The monetary system is essentially Catholic, the credit system essentially Protestant. ‘The Scotch hate gold.’ As paper, the monetary existence of commodities has a purely social existence. It is faith that brings salvation. Faith in money value as the immanent spirit of commodities, faith in the mode of production and its predestined disposition, faith in the individual agents of production as mere personifications of self-valorising capital. But the credit system is no more emancipated from the monetary system as its basis than Protestantism is from the foundations of Catholicism.
Given the fragmentary nature of this part of the book, it may be useful to take a step back from the text and try to set out the key ideas in Marx’s (and Engels’) presentation in synthetic form.
* * *
We first need to be clear as to the distinction between money, on the one hand, and capital on the other. Money as money is the independent expression of a sum of value. Capital is value whose value is augmented in magnitude, is valorised. Money as capital – capital in money form – is thus money with the capacity of valorisation. But money as capital is only capital in virtue of what makes it capital, not in virtue of being money; and although capital may take the form of money, not all money is capital. The failure of the political economists of his time to grasp this distinction evidently infuriates Marx.
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Thanks again for another helpful blog post!
I fell I’m not understanding a large part of what’s at stake in the discussion of the relation of interest rate and profit rate. You say, following Shaik:
“Why then should banking capital not enter into profit rate equalisation also, if, at this abstract level, it is only really another application of capital in search of a return?”
This is probably a dumb question, but if the interest rate just is the average rate of profit, wouldn’t the borrower be paying the ENTIRETY of his profit back to the lender?
Also, it seems that empirically (in the 1850s at least) interest rates really were different from the average rate of profit. Here’s what Marx says in Ch. 22:
“the rate of interest…whether it is the average rate or the market rate of the time, appears as something quite different from the general rate of profit, as a uniform, definite and palpable magnitude.” (C3, p. 487)
I feel like I’m missing something obvious here, but any feedback is appreciated!
Shaikh’s argument is essentially this. Banks are profit-making institutions, who generate income by charging interest on loans. They also have costs; banking profit is simply the difference between the two, income less costs. The bank rate of profit for a given period is the ratio of profit to banking capital. Should the banking sector rate of profit (not the interest rate) be higher than the general rate of profit for the whole economy, capital will flow disproportionately into the banking sector, increasing the supply of money for loans, pushing the interest rate, and hence banking income, and hence banking profit, down. The reverse also happens.
For accumulation in the ‘real’ sector to be viable, it is necessarily the case that the rate of interest be lower than the general rate of profit. Should this not be the case (in Marx’s terms, should the profit rate of enterprise be negative), then there would be no incentive to engage in higher risk investment in production of goods of services, rather than just leaving your money in the bank. Accumulation would stall. But this would mean (1) an increase in bank liquidity, which would increase the supply of money relative to demand and (2) a fall in the demand for loans for investment, which would reduce the demand for money relative to supply. Both of these would push the interest back down again. In his book, Shaikh argues convincingly that this is what actually happens as a long-term trend.
Thanks for your response! I don’t have the mathematics background (or indeed much of a classical economics background) to follow Shaikh’s argument, but your account of it makes a lot of intuitive sense to me.
The thing that still doesn’t make sense, from my perspective, are the implications for Marx’s account in Volume 3. In your blog post you ask, rhetorically I thought:
“Why then should banking capital not enter into profit rate equalisation also, if, at this abstract level, it is only really another application of capital in search of a return?”
This made a lot of sense to me: banking capital should share in the average rate of profit just like merchant’s capital does! But when I thought that through, it occurred to me that obviously, this would mean the “profit rate of enterprise” would have to remain at 0 perpetually…meaning there would never be any incentive to borrow for production.
It sounds to me like you’re saying that that’s basically correct: banking capital does share in the average rate of profit (i.e. the interest rate = average rate of profit), which means that it’s constantly grinding borrowing/lending to a halt until the increased supply and decreased demand for loans push the interest rate back—temporarily—below the average rate of profit…leading presumably to a short period of investment in new production, until the interest rate once again rises to meet the average rate of profit.
So (1): Is that what you’re saying Marx’s account SHOULD look like (as opposed to his claim in C3, Ch. 22 that the interest rate is purely a matter of supply and demand with no natural equilibrium aside from its upper and lower bounds)?
