Anti-Capitalist Meetup: Back to Basics: The Circuits of Commodities and Capital By NY Brit Expat

(2 pm. – promoted by ek hornbeck)

Due to popular demand (which I cannot understand for the life of me), today’s piece will discuss chapters 4 and 5 in Karl Marx’s Capital, volume I. On the surface, these two chapters appear simple and in many senses unimportant.  

However, that would be erroneous to conclude. These two chapters clarify two important circuits that are essential to understand the capitalist economic system and to distinguish it from earlier modes of production. Trade and money existed before capitalism itself, so what distinguishes capitalism from ancient slave societies, feudalism, and pre-capitalist mercantile economies?

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Karl Marx

In addition, Marx describes the different functions of money differentiating money as a unit of account or medium of circulation (circuit of commodities) from money in its role as capital (circuit of capital). Additionally, these chapters introduce the notion of surplus value, the self-expansion of capital, and the notion of a transfer of revenue between capitalists as distinct from the creation of surplus value and end on a cliff-hanger before Marx’s explanation of the creation of surplus value which links his discussion in chapter 1 on the value of commodities to the labour process itself.

All references come from Karl, Marx (1867) Capital Volume I,  Penguin Classics, 1990.

Before we begin the discussion of these chapters, I want to start by giving us some additional information to help understand the discussion.

The Physiocrats: The first thing I want to discuss is the debate between the Physiocrats (e.g., Quesnay, LeTrosne, Mercier del la Rivière) and the Mercantilists in France. We need to put this discussion in historical context; at that time, France had a large trading sector and a small manufacturing sector.

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Franḉois Quesnay

It is rather important to note that the 2 main opponents of the Physiocrats in terms of the analysis of the economy were the Mercantilists and the Populationnistes.  

The Mercantilists argued that the wealth of a nation was dependent on the size of its international trade; they held that the primary aim of trade or commerce was that of “buying low and selling high,” as such they believed that the wealth of the nation would be increased through selling commodities for as much as they were able. They believed that the surplus or the net product was created through this process — as such, the “profits” that they were saying were created through the process of exchange resulted from buying the products from producers for as low as possible and then selling it overseas for as high as possible.  This idea that profits were created through the exchange process was soundly rejected by the classical authors and Marx who argued that profits were created in the production process itself and then realised if, and when, the product was sold. It is this chapter where Marx puts forward his criticism of the Mercantilists.

The “if” in the previous sentence refers to those classical economists who did not assume Say’s Law and were concerned with the possibility of the product not being sold and hence the profits not realised.  This has serious implications for economic growth and accumulation as an unrealised surplus is not available to be used invest in production, or to create and buy capital goods, which is what underlies economic growth.

The other main opponents to the Physiocrats were the Populationnistes who held that the only true wealth of a nation was the number of its inhabitants; they argued that it was people that made a country rich and opulent.  Accordingly, the main way that France could increase its economic power, according to this school of thought, was by adopting policies and laws designed to increase its population (from this alone you can see that different vastly different positions on population existed prior to Malthus’s Principles of Population).

Quesnay and the Physiocrats maintained that the quantities of consumable agricultural products, and not money and people, were what could bring prosperity to a country.  The Physiocrats argued that the first preoccupation of rulers was to implement policies which would increase the physical quantities of agricultural commodities produced and consumed each year.  

This, I believe, comes off of the arguments articulated in On Natural Rights by Quesney where he argues that it is the responsibility of government to ensure subsistence of the population.

“The foundation of society is the subsistence of men, and the funds necessary to the support of the power which must defend them: thus it could be nothing but ignorance, for example, which would favour the introduction of positive laws, contrary to the order of reproduction, and of the regular annual distribution of the wealth of the territory. If the torch of reason enlighten government, all positive laws injurious, to the society and the sovereign will disappear (”

However, not only should France increase output of the agricultural sector, but in order to raise the level of the surplus this had to be combined with measure to reduce the quantities of products needed as means of production of that output. The Physiocrats put forward an alternative notion to that of the Mercantilists and the Populationnistes with respect to the creation of wealth of nations and of revenue; they argued that wealth and revenue was created in the production process through the use of labour on land in production.  What this means is that they argued that the use of labour on land in production enabled the creation of a product that not only replaced what was used to produce the  current level of output (which included the wages of labour and the inputs to production), but created an additional product over and above that (surplus product).  As such, the gross product (the total product) minus that used to replace what was used in production, gives us the net product or the surplus product in the economy.

