marx on the rate of profit, the rate of profit of enterprise and the rate of interest

MARX ON THE RATE OF PROFIT, THE RATE OF PROFIT OF ENTERPRISEAND THE RATE OF INTERESTAuthor(s): T. P. LIANOSSource: Acta Oeconomica, Vol. 37, No. 1/2 (1986), pp. 123-128Published by: Akadémiai KiadóStable URL: http://www.jstor.org/stable/40729259 .

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Acta Oeconomica, Voi 37 (1-2), pp. 123-128 (1986)

MARX ON THE RATE OF PROFIT, THE RATE OF PROFIT OF ENTERPRISE

AND THE RATE OF INTEREST

T. P. LÍANOS

The author proves that, with a certain condition, if the rate of entrepreneurial profit is zero, the rate of interest exceeds the rate of profit. That is, it is not necessarily true that the rate of profit is the upper limit to the rate of interest. He also examines the development of the rate of profit, the rate of entrepreneurial profit and the rate of interest in the course of the business cycle.

One area of importance in modern Marxist literature is that of monetary economics and, in particular, the determination of the rate of interest and its role in the phases of the business cycle. This is a relatively unexplored area, although Marx devoted the largest part in the third volume of Capital to monetary phenomena. Part of the difficulty in dealing with these problems is the state in which Marx left the notes from which Engels constructed the third volume.

It is well-known from Engels' preface to this volume that Marx left "no finished

draft, not even a scheme whose outlines may have been filled out, but only the

beginning of an elaboration - often just a disorderly mass of notes, comments and extracts" [1].

It is interesting to note that Engels thought that part 5 of the third volume, which deals with interest and money capital, was "the most complicated subject in the entire volume".

The Marxist literature on this subject contains a number of studies that provide a

systematic and illuminating exposition on Marx's ideas on monetary issues and also form the basis for modern developments in the area of Marxist monetary theory. In this regard, one should mention the early studies by Hilferding, Alexander and Fan-

Hung [2, 3, 4], and the recent studies by Fine, Harris, Mátyás, Panico and Weeks [5, 6, 7, 8, 9, 10], among others.

One aspect of Marx's ideas on the rate of interest is its relationship with the rate of profit and the rate of profit of enterprise. This relationship is unexplored and the

purpose of this paper is to provide an attempt to formalize the relationship between these three variables.

The analysis of this relationship may start from the following statement. "The

profit of every capital, and consequently also the average profit established by the

equalization of capitals, splits or is separated, into two qualitatively different, mutually

Acta Oeconomica 37, 1986 Ákadémiai Kiadó, Budapest



124 T. P. LÍANOS: RATE OF PROFIT AND RATE OF INTEREST

independent and separately individualised parts, to wit - interest and profit of enterprise - both of which are determined by separate laws. The capitalist operating on his own capital, like the one operating on borrowed capital, divides the gross profit into interest due to himself as owner, as his own lender, and into profit of enterprise due to him as to an active capitalist performing his function." [11]

This passage established that, independently of the identity of the recipients, for the economy as a whole (and also for every individual capital) we can write that

R = P + In (1)

which is simply an identity where R = profit, P = profit of enterprise and In = interest. From this identity follows Marx's earlier statement (in the original text) that " . . . one might consider as the maximum limit of interest the total profit. . ." [12]

Clearly, when the profit of enterprise is zero, interest is equal to profit. From the above identity it is also clear that the maximum limit of P is R when In = 0. However, Marx says that "the minimum limit of interest is altogether indeterminable. It may fall to any low. Yet, in that case there will always be counteracting influences to raise it again above this relative minimum." [13]

Interest is the product of an amount of money capital and the rate of interest, and since borrowed money capital cannot be zero as long as we retain the division of the capitalist class into money-capitalists and industrial capitalists, one may argue that when Marx speaks of the minimum limit of interest, he has in mind the rate of interest.*

The identity (1) can easily be transformed from a relationship between absolute magnitudes to one between rates. The constant and variable capital expressed in monetary terms is C + V. It is this magnitude that generates the total amount of profit R. Dividing both sides of identity (1) by C + V gives

-5 ?_+Jü_ (2) v ' C + V C + V C+V v (2) '

where now the rate of profit is q= ^,The production process is partly financed by

industrial-capitalists themselves and partly by money-capitalists. The amount of

money-capital lent and borrowed is M. Thus, industrial-capitalists finance C + V - M of total money-capital and the remaining M is obtained from the money-capitalists through the money-capital market. Equation (2) can now be expressed as

R P C + V-M In M cTv~~C + V C + V-M C + V M

R P Now the rate of profit is q = _ , ._, the rate of profit of enterprise is r = - and

C< + , V LtV - m

* Panico, [14], attributes the characteristic of being "altogether indeterminable** without reservations to the rate of interest rather than to interest, as Marx does.

