclassical economics, i.e., the profits of the capitalists. Only if, they make profits will they produce output; and will they invest these profits in new means of production and cause the economy to grow. They begin with some money and end up with a larger sum. Profits are made possible by the exploitation of wage workers, therefore, capitalism can be described as a system whose motto is the accumulation of capital. This ceaseless drive by individual capitalists to make money and achieve growth, (accumulation of capital) is predicated upon the extraction of a surplus from the labour of the workers (Rosefielde, 2001).

Accumulation of Capital

To become a capitalist, it is important to have enough money as it is the main stay of such organizations or systems. Capitalist enterprises cannot be started without money; money is the starting point of capitalist production. This capital money is the one that is used to organise the production of output, i.e., the money capital must undergo a series of transformation with the ultimate aim of converting the original sum into a large sum of money. When they still have capital, the means of production are acquired to facilitate efficiency in production. These inputs are called commodity, capital which includes all nonhuman means of production: factors such as land, buildings, equipment, machinery, and raw materials (constant capital). Others will be used to purchase human means of production, i.e., labour power, which is purchased like any other commodity (variable capital). Once the required amounts of variable and constant capitals are bought, under the control of the capitalist, it is used to produce the desired output. The output is considered as commodities of sale which are returned into the market for selling. If the money obtained from the sale is successful, profits are made accumulation of wealth (Karl, 1997).

Conclusion

Businesses must use a large part of the profits to begin another process of capital accumulation. Capitalists must not only make profits but must see that their capital grows. This is not based on greed, but the kind of competition they are facing. If capitalists do not invest profits in expanded production, and their rivals do. They will not be able to compete effectively in the long run. They may not acquire the best equipment, develop a research facility, enlarge their advertisement budgets, or get bank loans at favourable terms. Failure to do so might lead to disastrous consequences such as closure or bankruptcy, and all amenities such as prestige, high incomes, and political power. Competition forces each capitalist to make profits grow, i.e., accumulate capital.

References

Keen s. (2004). Debunking Economics; The Naked Emperor of the Social Sciences, 2004, p. 294

Karl M., (1997)”Constant capital and variable capital”, in Capital Vol. 1, Chapter 8

Rosefielde, S., (2001), Premature Deaths: Russia’s Radical Economic Transition in Soviet Perspective. Europe-Asia Studies, Vol. 53, No. 8 (Dec., 2001), pp. 1159-1176 : Taylor & Francis, Ltd.