The Physiocrats believed that the surplus product or the net product derived from solely from the use of labour on land in the production process. They argued that the surplus product derived from the “benevolence of nature” which is an odd argument as land lying fallow produces nothing and it is the labour used in land that creates a surplus. From this notion, comes the idea that if a surplus is to be created it will have to come from the sector which utilises land in production.  This sector, which they termed called the primary sector, is clearly that of agriculture. They maintained that trade and manufacturing were sterile, money earned through trade and in manufacturing did not produce a surplus and that is based upon the idea that exchange was only done on the basis of equivalence in exchange and that no increase in wealth of a nation could be produced in this manner.

Wealth is envisaged by the Physiocrats to be the amount of consumable agricultural products; agricultural use values or physical output.  However, they realised that only the value magnitude of wealth can be used to compare the economic power of France to that of other countries.  In order to become part of the nation’s wealth products must pass through markets, where they are exchanged according to certain monetary prices. The wealth of a country depends on the size of its total consumable agricultural surplus; that is the product over and above what is needed for reproduction, as that provides an indication of the growth potential of the nation.  The size of the surplus is measured by the difference between the values of agricultural output minus the value of its inputs (in price terms).

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The second thing I want to discuss is Marx’s references to Aristotle throughout these chapter; he specifically is raising the discussion in the Nicomachean Ethics.  I would recommend that those who are interested in this discussion should read “Economic Value and Moral Value in Aristotle” by Cosimo Perrotta in History and Political Economy: Essays in Honour of Peter Groenewegen  (Routledge, 2004).

Why Aristotle of all people? This relates to the notion of reciprocal justice or the equality of exchange of goods in his discussion of exchange. Aristotle argued (and this has been accepted by economists analysing the capitalist economic system) that when goods are traded between people, these goods exchange for an equivalent value. So if you sell 5 beds for 1 house that must be an exchange of equivalents or no one would trade. Why would someone trade something that they have made in 5 hours for something that only took an hour to make?  You wouldn’t … if someone rips you off, why would you trade with them? Aristotle took this as an ethical position; that those that do not do so are not behaving ethically and, as such, trade takes place between things of equivalent values.

This brings us to something that is important that Marx takes from Aristotle; if you think that something is worth a certain value, you are entering into exchange with an assumption that the thing you are trading has a certain value and that this is known prior to being brought to the market and that the trade only valorises this belief. Both Marx and Aristotle hold that a commodity has a known and recognised value before being brought to market and that this inherent value will be realised in exchange.  

Another point on Aristotle is relevant here and it is referenced by Marx; that is his disdain for money used to make more money; the M-M’ circuit that is raised in chapter 5 that is lending money to obtain more money. This is seen as unethical according to Aristotle and upsets the moral balance of the economy as a whole.

The final point I want to discuss actually is the footnote at the end of chapter 5, footnote 24. What I love about reading Marx is his footnotes which contain a wealth of knowledge.

What he says in footnote 24 is:

“[…] the formation of capital must be possible even though the price and the value of a commodity be the same, for it cannot be explained by referring to any divergence between price and value. If prices actually differ from values, we must first reduce the former to the latter, i.e., disregard this situation as an accidental one in order to observe the phenomenon of the formation of capital on the basis of the exchange of commodities in its purity, and to prevent our observations from being interfered with by disturbing incidental circumstances which are irrelevant to the actual course of the process. We know, moreover, that this reduction is not limited to the field of science. The continual oscillations in prices, their rise and fall, compensate each other, cancel each other out, and carry out their own reduction to an average price which is their internal regulator. This average price is the guiding light of the merchant or the manufacturer in every undertaking of a lengthy nature. The manufacturer knows that if a long period of time is considered, commodities are sold neither or nor under, but at, their average price. […] How can we account for the origin of capital on the assumption that prices are regulated by the average price, i.e., ultimately by the value of the commodities? I say ultimately because average prices do not directly coincide with the values of commodities, as Adam Smith, Ricardo and others believe (Marx, 1867, Chapter V, p. 269).”

