Capital III, Chapter 21 - Part 1

Interest-Bearing Capital

The analysis, so far, has taken us from the development of an average rate of profit, based on the advanced productive-capital to a definition of average profit that includes the advanced merchant and commercial capital. That is the capital advanced to undertake the circulation of commodities, and the money-dealing capital, which effects the necessary movement of money required as payments. The definition of general or average profit was made more precise by referring to it as the general annual rate of profit, which makes clear that it is calculated on the basis of the sum of the industrial and merchant capital, advanced for one turnover period, and not the capital laid out for the entire year. It is this definition, now set out, Marx says, which should be understood by the term general or average rate of profit, from this point on.

Under this latest definition, of the general annual rate of profit, it makes no difference whether we are discussing an industrial capital or a merchant capital. Either type of capital receives the same rate of profit, which is pro rata to the capital it advances for one turnover period. With capitalist production, any owner of capital can bring about the self-expansion of that capital, i.e. make profits. That indeed is what makes it capital; it is value that is self-expanding. And, the fact that it is self-expanding value, means that the form of this value is not relevant.

Value in any form may be capital or may simply be a commodity. What makes this particular value capital is the purpose to which it is put, and the social context within which that purpose is carried out. If I own a house, that house may simply be a use value, or a commodity I may have bought, and may sell. But, as simply a commodity, the value of this house has no potential to self-expand. If I sell it at its value, I will only get back the value I expended on its purchase, or that was expended on its production. However, if I use the house as an instrument of production, as part of a capitalist venture, then, like every other capitalist, I will expect to obtain the average profit on the capital I advance – here represented by the value of the house.

The house here represents constant capital. But, similarly, if I possess variable capital, in the shape of means of subsistence, which can be used as means of payment for workers, I could set these workers to work, in the expectation that the new value these workers create, by the exercise of their labour, will be greater than the value of these means of subsistence, I pay them as wages. However, if I simply consume the food, clothing, and shelter, which comprise these means of subsistence, there is no chance of their value expanding. And, as with the house, if I simply sell these commodities, at their value, I will only obtain for them the same value I expended for their purchase. Similarly, if the means of subsistence I own, and pay as wages to workers, only results in those workers producing a use value I consume myself, for example, where I employ domestic servants such as a cook, then again no surplus value is produced, and that value did not act as capital.

In both cases, the capital is a sum of value, and this value is expressed in money terms, even though, in neither case, was this value in the form of money. Capital is expressed as an amount of money only because money is the universal equivalent form of value. All value, in whatever form can be reduced to and represented by it. Therefore, value, and so also capital-value, can then be compared.

In this sense, all value, in whatever form, is money, but money also, in this sense, as value that has the potential to expand, i.e. capital, thereby assumes an additional use value. In just the same way that labour has the use value not only to produce some specific product, but also to create value, and so surplus value, so capital has the use value of being able to self-expand.

“Money — here taken as the independent expression of a certain amount of value existing either actually as money or as commodities — may be converted into capital on the basis of capitalist production, and may thereby be transformed from a given value to a self-expanding, or increasing, value. It produces profit, i.e., it enables the capitalist to extract a certain quantity of unpaid labour, surplus-product and surplus-value from the labourers, and to appropriate it. In this way, aside from its use-value as money, it acquires an additional use-value, namely that of serving as capital. Its use-value then consists precisely in the profit it produces when converted into capital. In this capacity of potential capital, as a means of producing profit, it becomes a commodity, but a commodity sui generis. Or, what amounts to the same, capital as capital becomes a commodity.” (p 338-9)

Again, this is like the situation with labour-power. Labour-power – the power to perform labour and thereby create value – becomes a commodity, because this capacity, for capital, constitutes a use value. It does become a use value, because, having been separated from their means of production, the workers must sell their labour-power, in order to live.

But, under capitalist production, as a result of the development of prices of production, determined by the general rate of profit, it is no longer, for any individual capital, the employment of this labour-power which is the source of profit, but only the ownership of capital. A very large capital may employ little labour-power, and yet will obtain a large amount of profit compared to a small capital that employs a lot of labour-power.

At the level of capital in general, profit remains a function of the exploitation of labour, and production of surplus value, but, at the level of the individual capital, this is no longer true. The appropriation of profit is now only a function of the ownership of capital. A merchant capital produces no surplus value, but obtains its proportionate share of profit; at the extreme, an industry that was fully automated, and employed no workers, would produce no surplus value at all, but would claim its share of profit pro rata to the size of its capital.

