Thursday, 11 February 2016

Capital III, Chapter 26 - Part 7

The rate of interest, as Marx has determined earlier, is a function of the demand and supply for money-capital. As he describes here,

“It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production.” (p 419)

This is true in a number of ways. If the rate of profit rises, this will tend to create a greater demand for money-capital, as producers seek to expand production to benefit from these higher profits. On the other hand, higher profits mean a greater supply of potential money-capital, as those profits are realised. Firms have more profits to reinvest. Profits that can't be used immediately go into the money market to be loaned out.

On the other hand, if the rate of profit falls, because the price of inputs is rising, this may still be compatible with rapidly rising masses of profit. If costs of production are £1,000, and profits are £100, that is a 10% rate of profit. If costs of production are £2,000, and profits are £160, that is an 8% rate of profit, yet the mass of profit is 60% higher. In that case, there may be a relatively higher demand for money-capital, to cover the purchase of these more expensive inputs, so as to obtain this greater mass of profit. As a result, the demand for money-capital will rise, relative to the supply and interest rates will rise.

“Now to Lord Overstone, alias Samuel Jones Lloyd, as he is asked to explain why he takes 10% for his "money" because "capital" is so scarce in his country.” (p 419)

Marx does not set out his case as clearly as he should in his following comments, because he fails to distinguish between capital and money-capital himself. So, he quotes Overstone,

“The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital.” (p 419)

To which Marx responds,

“(excellent! Value of capital, generally speaking, signifies precisely the rate of interest! A change in the rate of interest is thus made to spring from a change in the rate of interest. "Value of capital," as we have shown elsewhere, is never conceived otherwise in theory. Or else, if Lord Overstone means the rate of profit by the phrase "value of capital", then the profound thinker returns to the notion that the interest rate is regulated by the rate of profit!)

"or an alteration in the amount of money in the country.”” (p 419-20)

But, as Marx has just outlined, the value of capital is signified by the rate of profit, whereas it is the the value of money-capital that is signified by the rate of interest. Money-capital here, as set out in previous chapters, does not just signify money-capital itself, but also the money equivalent of productive-capital, whose use value, as capital, as self-expanding value, is loaned out for a given period.

If Overstone's use of the term “capital” here is understood to mean “money-capital” then Marx’s objections are valid. The the value of money-capital is indeed signified by the rate of interest, and is a function of its use value in being able to create profits, so that the rate of profit sets its limit.

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