Why raise this before we even begin the discussion of the chapters? This is a very important footnote. It states several things

1) Marx makes it clear that he is not discussing the difference between value and price as the basis of for the formation of surplus value or profits.

2) Marx makes it very clear that the discussion in these chapters is not looking at the random or accidental differences in market prices from average prices that forms the basis of profit (to use Smith’s examples, a dearth of black cloth when a national day of mourning is declared or good harvest which raises and lowers the market price temporarily); these only provide a temporary advantage or disadvantage. He is stating that these are not a point of interest for us or for manufacturers, that what we are concerned with average prices over a long period of time … what the classical economists called natural prices which serve as a centre of gravitation for market prices.

3) As such, we are looking at the prices (regulated by their values as they differ but will ultimately coincide – he is anticipating what will discussed in Capital, Volume III here, called the “transformation problem” which addresses individual deviation of prices from values, but the equivalence at a general level) which is what the manufacturer expects to earn when he brings his goods to market and upon which he makes decisions as to choice of technique.

These average prices (also called natural prices, normal prices  and prices of production) are those that the analysis is concerned with; we are not concerned with temporary or accidental situations that may (for one harvest or period of production of goods) lead to one sector of production getting an better or worse price in the market due to accidental circumstances. These prices are discussed at length by Smith and by Ricardo on the chapters on natural prices and market prices; Marx makes it clear that he is doing the same. So, when he says that there could be a 10% increase on all prices and that there is no advantage for buyer or seller, he is not referring to market prices, but a 10% mark-up on average prices.

In connection to this discussion, there is an additional criticism that occurs in these two chapters; this is Marx’s criticism of “vulgar” economists or economics (this is in reference to discussions of Etienne Condillac and J.B. Say).  What does Marx mean by this term?

Marx uses the term “vulgar” to describe economists (or their theories) that confuse that which determines market prices (that is, prices in the real world) with the determination of prices which regulate market prices themselves. Specifically, that refers to those economists that say that the regulating price of the commodity is determined by supply and demand.  In Marx (and for that matter, Smith and Ricardo) the price that a commodity sells for in the market is subject to random and transitory influences; we are not interested in those prices when we do economic analysis.  Supply and demand can tell us how much above (insufficient commodity brought to market relative to demand) or below (too much of the commodity is brought to market) but it will not tell you the exact price, it will tell you the deviations of the price in the market relative to the average price.

In the context of this discussion, the use of utility (use-value) as determining price is included.  In Marx (as in Smith and Ricardo), in the absence of use value, a thing will not be produced and brought to market, but this does not determine prices. Use value is a necessary part of a commodity, but does not relate to price determination. This is vulgar as it is describing what appears on the surface to describe an underlying determinant or regulator of average prices.

Now let’s go to Marx!

Chapter 4: The General Formula of Capital

Before we start, I want to make certain that we understand the difference between use values and exchange values as Marx assumes that you have read Chapter 1 before reading Chapters 4 and 5.  

Commodities possess two things or they are not commodities:

1) Use value which relates to the object fulfilling or satisfying a human need of any kind(or a societal one), it is often used to describe the goods themselves in economic discussions. Use values are only realised in use or in consumption.

2) Exchange value appears as the proportion that goods stand in relation to each other in the market.  In Marx, exchange value is the expression of the value of the commodity which depends on how much abstract social labour time is used in its production. The thing that enables goods to exchange for each other and their common link is that they are all products of human labour; once we separate the specific use values created from the type of labour used to produce them, the only thing that unites them is that abstract social human labour. The exchange value of commodities which expresses the value of the good, must satisfy a profitability condition in order that the capitalist will lay out the money for the production of that good and to bring it to market.

