Sunday, 10 January 2016

Capital III, Chapter 22 - Part 7

“The average rate of interest appears in every country over fairly long periods as a constant magnitude, because the general rate of profit varies only at longer intervals — in spite of constant variations in specific rates of profit, in which a change in one sphere is offset by an opposite change in another. And its relative constancy is revealed precisely in this more or less constant nature of the average, or common, rate of interest.” (p 366)

In other words, as set out earlier, productive-capital can never simply, en masse, move from below average profit areas to above average profit areas. But, it is only this movement of capital, from one sphere to the other, which brings about an increase in the supply of commodities, in one area, reducing their market prices, and a reduction in supply of commodities in the other, causing an increase in their market prices. But, it is only by this means that market prices can be brought into line with prices of production, so that the rate of profit is brought into line with the average.

This is not the case with the average rate of interest. The total supply of money-capital is thrown on to the market en masse, and confronts the demand for it en masse, so that an average rate is continually being established in reality.

“The market rate of interest, while fluctuating continually, appears therefore at any given moment just as constantly fixed and uniform as the market-price of a commodity prevailing in each individual case. Money-capitalists supply this commodity, and functioning capitalists buy it, creating the demand for it. This does not occur when equalisation creates a general rate of profit. If prices of commodities in one sphere are below or above the price of production (wherein we deliberately leave aside the fluctuations attendant upon the various phases of the industrial cycle in each and every enterprise) the balance is effected through the expansion or curtailment of production, i.e., the expansion or curtailment of the masses of commodities thrown on the market by industrial capitals — caused by inflow or outflow of capital to and from individual spheres of production. It is by this equalisation of the average market-prices of commodities to prices of production that deviations of specific rates of profit from the general, or average, rate of profit are corrected.” (p 366-7)

There are two other factors that Marx cites, which work towards an average rate of interest, compared to an average rate of profit. The first is the fact that interest-bearing capital has existed for millennia but industrial profit has only existed from the start of capitalist production, in the 15th century. Competition, the demand for and supply of that money-capital over all of that time brought about an equalisation, creating an average rate of interest.

The second factor is the role of the world market. An average rate of profit can only be established on the basis of the physical movement of productive-capital, from one sphere to another, and this faces considerable frictions that prevent this movement and the equalisation of rates. That is the case simply between sectors within a national economy, let alone between national economies. But, money capital is completely movable wealth. It is footloose and can be moved to be invested in this sphere or some other, this national economy or some other. If the demand for money-capital in country A is high, and supply of money-capital is high in country B, then money-capital will tend to flow from country B to country A, equalising the rate of interest. Any difference in the average rate of interest in A, compared to B, will then not be as a result of a failure of demand and supply, to bring about such an equalisation, but will be due to the risks involved in lending to A being different to the risks involved in lending to B.

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