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Capital III, Chapter 20 - Part 12

Commerce, by drawing more and more production into circulation transforms agriculture and the associated rural industries. Farms become capitalist farms, and the attendant cottage industries that previously were a means of peasants producing to meet their own direct needs, with a few products left over to be exchanged, increasingly become industries in their own right, carried on separately, with their products now produced solely as commodities for the purpose of exchange.

“It develops the product into a commodity, partly by creating a market for it, and partly by introducing new commodity equivalents and supplying production with new raw and auxiliary materials, thereby opening new branches of production based from the first upon commerce, both as concerns production for the home and world-market, and as concerns conditions of production originating in the world-market. As soon as manufacture gains sufficient strength, and particularly large-scale industry, it creates in its turn a market for itself, by capturing it through its commodities. At this point commerce becomes the servant of industrial production, for which continued expansion of the market becomes a vital necessity.” (p 336)

At this stage, the limit for this mass production is only set by the quantity of the capital employed, and the productivity of labour. In the past, it was the merchant that had the monopoly of knowledge over market prices, and exercised predominance as a result. But now, it is industrial capital that continually compares its cost-price against its competitors, and continually seeks to reduce it, in order to increase its market share, or its profit margin.

The fact that merchant capital predominated for so long, explains why, when the first attempts at systematic economic theory arise, with Mercantilism, its starting point is exchange, the circulation of commodities, a belief that profits arise from it.

“Partly because merchant's capital is the first free state of existence of capital in general. And partly because of the overwhelming influence which it exerted during the first revolutionising period of feudal production — the genesis of modern production. The real science of modern economy only begins when the theoretical analysis passes from the process of circulation to the process of production. Interest-bearing capital is, indeed, likewise a very old form of capital. But we shall see later why mercantilism does not take it as its point of departure, but rather carries on a polemic against it.” (p 337)

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Capital III, Chapter 20 - Part 11

As Marx says, in contrast to the ancient world, merchant capital now necessarily pushes forwards to capitalist production. Lenin detailed the same effects in Russia, as set out in his writings against Economic Romanticism, and particularly in “The Development of Capitalism in Russia”.

At the time Marx was writing Capital, he noted,

“Unlike the English, Russian commerce, on the other hand, leaves the economic groundwork of Asiatic production untouched.” (p 334)

But, even by the time Engels was publishing the work, the situation had changed, causing him to note,

“Since Russia has been making frantic exertions to develop its own capitalist production, which is exclusively dependent upon its domestic and the neighbouring Asiatic market, this is also beginning to change.” (Note 51, p 334)

There are two ways in which this transition is effected. Either the merchant themselves becomes a producer, in order to obtain the quantity and quality of commodities they require, to meet the needs of their markets, or else the merchant simply takes control of the production process, turning independent workers effectively into employees.

That is done via a variety of means such as the putting-out system, where merchants buy material and then supply it to cottage workers who work it up, selling the finished product back to the merchant. Or else, the merchant may operate via one or more sweatshops, whereby they contract with a small master for the supply of commodities. The master occupies no better position than their workers, but is forced to “sweat” this labour in order to keep prices to a minimum, to ensure sale to the merchant. In essence, the merchant simply appropriates the surplus value produced by the workers.

“This system presents everywhere an obstacle to the real capitalist mode of production and goes under with its development. Without revolutionising the mode of production, it only worsens the condition of the direct producers, turns them into mere wage-workers and proletarians under conditions worse than those under the immediate control of capital, and appropriates their surplus-labour on the basis of the old mode of production.” (p 334)

Again, Lenin notes the same thing in Russia. The conditions of workers in the handicraft sector was worse than that for workers employed by small manufacturing capital, which was in turn worse than for workers employed by the big industrial capitals.

“There is, consequently, a three-fold transition. First, the merchant becomes directly an industrial capitalist. This is true in crafts based on trade, especially crafts producing luxuries and imported by merchants together with the raw materials and labourers from foreign lands, as in Italy from Constantinople in the 15th century. Second,the merchant turns the small masters into his middlemen, or buys directly from the independent producer, leaving him nominally independent and his mode of production unchanged. Third, the industrialist becomes merchant and produces directly for the wholesale market.” (p 335)

The latter was the case with, for example, Boulton and Watt, and particularly for those former workers and artisans such as Wedgwood, who develop their businesses from crafts into industrial capitalist enterprises.

