Abstract
In the classical theory of interest, as enunciated by David Ricardo, interest is determined by the rate of profit. Marx was critical of this view, starting with an idea that usury is a feature of pre-industrial or mercantile capitalism, and proceeding to the view that the development of money markets concentrates monetary resources and tends to reduce the money rate of interest. It is not the current money rate of interest that is determined by the rate of profit, but some average or long-term rate that is implicit, rather than emerging as a real economic variable. The chapter concludes by showing that in a pure capitalist economy, interest is a pure transfer between capitalists of their existing monetary resources, rather than requiring a current surplus of production over costs. In this way, the rate of interest ceases to be dependent on the rate of profit.
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Notes
- 1.
David Ricardo, The High Price of Bullion: A Proof of the Depreciation of Bank Notes, in The Works and Correspondence of David Ricardo, Volume III, Pamphlets and Papers, 1809–1811, ed. Piero Sraffa (Cambridge: Cambridge University Press, 1951), 88–9.
- 2.
Ibid., 143.
- 3.
David Ricardo, On the Principles of Political Economy and Taxation, in The Works and Correspondence of David Ricardo Volume I, ed. Piero Sraffa and Maurice Dobb (Cambridge: Cambridge University Press, 1951), 365. The Usury Laws at the time when Ricardo was writing restricted the rate of interest to a maximum of 5 per cent.
- 4.
Ibid., 297.
- 5.
Ibid., 298. See also G. L. S. Shackle, “Foreword,” in Value Capital and Rent, by Knut Wicksell (London: George Allen and Unwin, 1954).
- 6.
Ibid.
- 7.
Ricardo, On the Principles of Political Economy and Taxation, 298.
- 8.
Ibid., 297–300. See also Jan Toporowski, Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day (Cheltenham: Edward Elgar, 2005), 17–25.
- 9.
Karl Marx, Theories of Surplus Value Part III (Moscow: Progress Publishers, 1971), 487.
- 10.
Ibid., 477–8.
- 11.
Ricardo, On the Principles of Political Economy and Taxation, 297.
- 12.
Matthew Smith, Thomas Tooke and the Monetary Thought of Classical Economics (Abingdon, UK: Routledge, 2011), 212.
- 13.
Fredrick Engels, “Preface,” in MECW (London: Lawrence & Wishart, 1998), 37: 6.
- 14.
Karl Marx, Capital, Vol. III, in MECW (London: Lawrence & Wishart, 1998), 37: 365–6, 512.
- 15.
Ibid., 360.
- 16.
Ibid., 513–15.
- 17.
Ibid., 358–9.
- 18.
Ibid., 360.
- 19.
Ibid., 361–2.
- 20.
Ibid., 362, 366. In the twentieth century, Keynes and Kalecki argued that it was this long-term rate of interest that is relevant to business investment.
- 21.
Ibid., 362, 364–5, also 366–8.
- 22.
Ibid., 378.
- 23.
Nicholas Barbon, A Discourse of Trade (London: Milbourn, 1690).
- 24.
Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), 330.
- 25.
Rudolf Hilferding, Finance Capital A Study of the Latest Phase of Capitalist Development (London: Routledge and Kegan Paul, 1981): 268–9.
- 26.
See Ralph George Hawtrey, A Century of Bank Rate (London: Longmans, Green and Co., 1938), chapter VI.
- 27.
Karl Marx, Capital. Vol. II, in MECW (London: Lawrence & Wishart, 1997), 36: 473–7.
- 28.
Karl H. Niebyl, Studies in the Classical Theories of Money (New York: Columbia University Press, 1946), chapter 3.
- 29.
Michal Kalecki, “An Essay on the Business Cycle Theory,” in The Collected Works of Michał Kalecki Volume I Capitalism: Business Cycles and Full Employment, ed. Jerzy Osiatynski (Oxford: The Clarendon Press, 1933), 93–8.
- 30.
Marx, Capital, Vol. III, chapter XXI.
- 31.
It is the neglect of the distinction between capitalist credit and debt and pre-capitalist debt, and the income and balance sheet implications of that distinction, that confuses long-term (econometric) studies of debt, such as Carmen M. Reinhart, and Kenneth S. Rogoff, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” NBER Working Paper No. 13882 (March 2008).
- 32.
Hartley Withers, The Meaning of Money (New York: Dutton, 1909); Dennis Holme Robertson, “Theories of Banking Policy,” in Essays in Monetary Theory (London: P.S. King, 1940). “We have spoken of bankers and financiers as the makers of credit. But we have also recognized that the chief financial material out of which they make it is the stocks and shares and other certificates of value which represents the capital created by the saving and investing classes. It is thus the growth of the forms of saving which take these financial shapes that enables the increased credit to emerge from the financial factories. All such modern saving can furnish material for the creation of more credit.” John Atkinson Hobson, Gold Prices and Wages with an Examination of the Quantity Theory (London: Methuen, 1924), 89.
- 33.
“The rate of interest that is paid on deposits is always somewhat lower than the rate charged by banks on loans. The difference between these two rates remunerates the bank …” Knut Wicksell, Interest and Prices: A Study of the Causes Regulating the Value of Money (London: Macmillan, 1936), 139.
- 34.