“We have seen that when commodities are in the relation of exchange, their exchange-value manifests itself as something totally independent of their use value. But if we abstract from their use-value, there remains their value, as it has just been defined (i.e., social human labour in the abstract). The common factor in the exchange relation, or in the exchange value of a commodity, is therefore its value.  The progress of the investigation will lead us back to exchange value as the necessary mode of expression, or form of appearance, of value (Marx, 1867, p. 128).”

Marx begins chapter 4 (The General Formula for Capital) by saying that the circulation of commodities is the starting point of capital. What he says is that trade historically presupposes how capital arises, trade predates industrial capitalism. It is trade from which capital develops.

All trade he argues (irrespective of what the actual use values are) has as its ultimate product money, that in the first forms of capital (merchants and usurers capital), the final consideration is money and it is in the form of money that capital makes its first appearance.

The difference between money as money and money as capital relates to the difference in their form of circulation.


C – M – C

C – M     M – C


The circuit of commodities takes the form of C-M-C which is the transformation of commodities into money (the seller gets money for commodities) and money into commodities (the seller becomes the buyer takes that money and buys goods with it). This is selling in order to buy.

Alongside the circuit of commodities there is another distinct form with another object; that is the circuit of capital. That is M-C-M. The transformation of money into commodities and its reconversion back into money again. Here is money as money capital. In the M-C part of the movement, the purchase, the money is changed into a commodity. In the C-M phase, the sale, the commodity is changed into money. It is essentially the exchange of money for money.


M – C – M

M – C       C – M


Marx argues that this would be empty, if in the exchange, we have put forward a certain amount of money and obtain equivalent amounts of money in the exchange.  Wouldn’t it make more sense to hold onto the money rather than risk losing some due to the vagaries of circulation?

He then moves onto comparing the two circuits C-M-C and M-C-M. Both have a sale C-M and a purchase M-C, a commodity and money and a buyer and seller.  There are three participants in this contract, one who only sells, one who only buys and the third is the person that does both.

What distinguishes these two paths is the inverted order of succession of these circulations. C-M-C begins with a commodity and ends with a commodity; in M-C-M we begin with money and end with money.

In the commodity circuit, money is converted into a commodity and that is its final form. The money has been spent and that is it. In the circuit of capital, M-C-M, the buyer lays out money that he expects as a seller to recover as money at the end. Money is not spent here, money is advanced and it is expected that he will get his money back again at the termination of the circuit.

What is the purpose of money in these two circuits?

In C-M-C, money serves the intermediate role between the buyer and seller. In M-C-M, the return of the money is the final aim of the circuit when the commodity is sold for money and that returns to the person who laid out the money.

In the circuit of commodities the consumption of use values, the satisfaction of needs, is the final goal.  In the circuit of capital, on the other hand, the final goal is not consumption, it is concerned with exchange values; that is, this circuit is solely concerned with the return of the money and is dependent upon the sale of the goods for which the money has been advanced.

This brings us to a second and very important point. In the circuit of commodities, you as seller bring your commodity to market and get money and then you buy commodities with it. What you receive is essentially traded for an equivalent amount of something else with money standing in as a unit of account between the two distinct commodities. The seller gets money and uses that money as a buyer to buy something of the same value. The end is the consumption of commodities.

In the circuit of capital, if you get the same amount of money at the end of the circuit, then the circuit has failed. The amount you obtain for the sale of the commodity must be greater than that laid out for the purchase of a commodity in the beginning of the circuit. So, the complete form of this circuit is not M-C-M but rather M-C-M’ … why would you enter the risks of circulation if you were not going to gain from it? It is change from M-M’, the change in the amount of money that it the concern, this change in money is what Marx calls surplus value, you get back the original sum plus an increment.


M – C – M’

M’ = M + ΔM

In the circuit of commodities (C-M-C), there is an exchange of equivalent values.  If there is a situation where you do not get an exchange of equivalents, this is due to random or accidental circumstances; this circuit is concerned with the satisfaction of human needs; so use-values is the operative word here.  

However, in M-C-M’ if you do not get the incremental sum (Δ M) at the end of the circuit, you have failed. Moreover, if you then only spend that money and take the money out of circulation (and do not reinvest it), then that incremental sum and money are no longer capital (it becomes a hoard and is removed from increasing itself again).


