Thursday 2 September 2021

Michael Roberts, The Rate of Interest and Booms and Slumps - Part 6 of 12 - Rate of Profit and Rate of Profit of Enterprise

Rate of Profit and Rate of Profit of Enterprise


Roberts says,

“But the decisive driver of investment would be profitability, not the interest rate. If profitability was low, then holders of money would increasingly hoard it or speculate in financial assets rather than invest in productive ones.”

Roberts' own argument speaks against him here. His estimate of the average rate of profit is much lower than mine, for reasons I have described in previous posts. However, even given his much lower estimate of the rate of profit, currently, it is still significantly positive. The yield on simply holding cash is zero, and when inflation is considered, negative. The yield on a huge quantity of global financial assets is negative, even in nominal, let alone real terms, and the real yield on virtually all bonds, even the riskiest junk bonds, is near or below zero! Even with equities, yields are, on average, only around 6%, and inflation adjusted not much more or with rising inflation, less than half that. That is only a fraction, even of the average rate of profit on Roberts' basis of calculation.

So, according to his argument, money-capital should even now be moving out of those assets and into real capital investment in industrial capital. The reason it is not doing so is not that the rate of profit is too low (compared to what?), and certainly not compared to yields on assets, or the rate of interest, but because it is competing against large capital gains created by asset price inflation, underpinned and guaranteed by the action of the state, and central banks.

However, Marx shows why Roberts' argument is necessarily wrong, as some of the quotes already provided demonstrate. Moreover, Roberts argues as though capitalism still operated on the basis of some 18th century, or early 19th century model of privately owned capitals. Yet, in fact, Marx illustrates that it is precisely the fact that capital divides into two distinct factions of capitalists, which creates the distinct category of interest, and the antagonistic relation between them.

“It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest.”

(Capital III, Chapter 23)

The decisions on capital investment are made by the functioning capitalists, and Marx makes clear that, for them, the decisive factor is not the average rate of profit, but the rate of profit of enterprise. Unlike the average rate of profit, or rent or interest, it is merely a residual after interest, rent and taxes have been deducted from profits.

“assuming the average profit to be given, the rate of the profit of enterprise is not determined by wages, but by the rate of interest. It is high or low in inverse proportion to it.”

(Capital III, Chapter 23)

Even a high rate of profit may, therefore, result in a low rate of profit of enterprise, as a result of high rates of interest. For the functioning capitalist, it is the rate of profit of enterprise that is significant, because they see it as a cost of production, their wages for entrepreneurship, which must meet a minimum level to make the provision of their labour worthwhile. But, also, once their wages have been covered out of that profit of enterprise, it is from there that the internal funds for capital accumulation are provided, or else released into capital markets.

If it were only the average rate of profit that was determinant, and not the profit of enterprise, then there would be no difference between capitalists who operate using their own capital, and those that are merely functioning capitalists using borrowed capital. But, Marx makes clear that this cannot possibly be true.

“If interest were = 0, the industrial capitalist operating on borrowed capital would stand on a par with a capitalist using his own capital. Both would pocket the same average profit, and capital, whether borrowed or owned, serves as capital only as long as it produces profit. The condition of return payment would alter nothing. The nearer the rate of interest approaches zero, falling, for instance, to 1%, the nearer borrowed capital is to being on a par with owner's capital.”

(Capital III, Chapter 23)

Its true that the capitalist who operates using their own capital considers the capital they advance as also attracting the market rate of interest, so that mentally they separate out the total return as being part interest and part profit of enterprise. But pocketing the total amount still puts them in a qualitatively different position to the functioning capitalist who operates using borrowed capital. The only time this could have any significant effect would be if the rate of interest rose to a level higher than the average rate of profit they could obtain by utilising that capital productively, in which case they might then be persuaded to use it as loanable capital, rather than as productive-capital.

“We have seen that the actual specific product of capital is surplus-value, or, more precisely, profit. But for the capitalist working on borrowed capital it is not profit, but profit minus interest, that portion of profit which remains to him after paying interest. This portion of the profit, therefore, necessarily appears to him to be the product of a capital as long as it is operative; and this it is, as far as he is concerned, because he represents capital only as functioning capital.”

(Capital III, Chapter 23)

So, to say that capital accumulation is dependent solely upon the average rate of profit, as against the rate of profit of enterprise, which is itself a function not only of the average rate of profit, but also the rate of interest is clearly not consistent with Marx's analysis.

And, Roberts then, himself admits that. He says,

“What matters is not whether the market rate of interest is above or below some ‘natural’ rate, but whether it is so high that it is squeezing any profit for investment in productive assets.”

But, also, we are not living in an early 19th century capitalist economy in which, industrial capital is privately owned, but in an economy dominated by socialised capital. In the case of corporations, shareholders do not simply lend money-capital to the company, but also exercise rights of control over the capital they have loaned, and the real capital acquired with it. They do so via the Boards of Directors they appoint, which sit above the functioning capitalists who should exercise the day to day control over it, and who are its personification.

“On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth. Very curious details concerning this are to be found in The City or the Physiology of London Business; with Sketches on Change, and the Coffee Houses, London, 1845.

"What bankers and merchants gain by the direction of eight or nine different companies, may be seen from the following illustration: The private balance sheet of Mr. Timothy Abraham Curtis, presented to the Court of Bankruptcy when that gentleman failed, exhibited a sample of the income netted from directorship ... between £800 and £900 a year. Mr. Curtis having been associated with the Courts of the Bank of England, and the East India House, it was considered quite a plum for a public company to acquire his services in the boardroom" (pp. 81, 82).

The remuneration of the directors of such companies for each weekly meeting is at least one guinea. The proceedings of the Court of Bankruptcy show that these wages of supervision were, as a rule, inversely proportional to the actual supervision performed by these nominal directors.”

(Capital III, Chapter 23)

These directors act in the interests of shareholders – and themselves – not the company. They use profits to buy back and inflate the company share price, they hand money back to shareholders, they pay dividends above what a market rate of interest would justify, and so on.


No comments: