Bourgeois economics describes the rate of interest as the price of money. That is clearly nonsense, because money is the measure of value, which takes the form of price. To say that the rate of interest is the price of money, is equivalent to saying that it is the price of the measure of prices. If gold is the money commodity, and a gram of gold is the standard of price, it would be like saying that the price of a gram of gold (standard of prices), is a gram of gold, which is tautologically true, but meaningless, or else to claim that the price of a gram of gold is not a gram of gold, but something more, which is irrational. If the name given to the standard of prices is £, it would be like saying that the price of £1, is, say, £1.10!
Bourgeois economics attempts to get around this irrationality, by claiming that the reason that £1 can have a price of £1.10, is due to time preference. In other words, because I prefer to have £1, now, rather than at some point in the future, it is the price I pay to borrow the £1, now, from someone who has it, rather than wait until the future to obtain it. But, that is also irrational, because, in the same way that I have a time preference to have the £1, now, the person, who currently has it, must equally have a time preference, not to have it now, but to have it at some point in the future, instead. Both represent different use values, which is the basis of all exchange, and maximisation of welfare/utility, based upon equal values.
Let us take a normal exchange of commodities, say a litre of wine, and a metre of linen. Both commodities have a value equal to, say, 10 hours of universal labour. It is this common value that makes them exchangeable in this proportion. So, what then makes these two commodity owners exchange these commodities? It is that the owner of wine obtains greater use value/utility from a metre of linen than they do from the litre of wine in their possession, and vice versa. If a litre of wine has a value, instead, of 12 hours, but its owner is prepared to exchange it for a metre of linen, because of this greater use value/utility, the owner of linen would obviously oblige, and that may happen if they are the only supplier of linen. They then obtain 12 hours labour in exchange for just 10 hours labour, which is a good deal for them, but a bad deal for the owner of wine. Though, by the same token, if the owner of linen, places a similar higher preference for the utility of wine over linen, it would be expected they would then, similarly exchange 1.2 metres of linen, with a value of 12 hours labour, for the litre of wine!
However, in the real world, there is more than one producer and supplier of linen, and of wine and all other commodities. All producers of linen, seeing the possibility of exchanging 10 hours of labour, in the form of a metre of linen, for 12 hours labour, in the form of wine, would compete to exchange with the wine owner, and this competition would then force down the exchange rate (exchange-value of linen expressed in wine) of linen and wine, to their equal value, so that 1 litre of wine with a value of 12 hours labour, exchanges for 1.2 metres of linen, also with a value of 12 hours labour.
The basis of exchange is not that participants in the exchange obtain greater value than they give away, which is the basis of unequal exchange of the type the Mercantilsts theorised as being the source of surplus value (what Steuart called profit on alienation), but that, in exchanging equal values, both parties increase their level of utility/welfare, because both obtain a commodity that has greater utility/use value for them than the one they give up in exchange. Indeed, as Marx points out, when we move from commodity exchange between simple commodity producers to generalised commodity production, let alone capitalism, the producer of commodities specifically for the market, obtains no use value from the commodities they produce, because they are never produced for their own consumption, but precisely to be exchanged, for money of equal value. They exchange, say, 1 litre of wine, with a value of 10 hours labour, for £1, also with a value of 10 hours labour.
The litre of wine, out of the hundreds of litres they produce, has no use value for them, other than that it has an exchange-value/price of £1, which does have use value for them, because this £1 can be used to buy linen, food, and other commodities they require, and so obtain the use value of all these other commodities. The wine producer, alienates the use value of the litre of wine, but retains its value, now in a different form, i.e. that of £1. When they exchange the £1 for a metre of linen, they, thereby, complete the process, by which they metamorphose the litre of wine, which had no use value for them, into a metre of linen, which does have use value for them. As Marx points out, in The Grundrisse, and in Theories of Surplus Value, supply is a function of value, but demand is a function of use value. Value determines the rate of exchange between commodities, use value determines the quantities demanded, and exchanged, at these given values.
So, now let's apply this to money itself, and time preference. We could, in the above example, label wine as t, and linen as t + 1, which is also the labels that can be applied to the preference to have money now (t), as opposed to at some point in the future (t + 1). In other words, there is an exchange between two commodity owners, who exchange equal values, on the basis that they have different preferences, expressed as different levels of utility. One prefers to have £1 now, and the other to have £1 at some point in the future. But, as described above, what these different levels of utility/use value cannot justify is unequal exchange, the exchange of one commodity (money) with a value of 10 hours, for another commodity (also money) with a value of 12 hours, because competition between commodity owners and producers would reduce this rate of exchange down to equal amounts of value. Assuming no inflation, there is no cost or value added to t+1, as opposed to t, so free competition should should equalise their prices.
So, how do we explain the existence of interest and the rate of interest? Firstly, its necessary to understand that, just as there is a difference between capitalist rent, and feudal rent, so there is a difference between capitalist interest, and interest in previous modes of production, i.e. usury. In setting out, the examples above, I noted that, if the producer of linen was a monopolist, so that the producer of wine, who is prepared to exchange 12 hours of labour in the form of a litre of wine for 10 hours of labour in the form of a metre of linen, that is possible, because the monopoly position of the latter prevents any other suppliers forcing the price of linen down to its value. The resulting unequal exchange, means that the 2 hours of labour that the linen producer obtains represents a rent.
That is the case with usury. It is not a case of time preference, but of absolute necessity for the borrower to obtain money to pay bills, and, in conditions where the monopoly owners of money are then able to charge almost any amount of interest. It is why, those desperate for money to pay bills are charged 4000% p.a. by pay day lenders, and why, as Marx says, it is at times of crisis, when firms demand money, not as money-capital for investment, but purely out of desperation to pay bills and stay afloat, that interest rates reach their highest level. So, this does not represent a free and equal exchange, but, on the contrary, a condition of necessity on the part of the borrower, and monopoly on the part of the lender, so that the rate of interest is not, then, some free market price of money, but simply a monopoly rent.
But, capitalist interest is different from this condition, because it does involve a free and equal choice by the borrower to have money, now, rather than later, and of the lender to have money later, rather than now. As described above, however, this condition, of itself, provides no basis for the existence of interest, or a rate of interest, as some form of price for money. The basis of capitalist interest, however, as Marx describes, is not as a price for money, which is meaningless or irrational, but as a price for money-capital. A price for money-capital, as against a price for money, is not meaningless or irrational, precisely because the value of £100 of money-capital is greater than the value of £100 of money. Capital is self-expanding value, and the value of £100 of capital, then, depends upon the average rate of industrial profit.
If the average rate of profit is 25%, so that £100 of capital, in the form of say a machine, has the potential, on average, to produce £25 of profit, the value of £100 of capital is actually £125. The use value of capital is this facility of self expansion, and it is this use value that is paid for, when that capital (as against a commodity such as a machine or money) is itself sold as a commodity.
It can then, be seen why someone would have a time preference for £100, as money-capital, now, as against £100 of money at some point in the future, because £100 of capital has a value not of £100, but of £125. It is precisely, this fact that means that the rate of interest exists not as a price of money, but as a price of money-capital. Clearly, the borrower would still not pay more than £25 (25%) interest to borrow this money-capital, because that would eliminate their profit, and reason for borrowing, but similarly, the lender would not lend the money without receiving some interest, because they could instead use the money to fund consumption, themselves, either productive or unproductive, i.e. they could employ £100 of industrial capital and obtain £25 profit from it. The rate of interest, then, does become a matter, not of desperate borrowers and monopoly suppliers, but of a free and equal battle between the demand for, and supply of, not money, but money-capital.
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