Industrial capital, combining productive-capital and commercial capital, is distinguished from interest-bearing capital and landed property. Interest-bearing capital and landed property both exist outside the circuit of industrial capital. Neither interest-bearing capital nor landed property take part in the determination of the average rate of industrial profit, nor themselves obtain the average rate of profit on the capital they advance. Interest-bearing capital, i.e. loanable money-capital obtains interest, whereas landed property obtains rent, which itself is surplus profit (profit in excess of the average industrial profit) obtained by capital invested on the land.
Interest-bearing capital does not take part in the circuit of industrial capital. Money-capital, as money-capital has no power to self-expand, in the way that industrial capital does. Loanable money-capital can expand, considered separate from production, and has done so long before capitalist production, in the form of usurer's capital. But, usurer's capital does not represent an actual self expansion of value. It is so for the owner of that capital, but arises only on the basis of a transfer of value from one set of hands to those of another. It is only productive-capital that is able to actually self-expand, as a result of the production of surplus value, and in order for this surplus value to be realised as profit requires commercial capital, so that profit, the self-expansion of capital, is the product of industrial capital.
“Industrial capital is the only mode of existence of capital in which not only the appropriation of surplus-value, or surplus-product, but simultaneously its creation is a function of capital.”
(Capital II, Chapter 1)
“The circuit of productive capital is the form in which classical Political Economy examines the circular movement of industrial capital.”
(Capital II, Chapter 2)
Usurer's capital, like all interest-bearing capital, appears to self-expand because an amount of capital is advanced, and returns as a greater sum of value, having been incremented by an amount of interest. But, this is not a true self-expansion of value. If A lends £10 to B, and, after a week, B pays A £12, including, £2 of interest, the £10 of capital, for A, appears to have self expanded by £2, but, in reality, B has simply transferred £2 of value from their own possession to that of A. A's gain is B's loss so that no overall expansion of value has occurred.
When A lends £10 to a productive-capitalist B, this £10 is not a different £10 to that, which B utilises to buy elements of productive-capital. Moreover, the £10 only forms money-capital in the true sense, if and when it is so used. On its own, it has no power to self-expand.
“So long as it remains in the garb of money, it does not function as capital and its value does not therefore expand.”
(Capital II, Chapter 1)
The purpose of industrial capital is not to expand the value of money-capital in its possession, but to increase the mass of productive-capital in its possession, because it is only that which enables it to produce additional surplus value, i.e. to self-expand further.
“In the reproduction process of capital, the money-form is but transient – a mere point of transit.”
(Capital III, Chapter 24)
Interest is always an appropriation of value, not an actual self-expansion of value. The actual self-expansion of value arises because industrial capital is set to work. This industrial capital produces the average rate of profit. If £1,000 of industrial capital is set in motion, and the average rate of profit is 10%, £100 profit is produced. The fact that the industrial capitalist borrowed £1,000 does not mean that £2,000 of capital was employed, because the £1,000 they borrowed, is the same £1,000 they use to buy the elements of productive-capital. It is only the £1,000 of productive-capital that constitutes industrial capital, and which produces the average profit. It is only this £1,000 that shares in the total profit produced by industrial capital.
If the industrial capitalist had money of their own, they could have simply used it to invest and so obtain the average profit, and thereby avoid the payment of any interest. It is the division of the class of capitalists into two separate groups, the industrial capitalists and the money-lending capitalists that itself gives rise to the category of interest. In order to obtain money-capital, the industrial capitalists are led to borrow it. What the money-lending capitalist lends is the use value of capital, the ability of capital to produce the average rate of profit. If the industrial capitalist had to pay a rate of interest equal to the average rate of profit, there would be no point in borrowing the money, because the interest they would pay would be equal to the profit they would make from the productive investment of it. That is why interest-bearing capital is always subordinated to industrial capital.
But, the money-lending capitalist will also not lend money for free. The current situation of negative yields on bonds does not change this. Firstly, these negative yields are a consequence of capital markets being distorted by QE, but more significantly this is not the same as a money-lender lending money to an industrial capitalist for productive purposes, where the lender would simply get back their capital sum minus an amount representing a negative interest rate. The speculators in bonds are only prepared to receive a negative yield, because they anticipate getting back a much larger capital sum, as a result of asset appreciation, i.e. capital gain.
If you want to understand why that is look at what happened recently with the issuance of Austrian government debt. The Austrian government issued a 100 year bond in 2017 with a 2% yield. The coupon, the amount of interest paid on such bonds is fixed, for example, the coupon on a £100 bond with a 2% yield is £2 p.a. The yield, therefore, moves up and down with the price of the bond, falling when the bond price rises, and vice versa. Now you might wonder who would be prepared to risk their money for up to 100 years into the future, for just 2%. The answer is plenty of people. Since the issuance of the bond, it has made a capital gain of 60%. This explains why speculators are not concerned about low levels of yields on assets, or even negative yields, because their eye is on the much larger capital gains that can be made from the perpetual rise in asset prices underpinned by the policies of QE implemented by central banks.
This is also one reason that Marx said that in examining the rate of interest it is necessary to look at the actual rates that industrial capitalists must pay in the market, and not at the yields on bonds, especially government bonds. A bank, for example, will not make a loan to a company on the basis of a negative rate of interest. Anyone simply lending money rather than buying an asset will expect a positive real rate of interest on it. Exactly what that rate of interest will be depends upon the supply of such loanable money-capital, as against the demand for it. The resultant interest is a deduction from the profit created.
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