“In the Middle Ages, the merchant was merely one who, as Poppe rightly says, "transferred" the goods produced by guilds or peasants [Poppe, Geschichte der Technologie seit der Wiederherstellung der Wissenschaften bis an das Ende des achtzehnten Jahrhunderts, Band I, Göttingen. 1807, S. 70. — Ed.] The merchant becomes industrialist, or rather, makes craftsmen, particularly the small rural producers, work for him. Conversely, the producer becomes merchant. The master weaver, for instance, buys his wool or yarn himself and sells his cloth to the merchant, instead of receiving his wool from the merchant piecemeal and working for him together with his journeymen. The elements of production pass into the production process as commodities bought by himself. And instead of producing for some individual merchant, or for specified customers, he produces for the world of trade.” (p 336)

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Capital III, Chapter 20 - Part 10

On the one hand, commercial capital is drawn towards the markets of towns, and on the other hand, the development of merchant capital encourages the development of towns themselves as centres of commercial activity. The towns themselves became increasingly separated from the countryside, and the artisans who establish their businesses in the towns do so no longer as simply a side line to their own direct production. Their output is from the start a production of commodities not products, and as such they are increasingly dependent on merchant capital for the sale of those commodities.

“However, it depends on altogether different circumstances to what measure industrial development will go hand in hand with this development. Ancient Rome, in its later republican days, developed merchant's capital to a higher degree than ever before in the ancient world, without showing any progress in the development of crafts, while in Corinth and other Grecian towns in Europe and Asia Minor the development of commerce was accompanied by highly developed crafts. On the other hand, quite contrary to the growth of towns and attendant conditions, the trading spirit and the development of merchant's capital occur frequently among unsettled nomadic peoples.” (p 332)

The dialectical nature of the historical process is again illustrated by the role of merchant capital. In the 16th and 17th centuries, the great voyages of discovery took place, which opened up the trade routes for this merchant capital, into Asia, Africa and America. It opened up these areas to the establishment of the colonial empires, which extended the remit of the great European feudal dynasties.

During that period, feudalism reaches its highest levels of achievement and wealth. Its lust for the wealth and all of the exotic variety of products, not to mention gold that these new territories offered stimulated the feudal aristocracy to send out the merchants as its agents. Companies like the Dutch and British East India Companies or the Hudson Bay Company, followed in a long line of merchants operating under royal and aristocratic patronage, going back to Columbus and beyond. These merchant companies with their own private armies, created their own colonial state apparatus, as a foreign facsimile of the feudal state, whose main purpose was to exercise dominance and to extract surplus product in the form of rent, interest, commercial profit and taxes.

And yet, in doing so, and pushing feudal production at home to its highest levels, it consequently created the conditions for capitalist production in Europe to expand, bursting beyond the limitations of feudal industry. A requirement of that was already existing capitalist production, which had arisen in the Middle Ages.

Capitalism does not become dominant because feudalism collapses, but because the expansion that occurs under feudalism, spurred on by trade, creates the conditions for capitalist production to demonstrate its superiority. It simply grows out of and beyond feudalism.

And, as the opening up of these new territories provides the basis for the expansion of this capitalist production, so in turn the latter, whose large scale production requires expanding markets, leads to an expansion of commerce. Where previously it was the large trading nation like Holland that predominated, now it was Britain, the producing nation, the industrial nation that achieves supremacy.

“The history of the decline of Holland as the ruling trading nation is the history of the subordination of merchant's capital to industrial capital.” (p 333)

In the colonies too, although this merchant capital, backed by its own military might, and that of the colonial state, destroys the basis of the existing modes of production, as it did in India, often with catastrophic consequences in causing famines and other disasters, it simultaneously and unconsciously creates the conditions for capitalist development in the colonies as well.

By destroying the existing basis of production and turning millions of Indians into wage workers, it simultaneously establishes the role of the market; a process which had taken centuries in Britain. It thereby opens the door for the development of commodity production in those economies, and thereby the development of a domestic bourgeoisie and proletariat.

Merchant capital, and the colonial state did not establish railways in order to facilitate colonial development, but to facilitate the more rapid, more efficient transport of materials from the colonies and of manufactured commodities to their markets. Yet, that very development did also require the training of Indian workers, did also unify India, for the first time, and opened up its markets also to Indian producers.

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