And (2): If so, presumably the empirical data supports this account? I know nothing about the empirical data in either Marx’s day or our own, but in C3, Part V, Marx seems quite confident that the interest rate is clearly numerically different and independent of the average rate of profit.
Apologies! Please ignore my entire previous comment. I’d failed to appreciate the distinction you rightly made between the bank rate of profit and the interest rate!
So what you’re saying is that the bank’s rate of profit (i.e. the spread between the rate they borrow at and the rate they lend at) should level out at the average rate of profit—for all the same reasons profit averages out everywhere else according to Marx.
And that furthermore, if this is the case, then whatever that lending rate is that, minus the bank’s borrowing rate, causes the bank’s rate of profit to equal the average rate of profit—THAT is the “natural” interest rate.
So for example if the general rate of profit is 15%, and banks borrow at 5%, then the “natural interest rate” for loans they give out would be 20%. Have I got it now?
Thanks for being patient with a layman!
Not exactly. You can’t just ‘read off’ the interest rate from the profit rate like that.
There are two fundamental determinations at work here. The first determines the interest rate at a level such that the rate of profit of the banking sector is equalised to the rest of production. The second is that which determines the interest rate vis-à-vis the average profit rate. The point is that the first two determination tells us nothing about the relationship of the *level* of the interest rate and the *level* of average profit. I find it useful to distinguish between the two through recourse to the distinction respectively between ‘money as capital’ and ‘money as money’ that Marx makes repeatedly in this section.
To simplify, let’s imagine that banks don’t borrow money, they only lend it. And let’s imagine that there is only one type of loan, and hence only one *type* of interest rate. And let’s also ignore the fact that individual banks within the sector will have different cost structures. Finally, let’s ignore the existence of regulatory institutions that set interest rates. These assumptions remove the detail, but don’t change the fundamentals.
Now, competition between banks will tend to equalise the ‘price’ of money, i.e. the interest rate, within the banking sector, just as competition within goods and services will equalise prices of goods of a similar type and quality within sectors within the ‘real’ economy (as Marx details in chapter 10 of this volume).
First determination. The revenue banks enjoy is determined by the interest rate *and* the amount of money they lend. The bank’s costs are given by the amortisation of fixed capital plus variable capital laid out (over the duration of the loan). Banking profit is simply (by definition) revenue less costs.
The *rate* of profit is the ratio of the flow of revenue (interest) over a given period (let’s say a year) to the stock of capital at that period’s beginning (see chapter 4 of this volume). The bank’s capital stock is fixed capital stock plus circulating capital for the period plus the bank’s reserves (set by law these days).
Now, let’s say that this rate is higher than in the rest of the economy (or even just more than one or more sectors of the rest of the economy). ‘Money as capital’ will flow disproportionately into the banking sector compared to elsewhere. This will increase banking liquidity, i.e. it will increase the supply of money relative to demand, and will push the interest rate down. This, all else being equal, will reduce the banks’ revenue, hence profit, hence rate of profit. If this process overshoots, and the banking rate of profit falls vis-à-vis the real economy, then capital will flow disproportionately out of the banking sector, with the reverse effect. This is the ‘turbulent equalisation’ that Shaikh describes. But where is the interest rate in relation to the level of average profit? We don’t know.
Second determination. Imagine ‘the’ interest rate is 5% and average profit is 10%. By engaging in the riskier operation of investing in the goods and services sector you get 5% above what you would have got by doing nothing and leaving your money in the bank. This is the incentive to invest like this; and it’s also the incentive to borrow money to invest like this. But let’s imagine this interest rate creeps up towards average profit. Investment in goods and services falls away and ‘money as money’ is attracted disproportionately to the banking sector; in addition demand for loans to invest in goods and services falls away too. The supply of money rises with respect to its demand as a consequence of the fall-off in investment and the demand for money for loan falls with respect to its supply as a consequence of the fall-off in the demand for loan capital. The interest rate is then pushed down.
Now, the interest rate is further determined by the cycles of production in the ‘real’ sector, as I think emerges in Marx’s description of the business cycle (see chapter 30). But within this, you need to separate out how the interest rate is determined through profit rate equalisation, and then how it is determined through the(dis)parity between the interest rate and average profit. It’s a double movement (or one movement with two ‘moments’, perhaps).
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