The pitfalls of the form, M–C–M′

The form M–C–M′ is often cited as a characteristic feature of Marxian economics. However, it has several problems.

First, the form M–C–M′ can downplay the constraint of production. Second, it can also be wrongly applied to the total of social production.

In the first case, problems arise when people say that credit speeds up capital turnover and increases the profit rate over time. This idea may apply to commercial capital or to industrial capital that operates without fixed capital. But most industrial capital has fixed capital. Fixed capital requires a certain level of output with adequate utilization (see the previous article). So, credit alone cannot speed up its turnover. What credit can do directly is to prevent a stoppage of production due to a lack of money capital.

Industrial capital can increase its profit by expanding fixed capital using money capital that has been freed up through credit (Ito and Lapavitsas, 1999, 89-90). However, to divert money capital to fixed capital, industrial capital must always be able to access credit when needed. In a decentralized capitalist economy, this condition does not always hold. Therefore, for credit to serve in expanding production, a special contract must be arranged in advance—what recent Unoist literature calls an “Inter-capital Organization.” In the real world, that contract is similar to an open account or pre-approved trade credit. Between bank and firm, it is called a credit facility (iwata, 2024).

Next, from the perspective of the capital that gives commercial credit, it can speed up the sale on credit. It may increase profit if it diverts money capital to fixed capital. However, sales on credit do not bring in money for some time. Considering the possibility of a shortage of money capital, the industrial capital giving credit must also secure a means of obtaining credit in advance. Thus, the problem is the same as that of the industrial capital that is given credit.

In this way, we can see that the expression M–C–M′ hides a richer structure of the capitalist economy.

Second, when the form M–C–M′ is wrongly applied to the total of social capital, money seems to be insufficient for M′. This misunderstanding appears in the "Profit Paradox" in Monetary Circuit Theory (MCT), and also in R. Luxemburg’s claim that money must come from non-capitalist areas.

Certainly, Marx formulated M–C–M′ as the general formula of capital in Volume One of Capital. But this was from the viewpoint of individual capital. In Volume Two, he studied the transformations of capital from several different angles. Besides the circuit of money capital (M–C … P′ … C′–M′), he also studied the circuit of productive capital (P … C–M′–C … P′) and the circuit of commodity capital (C′–M′–C … P … C′). He downplayed the form M–C–M′ as reflecting a mercantilist view.

To analyze the total social capital, we must look at it from a combined or integrated perspective. The valorization of capital is not the same as the increase in the amount of money. As Marx explained in Volume Two, Money functions as a means of exchange among individual capitals and facilitates the accumulation of productive capital (P′). At the end of a period, not all profits must take the form of money. Some appear as productive capital or consumer goods for capitalists. ("profit in kind" Graziani, 2003,71) 

However, MCT also has another paradox: the "Interest Paradox." If money is created only by bank lending and money is a liability of the bank, then the bank’s profit (interest) must be a claim on firms. In that case, the bank would have to buy its own consumer goods from firms using this claim—meaning "in kind" payment (Graziani, 2003, 31, 118).

Since MCT rejects commodity money as a barter and supports a pure credit money society, this "in kind" transaction becomes a difficult and unresolved problem. The issue becomes clear if we think about the fact that a bank cannot hold its own debt money.

However, we can solve this problem through the new commodity theory of money (Iwata, 2021, see also the previous article), which argues that money is issued based on commodity value. According to this theory, a bank can issue money to pay its costs, such as wages, backed by its revenue. In the balance sheet, the retained earnings are transformed to money as liability. Generally speaking, bank can issue money backed by commodity value. In this case, commdity value is products of firms. In the real world, banks pay into accounts at their own bank. To put it more simply, before the cashless society, the central bank had to pay wages and other costs in the form of banknotes. Thus, to solve the “Interest Paradox”, we adopt the new commodity theory of money, by discarding too narrow thinking “creating money by lending”. 

Therefore, to solve the "Interest Paradox," we adopt the new commodity theory of money and move beyond the narrow view that money is created only through lending.

Ito, Makoto, and Costas Lapavitsas. Political Economy of Money and Finance,  London: Macmillan, 1999.

Iwata, Yoshihisa. “The Role of Commodity Value in Inconvertible Credit Money: A Contemporary Unoist Perspective.” Paper presented at The 72nd Annual Conference of the Japan Society of Political Economy, Tokyo, 14 September 2024.

Iwata, Yoshihisa. “Even Inconvertible Money Is Credit Money: Theories of Credit Money in Japanese Marxian Economics from the Banknote Controversy to Modern Uno Theories.” The Journal of Tokyo Keizai University: Economics 311 (December 2021): 99–120.

Graziani, Augusto. The Monetary Theory of Production. Cambridge: Cambridge University Press, 2003.

Graziani, Augusto. “The Theory of the Monetary Circuit.” Économies et Sociétés, série Monnaie et Production, no. 7 (1990): 7–36.