Acta Oeconomica 37, 1986



T. P. LÍANOS: RATE OF PROFIT AND RATE OF INTEREST 125

the rate of interest is i = - . Thus, equation (3) is written as M

C+V-M.. M e=r-cTM-+1cTv (4)

The ratio shows the proportion of total capital which is financed by

M industrial-capitalists and the ratio - - - shows the proportion financed by money-

capitalists. Defining - - - = k and, consequently, - - = 1 - k equation (4) now

becomes

e = r(l-k) + ik k<l (5)

Assuming a constant rate of profit we can clearly see the maximum and minimum values of the rate of interest, by writing the above equations as:

r=^-j_4 1-k 1-k (6) 1-k 1-k

Q from which it follows that the maximum value of the rate of interest is i = - and it k

occurs when r = 0. The minimum value of the rate of interest is zero and then the rate of

profit of enterprise is at the maximum which is r=- . It should be noted that for a

given g the maximum values of i and r depend on the proportion of money-capital borrowed and lent to the total money-capital advanced to the production process. Relationship (6) above provides support to L. Harris' suggestion that Marx's statement about the limit of interest payments "... does not delimit the interest rate unless the amount of interest-bearing capital on loan is given". [15]

Figure 1 gives the geometric picture of equation (6) for a given level of the rate of profit. For q = q1 equation (6) appears as a straight line with a negative slope. As q increases to q2 the line shifts upward in a parallel way.

Two interesting things may be noted. First, the rate of interest can be greater than the rate of profit, since k < 1 . Second, if i = r then they both are equal to q. This occurs at the points of intersection with the 45° line, such as A in Fig. 1. Also, if i > r then i > q. This last statement can be proved by letting r=Ai where k<' and working on expression (6).

These results hold for a given level of the rate of profit. However, the rate of profit is not constant. It changes with the business cycle. Suppose that the minimum and





r

/AS*

maxr=î^r v /^'

maxir-fì- -&- i

Fig. 1

maximum values of the rate of profit over the business cycle are qx and q2, respectively. In terms of Fig. 1 this means that the line connecting r and i is shifting upward to the right. For the sake of simplicity, it may be assumed that the ratio of the amount of money capital lent to the total money capital, i.e. the value of k, remains constant during the business cycle. In this case the shift will be parallel, as on Fig. 2. The rate of profit of enterprise and the rate of interest are related to the rate of profit. The change in Q will be accompanied by changes in r and i. Typically, the simultaneous changes of three variables over the course of the business cycle are shown on Fig. 2. Suppose that the rate of profit is at its minimum level qx and at this level the rate of profit of enterprise is equal to the rate of interest. The relevant point on Fig. 2 is A. Now, the rate

r

r -- &- /^

Fig. 2




T. P. LÍANOS: RATE OF PROFIT AND RATE OF INTEREST 127

1 I I I , I

r,i i i i l i i i

^^ i i

^ expansion ^ recession 1

Fig. 3

of profit increases as the economic recovery takes place and the r1i1 line shifts in a parallel way. The simultaneous changes of r and i are shown by the circle and follow the direction of the arrows. The rate of profit of enterprise increases while the rate of interest falls slightly. Later on, both increase (at different rates) until r reaches its maximum. At point B the rate of profit is at its highest level, the rate of profit of enterprise continues to fall and the interest rate continues to increase. At B the economy enters the phase of recession and the line r2i2 shifts to the left. For a while the interest rate continues to increase and, at the same time, the rate of profit of enterprise declines drastically. After a point both r and i decline until i reaches its minimum point, and so on.

The relationship between r and i, as the rate of profit is changing, is shown more clearly in Fig 3. During the period of expansion the rate of profit of enterprise is generally higher than the rate of interest, and vice versa for the period of recession. Also, the rate of interest reaches its minimum before the rate of profit of enterprise reaches its maximum and, correspondingly, the former reaches its maximum before the latter reaches its minimum. Of course, the relationships of Fig. 3 are derived from the exact position of the cyclical shape of Fig. 2 that shows the combined movement of r and i. The exact relationship between r, i and q cannot be decided a priori, without the evidence of statistical data and analysis. On theoretical grounds, one would expect the relationship between the rate of profit of enterprise and the interest rate to follow, in general, the pattern indicated in Fig. 1 and Fig. 2. This is a hypothesis to be tested on the basis of statistical data.





References

1. Marx, K.: Capital. Vol. III. Progress Publishers, Moscow 1971. p. 4. 2. Hilferding, R.: Finance capital. 1910. 3. Alaxander, S. S.: Mr. Keynes and Mr. Marx. Review of Economic Studies, 1939. pp. 121-135. 4. Fan-Hung: Keynes and Marx on the theory of capital accumulation, money and interest. Review of

Economic Studies, October 1939. Reprinted in: Horovitz, D. (ed.): Marx and modern economics.

Monthly Review Press, 1968. 5. Fine, B.: Economic theory and ideology. Edward Arnold, 1980. ch. 4. 6. Harris, L.: On interest, credit and capital. Economy and Society, Vol. 5, No. 5. 1976. pp. 143-177. 7. Harris, L.: The role of money in the economy. In: Green, F.-Nore, P. (eds): Issues in political economy, a

critical approach. Macmillan Press, 1979. ch. 5. 8. Mátyás, A.: Similarities between the economic theories of Marx and Keynes. Acta Oeconomica, Vol. 31,

Nos 3-4 (1983). 9. Panico, C: Marx s analysis of the relationship between the rate ot interest ana me rate or proms.

Cambridge Journal of Economics, 1980, vol. 4, pp. 363-378. 10. Weeks, J.: Capital and exploitation. E. Arnold, 1981. 11. Marx, K.: op. cit. p. 375. 'l. Op. CH. p. J3Ö. 13. ibid. 14. Panico, C: op. cit. p. 173. 15. Harris, L.: op. cit. p. 150.

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