This new sum (ΔM) is then taken and a new cycle starts again with the aim of making more money than you have originally lain out. It is part of a process that is limitless. As a part of this movement, the possessor of money which is invested and earns surplus value becomes a capitalist.

The aim of the capitalist, the valorisation of value, is his aim and it is the appropriation of more wealth that is his concern. The production of use-values (or commodities) is not the aim of the capitalist, nor is the specific return on a single transaction. Instead, it is the unceasing movement of profit-making. But (and in this he differs from a miser who withdraws money from circulation) this is a ceaseless process which requires the capitalist to throw his money into circulation again and again.

In the circuit of commodities (C-M-C), money mediates the exchange of commodities. In the circuit of capital (M-C-M’), money and capital function as different modes of existence of value itself, money is capital and commodities are capital.  Value changes between money (M) and the commodity (C) form without being lost in the transformation, it changes its form, it changes its own magnitude, it appears to change its value on its own, it appears as self-valorisation … by being value it increases itself.  It needs to change form from money to commodities or it cannot become capital.

In C-M-C, the value of commodities will take a form (money) that is independent of the actual goods themselves. In M-C-M’ value presents itself as a self-moving substance passing through a process of its own and money and commodities are only mere forms. It is only through the change (that increment in the sum advanced, ΔM) that money advanced becomes capital and it is only in the sale where that surplus value is realised and money obtained and then reinvested where you find capital.

Value in the circuit of capital, becomes value in process, money in process, it comes out of circulation and enters circulation, it preserves itself and multiplies within circulation. It then begins the cycle again.

Different forms of the Circuit of Capital

M – M’ (usurer’s capital)

M – C – M

(merchants capital with the exchange of equivalents)

M – C – M’ (industrial capital)

So whether this appears as M-M’ (usurer’s capital; lending money to make money), M-C-M (merchants capital), or M-C-M’ (industrial capital), it is not in the process of circulation where the increase (Δ M) takes place.  It is only appearance that money begets money.

Chapter 5    Contradictions in the General Formula of Capital

Marx continues his discussion of the differences between the simple circuit of commodities and the circuit of capital. It appears as a simple inversion of commodities and money, but that is not really what is going on.

As a capitalist, I buy goods from A and sell them to B. As a simple owner of commodities I sell them to B and buy further commodities from A. For person A and B, they are in the circuit as buyers and sellers of commodities. The capitalist confronts A and B as the owner of money or of commodities and as an individual person in the circuit, I would confront each person either as a buyer of their commodities or as a seller of goods they want to purchase.  The capitalist is intermediary in this process and person A and B do not know each other as there is not a direct exchange between them.  

What is necessary to understand is the basis of the change in money that appears at the end of the circuit of capital, is this due to the simple circulation of commodities or is there something else which could create this surplus value?

In the circuit of commodities (C-M-C), let’s assume a direct exchange between two owners of commodities. Money serves as a unit of account in this situation and the exchange balances out between buyer and seller equally. Money expresses the value of commodities in their prices. Both people in the exchange buy and sell use values which they do not want for those that they need.  In this exchange, there is a transfer of use values and both can be thought to gain from the exchange.

In the context of these commodities as exchange value, an exchange takes place between two people one that has a surfeit of commodities worth a certain exchange value with another person that has a surplus of commodities worth a certain value.  The exchange between them is predicated on the basis that there is an exchange of commodities of equal value.

If we substitute money for the commodities, that does not change the situation as money serves as a medium of exchange. The value of the commodity is known prior to entering circulation and is not changed in the circulation process.

Moving from concrete to the abstract, Marx argues that all that happens in exchange is a transformation or a change in the exact form of the commodity. It value (its quantity of objectified social labour) remains the same, it does not change magnitude in the process of exchange. The circulation of commodities involves only an exchange of equivalents and nothing more.  

As Marx states this is often expressed as a situation (by those that do not know where value comes from) as an equivalent of supply and demand as though supply and demand determine the exchange values of commodities.  What Marx says instead, is that if commodities are sold at their values, there is no gain. Commodities prices can diverge from their values, but that is an infringement of laws governing exchange (this is the reference to the transformation problem).