The theory may be summarized as follows. In a closed economy, with no government, in a given period, total income \( \left(\mathrm{Y}\right) \) is equal to the sum of profits plus wages\( \left(\mathrm{W}+\mathrm{P}\right) \), which in turn, is equal to Consumption plus Investment \( \left(\mathrm{C}+\mathrm{I}\right) \). \( \mathrm{Y}-\mathrm{C}=\mathrm{I}=\mathrm{Saving} \). Saving may be divided into the saving of workers \( \left({\mathrm{S}}_{\mathrm{w}}\right) \) and the saving of capitalists \( \left({\mathrm{S}}_{\mathrm{c}}\right) \). Similarly, Consumption may be divided into the consumption of workers \( \left({\mathrm{C}}_{\mathrm{w}}\right) \) and the consumption of capitalists \( \left({\mathrm{C}}_{\mathrm{c}}\right) \).
Profits are therefore equal to \( {\mathrm{S}}_{\mathrm{c}}+{\mathrm{C}}_{\mathrm{c}} \). \( {\mathrm{S}}_{\mathrm{c}} \) is equal to total Saving or Investment minus \( {\mathrm{S}}_{\mathrm{w}}\left(\mathrm{I}-{\mathrm{S}}_{\mathrm{w}}\right) \). Total Profits \( \left({\mathrm{S}}_{\mathrm{c}}+{\mathrm{C}}_{\mathrm{c}}\right) \) therefore equal to \( \mathrm{I}+{\mathrm{C}}_{\mathrm{c}}-{\mathrm{S}}_{\mathrm{w}} \). See Michal Kalecki, “The Short-term Rate of Interest and the Velocity of Cash Circulation,” Review of Economic Studies 2 (1942).
It is easy to show that in the more complicated situation where banks earn money from intermediating household or workers’ deposits and loans, the profits of banks make no difference to aggregate profits.
- 35.
Michal Kalecki, Selected Essays on the Dynamics of the Capitalist Economy 1933–1970 (Cambridge: Cambridge University Press, 1971), 109.
- 36.
Kalecki The Short-term Rate of Interest and the Velocity of Cash Circulation”.
- 37.
Nobuhiro Kiyotaki, and John Moore, “Credit Cycles,” Journal of Political Economy 105, no. 2 (April 1997) present a model of credit cycles in which the only collateral is real or productive capital. Such a credit cycle, of course, then follows the investment cycle. The much more convenient and widespread use of financial assets as collateral extends the range and possibilities of the credit cycle far beyond the less financial investment cycle.
- 38.
The process by which this happens in described in Jan Toporowski, “A Kalecki Fable on Debt and the Monetary Transmission Mechanism,” London School of Economics, Financial Markets Group Special Paper No. 239 (August 2015). Wicksell, who conceded that capitalists hold bank deposits (Wicksell, Interest and Prices A Study of the Causes Regulating the Value of Money, 138–9), does not draw the logical inference from this that those capitalists then also receive interest on those deposits in addition to their income from production and trade.
Bibliography
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Kalecki, Michal. “The Short-term Rate of Interest and the Velocity of Cash Circulation.” Review of Economic Studies 2 (1941): 97–9.
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Niebyl, Karl H. Studies in the Classical Theories of Money. New York: Columbia University Press, 1946.
Reinhart, Carmen M. and Kenneth S. Rogoff. “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” NBER Working Paper No. 13882 (March 2008).
Ricardo, David. The High Price of Bullion: A Proof of the Depreciation of Bank Notes. In The Works and Correspondence of David Ricardo, Volume III, Pamphlets and Papers, 1809–1811, edited by Piero Sraffa, 47–98. Cambridge: Cambridge University Press, 1951a.
Ricardo, David. On the Principles of Political Economy and Taxation. In The Works and Correspondence of David Ricardo Volume I, edited by Piero Sraffa with Maurice Dobb. Cambridge: Cambridge University Press, 1951b.
Robertson, Dennis Holme. “Theories of Banking Policy.” In Essays in Monetary Theory London: P.S. King, 1940.
Schumpeter, Joseph A. History of Economic Analysis. New York: Oxford University Press, 1954.
Shackle, G. L. S. “Foreword.” In Value Capital and Rent, by Knut Wicksell, 5–13. London: George Allen and Unwin, 1954.
Smith, Matthew. Thomas Tooke and the Monetary Thought of Classical Economics. Abingdon, UK: Routledge, 2011.
Toporowski, Jan. Theories of Financial Disturbance: An Examination of Critical Theories of Finance from Adam Smith to the Present Day. Cheltenham: Edward Elgar, 2005.
Toporowski, Jan. “A Kalecki Fable on Debt and the Monetary Transmission Mechanism.” London School of Economics, Financial Markets Group Special Paper No. 239 (August 2015).
Wicksell, Knut. Interest and Prices: A Study of the Causes Regulating the Value of Money. London: Macmillan, 1936.
Withers, Hartley. The Meaning of Money. New York: Dutton, 1909.
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Toporowski, J. (2019). Marx’s Observations on the Classical Theory of Interest. In: Gupta, S., Musto, M., Amini, B. (eds) Karl Marx’s Life, Ideas, and Influences. Marx, Engels, and Marxisms. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-24815-4_10
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