## Tuesday, 5 January 2016

### Capital III, Chapter 22 - Part 2

Marx quotes Joseph Massie

“"The relation between the sum paid for the use of capital and the capital expresses the rate of interest as measured in money." "The rate of interest depends 1) on the rate of profit; 2) on the proportion in which the entire profit is divided between the lender and borrower." (Economist, January 22, 1853.) "If that which men pay as interest for the use of what they borrow, be a part of the profits it is capable of producing, this interest must always be governed by those profits." (Massie, 1.c., p.49.)” (p 359)

If the rate of interest was a fixed relation to the rate of profit then, as the mass of profits rose, so the mass of interest would rise in proportion to it. So, if the rate of interest was always a quarter of the rate of profit, then, if the the rate of profit was 20%, the rate of interest would be 5%, and if the rate of profit fell to 12%, the rate of interest would fall to 3%.

However, it was seen earlier that there is no such fixed relation between the rate of profit and the rate of interest. If there were a fixed relation, then, as the rate of profit rises, the mass of profit, pocketed by the industrial capitalist, must rise, compared to the interest paid.

“Take it that interest = 1/5 of the average profit. One-fifth of 10 is 2; the difference between total profit and interest = 8. One-fifth of 20 = 4; difference = 20 - 4 = 16; 1/5 of 25 = 5; difference = 25 - 5 = 20; 1/5 of 30 = 6; difference = 30 - 6 = 24; 1/5 of 35 = 7; difference = 35 - 7 = 28. The different rates of interest of 4, 5, 6, 7% would here always represent no more than 1/5, or 20% of the total profit.” (p 359)

By the same token, if the rate of profit rises, and the rate of interest rises, the amount of profit may remain constant.

“With the rate of profit at 20%, the rate of interest might rise to 8%, and the industrial capitalist would still make the same profit as he would at a rate of profit = 16% and a rate of interest = 4%, namely 12%.” (p 359)

It can be seen why, with a higher rate of profit, industrial capital is both willing and able to pay a higher rate of interest. At the same time, the use value of capital, as a commodity, its ability to self-expand, is greater when the rate of profit is high compared to when it is low. In other words, when the rate of profit is high, the demand for money-capital will also tend to be high, pushing interest rates higher. At the same time, those in possession of money-capital will seek higher interest rates on it, as compensation for relinquishing its use value. However, the question will also arise as to what effect a higher rate of profit has on the supply of capital. By definition, a higher rate of profit means more potential money-capital exists that can be loaned out. Whether this additional money-capital finds its way into the money market, increasing supply, or else is used to finance accumulation internally, thereby reducing demand on the money-market, the effect is the same, i.e. to increase supply relative to demand, and thereby push interest rates down.

To the extent that money-capital is increasingly accumulated in hoards, in the possession of the money-capitalists, therefore, the determination of interest rates becomes a competitive struggle between these two types of capital – money-capital and productive-capital, a struggle between demand and supply. Yet, at a fundamental level, both the demand for and supply of this money-capital is a function of productive-capital, because it is only by the creation of surplus value in production that additional supplies of money-capital are created.

On the other hand, the total supply of money-capital is not just a question of these additional supplies, but also of the existing stock of money-capital. This is one reason that the rate of interest is not directly determined by the rate of profit, another being that not all money-capital demanded is required for productive investment.

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