So when the circulation of commodities is represented as a source of surplus value as in the case of the Mercantilists, there is confusion between use value and exchange value of commodities.  So, a Mercantilist would argue that in the exchange of commodities, we cannot have an equal exchange. If we exchange equal values then we would not make a profit. So there must be a difference between exchange if we buy low and sell dear. They argue that we are exchanging a useless thing for a necessary thing (its use value), and as such, our subjective valuation of the commodities is determining exchange value of commodities.

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Etienne Bonat, Abate de Condillac

As Marx points out, Condillac believes that in a developed economy, each producer produces their own means of subsistence and only sells their personal surplus; this would not be the case outside of a subsistence economy.  The point that is being made by Condillac is that commerce itself adds value to products and they are treating commerce as a form of production. Irrespective of the use value of the good being of more value to the buyer rather than the seller, its money form is more important to the seller. Why sell if it is not the case?

In circulation, if commodities and their monetary equivalents are exchanged for equal amounts of value, it is not circulation that is creating the surplus value. Surplus value cannot be created in exchange, circulation of commodities is an exchange of equivalents or neither seller would sell. Buyers and sellers are mutually dependent on each other; the different commodities drive the exchange as the different commodities fulfil their respective needs.

“Suppose that some inexplicable privilege allows the seller to sell his commodities above their value, to sell what is worth 100 for 110, therefore with a nominal price increase of 10%. In this case, the seller pockets a surplus-value of 10. But after he has sold he becomes a buyer. A third owner of commodities now comes to him as a seller, and he too, for his part, enjoys the privilege of selling his commodities 10% too dear. Our friend gained 10 as a seller only to lose it as a buyer. In fact the net result is that all owners of commodities sell their goods to each other at 10% above their value, which is exactly the same as if they sold them at their true value. A universal and nominal price increase of this kind has the same effect as if the value of commodities had been expressed for example in silver instead of gold. The money-names or prices of the commodities would rise, but the relations between their values would remain unchanged (Marx, 1867, p. 263).”

So, if we make a universal increase in the price of all goods, that is, we add 10% to the respective prices of each commodity in exchange; a supplier would gain that 10% as a seller, but would lose that 10% in his role as a buyer of additional goods. That 10% will not change the overall value of the commodities themselves; as the overall value is not altered whether it is denominated in terms of silver or gold; the relation between the commodities themselves is unaltered. Money price would rise, but the relationship between values (what one exchanges for the other) will not have altered; the relative prices between the goods in terms of what they exchange for will not alter at all.

Marx demonstrates that the formation of surplus value or the transformation of money into commodities cannot be explained by commodities selling above their value or bought below their value.

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Colonel Robert Torrens

He then refers to Robert Torrens who argued that the changes in value can be explained by cost prices (money capital advanced and labour used in production) being different from the final prices. Well, of course (or the circuit of capital would fail), but this doesn’t really tell us anything. Why are final prices different from cost prices? That is what we need to understand.  

“A may be clever enough to gain the advantage over B and C without them able to take their revenge by charging him more.  Person A sells wine worth £40 to B and gets corn from B in exchange of the value of £50. A has gain £10 on the surface. But before the exchange we had £40 worth of wine in the hands of A and £50 worth of corn in the hands of B; the total value is £90. After the exchange, we still have the same total value of £90. The value in circulation has not changed by one iota; all that has changed is the distribution of that value between A and B. What appears on one side as a loss of value appears on the other side as surplus value; what appears on one side as a minus, appears on the other side as a plus.  The same change would have taken place if A, without the disguise provide by the exchange, had directly stolen £10 from B. The sum of the values in circulation can clearly not be augmented by any change in their distribution […]. The capitalist class of a given country, taken as a whole, cannot defraud itself (Marx, 1867, Volume I, p. 265).”

The nominal rise of prices or a seller selling above the value of the goods while paying more for them as a buyer brings us nowhere. It implies that the whole thing is on the face of it a swindle unless you are assuming that capitalists do not consume or buy intermediate goods.  

