What is "circulating capital"

capital \cap"i*tal\ (k[a^]p"[i^]*tal), n. [Cf. L. capitellum and capitulum, a small head, the head, top, or capital of a column, dim. of caput head; F. chapiteau, OF. capitel. See chief, and cf. cattle, chattel, chapiter, chapter.]

1. (Arch.) The head or uppermost member of a column, pilaster, etc. It consists generally of three parts, abacus, bell (or vase), and necking. See these terms, and Column.

2. [Cf. F. capilate, fem., sc. ville.] (Geog.) The seat of government; the chief city or town in a country; a metropolis. ``A busy and splendid capital''
   --Macauly.

3. [Cf. F. capital.] Money, property, or stock employed in trade, manufactures, etc.; the sum invested or lent, as distinguished from the income or interest. See Capital stock, under Capital, a.

4. (Polit. Econ.) That portion of the produce of industry, which may be directly employed either to support human beings or to assist in production.
   --M'Culloch.

   Note: When wealth is used to assist production it is called capital. The capital of a civilized community includes fixed capital (i.e. buildings, machines, and roads used in the course of production and exchange) and circulating capital (i.e., food, fuel, money, etc., spent in the course of production and exchange).
   --T. Raleigh.

5. Anything which can be used to increase one's power or influence.

   He tried to make capital out of his rival's discomfiture.
   --London Times.

6. (Fort.) An imaginary line dividing a bastion, ravelin, or other work, into two equal parts.

7. A chapter, or section, of a book. [Obs.]

   Holy St. Bernard hath said in the 59th capital.
   --Sir W. Scott.

8. (Print.) See Capital letter, under Capital, a.

   Active capital. See under Active,

   Small capital (Print.), a small capital letter; informally referred to (in the plural) as small caps; as, the technical terms are listed in small caps. See under Capital, a.

   To live on one's capital, to consume one's capital without producing or accumulating anything to replace it.

Circulating capital includes intermediate goods and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal to intermediate consumption. Finer distinction include raw materials, intermediate goods, inventories, ancillary operating expenses and ( working capital). It is contrasted with fixed capital. The term was used in more specialized ways by classical economists such as Adam Smith, David Ricardo and Karl Marx.

Where the distinction is used, circulating capital is a component of (total) capital, also including fixed capital used in a single cycle of production. In contrast to fixed capital, it is used up in every cycle (raw materials, basic and intermediate materials, combustible, energy…). In accounting, the circulating capital comes under the heading of current assets.

Building on the work of Quesnay and Turgot, Adam Smith (1776) made the first explicit distinction between fixed and circulating capital. In his usage, circulating capital includes wages and labour maintenance, money, and inputs from land, mines, and fisheries associated with production.

According to Karl Marx (second volume of Das Kapital, end of chapter 7) the turnover of capital influences "the processes of production and self-expansion", the two new forms of capital, circulating and fixed, "accrue to capital from the process of circulation and affect the form of its turnover". In the following chapter Marx defines fixed capital and circulating capital. In chapter 9 he claims: "We have here not alone quantitative but also qualitative difference."

Conventionally, (physical) capital assets held by a business for more than one year are regarded in annual accounting statements as "fixed", the rest as "circulating". In modern economies such as the United States, roughly half of the intermediate inputs bought or used by businesses are in fact services, and not goods.