Saturday, 13 February 2016

Capital III, Chapter 26 - Part 9

Overstone's other argument, set out by Marx here, is also heard frequently today. That argument is that interest rates rise because times are good, and the rate of profit is rising, causing the demand for capital to rise. Similarly, its suggested that the cause of current low interest rates is subdued economic activity. Like many commentators today, Overstone claimed that high interest rates could not kill off economic activity, because the rates only rose as economic activity was robust.

Again, this argument is nonsense. As economic activity increases, and the mass of profit rises, the supply of potential money-capital thereby rises, pushing interest rates down. Interest rates may rise sharply because an economic crisis causes businesses to demand money-capital to stay afloat. Moreover, Overstone's argument is based on a fallacy of where the supply of money comes from. In reality, it comes from the mass of realised profits, but Overstone believed it was constantly being created from savings.

So, Overstone in his testimony states,

“The rise in the rate of interest has been in consequence of the great increase in the trade of the country, and the great rise in the rate of profits; and to complain of the rise in the rate of interest as being destructive of the two things, which have been its own cause, is a sort of logical absurdity, which one does not know how to deal with.” (p 422)

And he continues,

“I have already alluded to the fact that during the 13 years this Act has been in operation, the trade of this country has increased from £45,000,000 to £120,000,000. Let any person reflect upon all the events which are involved in that short statement; let him consider the enormous demand upon capital for the purpose of carrying on such a gigantic increase of trade, and let him consider at the same time that the natural source from which that great demand should be supplied, namely, the annual savings of this country, has for the last three or four years been consumed in the unprofitable expenditure of war. I confess that my surprise is, that the rate of interest is not much higher than it is; or, in other words, my surprise is, that the pressure for capital to carry on these gigantic operations, is not far more stringent than you have found it to be.” (p 423)

But, of course, as Marx points out, this is all totally confused nonsense. This same increase in trade, from £45 m. to £120 m. was not the consequence of some exogenous injection of capital by the mobilisation of savings! The capital required to bring about this expansion of trade was itself a product of the process of production itself, both in the sense that the physical elements of that capital required for that expansion was a result of the production process, and in the sense that the money-capital required for the purchase of that physical capital was nothing more than the profits created in that production process.

However, Overstone's confusion here is consistent with the view, expressed in previous chapters, that this division of money-capital into an independent form of capital leads to the appearance that capital is what the money-capitalist provides, and whose price is interest, whereas profits are merely the wages of entrepreneurs. This is why Overstone can believe that it is only money-capitalists who are capitalists, whereas the industrial and merchant capitalists are, for him only entrepreneurs.

As Marx puts it,

“What an amazing jumble of words by our logician of usury! Here he comes again with his increased value of capital! He seems to think that this enormous expansion of the reproduction process, hence accumulation of real capital, took place on one side, and that on the other there existed a "capital", for which there arose an "enormous demand", in order to accomplish this gigantic increase of commerce! Was not this enormous increase of production an increase of capital itself, and if it created a demand, did it not also create the supply, and, simultaneously, an increased supply of money-capital? If the interest rate rose very high, then merely because the demand for money-capital increased still more rapidly than its supply, which implies, in other words, that with the expansion of industrial production its operation on a credit basis expanded as well. That is to say, the actual industrial expansion caused an increased demand for "accommodation," and the latter demand is evidently what our banker means by the "enormous demand for capital."” (p 423)

No comments: