Industrial Capital and Credit

Industrial Capital as the unity of production and circulation

 The structure of industrial capital, which unifies production and circulation, is shown in the following figure. (Obata, Michiaki. 2009. The Principles of Political Economy [in Japanese]. Tokyo: University of Tokyo Press. P.185）

A similar figure appears in Rob Bryer, 2017, Accounting for Value in Marx’s Capital: The Invisible Hand, Lexington Books

Industrial capital consists of two distinct components: productive capital and circulation capital.

At the beginning of its movement, industrial capital is allocated between these two.

Circulation capital consists of money capital (cash on hand) and commodity capital (finished inventory). Using money capital, the firm purchases materials, and production continuously yields finished products, which constitute commodity capital waiting to be sold.

The production volume per unit of time is fixed due to the constraints imposed by fixed capital.

Crucially, sales are uncertain. Therefore, in order to continue production without idling the fixed capital, the firm must maintain a certain amount of money capital to continue purchasing materials.

As the volume of sales fluctuates over time, the proportion of money capital and commodity capital within circulation capital also changes in a volatile manner.

In other words, the amount of money capital absorbs the uncertainty of circulation and keeps production running.

Theoretically, industrial capital temporarily resolves the contradiction between the uncertainty of circulation and the certainty of production constrained by fixed capital.

The Emergence of the Need for Credit

However, when a temporary decline in sales exceeds a certain threshold and money capital is depleted, the firm must rely on commercial credit, bank credit, and so on.

Building on the above explanation, credit is used not to increase production but to avoid interrupting it, since the production volume per unit of time is constrained by the scale of existing fixed capital. In order to expand fixed capital, commercial or bank credit is insufficient; long-term credit or share issuance is required.

Addressing the Uncertainty of Circulation and the Credit System

To summarize the entire credit system briefly:

First, within individual industrial capital, it allocates money capital to prepare for the uncertainty of circulation.

Second, among different industrial capitals, they engage in mutual commercial credit.

Third, bank capital emerges, specializing in credit and creating credit money.

Fourth, to expand fixed capital, long-term funds are required, because banks cannot extend long-term credit through credit creation alone. These funds are sourced from the long-term idle money that necessarily arises in industrial capital during accumulation for the renewal or new construction of fixed capital. This is discussed under the topic of “stock capital” or the “stock market.”

By analogy with the Monetary Circuit Approach, bank credit corresponds to initial credit, while long-term credit corresponds to final credit.