Let’s say that the seller can get more money than the goods are worth. All that is happening is that there is a change in the distribution of revenue (or a transfer of revenue from one person to another) but that is not changing the overall value of the goods. This is a transfer of revenue and it does not change the overall value of goods. The sum of the values in circulation does not change.

As such, if equivalents are exchanged, no surplus value results. If non-equivalents are exchanged, there is also no creation of surplus value, as the overall value of commodities does not changed; we are just transferring revenue between people. Circulation itself creates no value. This is why Marx left merchants and usurers capital out of the discussion in chapter 4.

So M-C-M’ is also merchant’s capital ((buying low to sell dear). However, since it occurs in the sphere of circulation, it in and of itself, if equivalents are exchanged, it cannot explain the transformation of money into capital and the formation of surplus value.  Exchange will not occur if there were not an exchange of equivalent, so then how is this possible?

If we need to explain merchant’s capital, we need to move beyond the circuit of capital to a series of intermediate stages to explain the situation; what happens between the capitalist laying out money to buy raw materials, intermediate goods and hire labour and the sale of the product? Otherwise the whole system is based upon literal fraud and robbery between capitalists and that is not the basis of the capitalist economic system.

In usurer’s capital (M-M’) money does not even take the form of commodities and this in many senses subverts the purpose of money and appears inexplicable.

“Since chrematistics is a double science, one part belonging to commerce, the other to economics, the latter being necessary and praiseworthy, the former based on circulation and with justice disapproved (for it is not based on Nature, but on mutual cheating), the usurer is most rightly hated, because money itself is the source of his gain, and it is not used for the purposes for which it was invented. […] (Aristotle, cited by Marx, p. 267)”

The above quote from Aristotle that Marx raises discusses the question of ethics of the usurer as he is using money outside its purpose which is to ensure an equal exchange of goods.  Marx argues that merchant’s capital and interest bearing capital are derivative forms of the circuit of capital and it becomes clear why they arise historically prior to the modern form of capital (both of these forms are mentioned in ancient Greece by Aristotle) that is, industrial capitalism.

In order for surplus value to arise, it cannot do so in the context of circulation which requires an exchange of equivalents.  So, the creation of surplus value must be sought elsewhere.

Once we leave circulation, the commodity owner only stands in relation to his own commodity. The value of that commodity is limited to the fact that the commodity contains a quantity of his own labour and that labour is measured according to definite social laws regulating the amount of labour socially recognised as necessary to produce that good. This quantity of labour is expressed by the magnitude of the value of the commodity and the value is reckoned in money that expresses a certain amount of value.

The commodity owner can create value by his labour, but he does not create values which are self-valorising. Value can be increased by adding new labour (and therefore new value) to the commodity.

So, you can change the value of a commodity by adding labour to it and transforming it; you can take leather and using labour transform it to shoes, but you have increased its value by adding labour to it. Shoes are worth more than leather because you need more labour to take leather and make shoes.

This is not the self-valorisation of the commodity; it has not annexed surplus value in the process of making shoes. So, how can the producer of commodities outside the sphere of circulation without coming into contact with other commodity owners valorise value and transform money and commodities into capital?

Capital cannot arise from circulation and it is impossible to arise apart from circulation. It has its origin in circulation and not in circulation. This leaves us with two conclusions:

1) The transformation of money into capital has to be developed on the basis of the laws of exchange of commodities which has as its starting point the exchange of equivalents.

2) The money-owner must buy his commodities at their value, sell them at their value, and at the same time gain more money from circulation than what he put into circulation in the first place or there is no purpose to what he is doing.

So, surplus value must derive from somewhere else and be realised in exchange or circulation and that is where Marx ends this chapter.  

Marx ends on what appears to be a cliff-hanger after demonstrating the falsity of the arguments that surplus arises in exchange that appear in the writings of the Mercantilists. He rejects the idea that it is simply a change in prices between the original laying out of money capital and its re-emergence after the sale of goods. He argues that surplus cannot be created in, but that the capitalist cannot realise the surplus unless the commodities are brought to market and then sold. But where does the surplus come from? The answer is implied throughout the discussion in Chapter 1 and in his next chapter on the labour process, Marx begins to answer the question of how the surplus is created.