27 October 2011

Interest-Bearing Capital


Interest-Bearing Capital

Capital Volume 3, Part 5, Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital.

This is a long part of Volume 3 and really too much with its sixteen chapters (21 – 36), almost a book in itself, to be covered in a single discussion. Therefore let us concentrate as before on the question of whether Volume 1 of Capital is undermined or over-ruled by Volume 3.

Marx makes it clear that this is not the case at the beginning of Chapter 23 where he writes:

“Interest, as we have seen in the two preceding chapters, appears originally, is originally, and remains in fact merely a portion of the profit, i.e., of the surplus-value, which the functioning capitalist, industrialist or merchant has to pay to the owner and lender of money-capital whenever he uses loaned capital instead of his own.”

These pages contain great good sense and a lot of assistance to people trying to understand the “Global Economic Meltdown” that has been going on since 2008, and is now generally referred to as “the crisis”. As an example, here are some paragraphs from our sample Chapter 29, Component Parts of Bank Capital, (download linked below).

“We shall now consider labour-power in contrast to the capital of the national debt, where a negative quantity appears as capital — just as interest-bearing capital, in general, is the fountainhead of all manner of insane forms, so that debts, for instance, can appear to the banker as commodities. Wages are conceived here as interest, and therefore labour-power as the capital yielding this interest. For example, if the wage for one year amounts to £50 and the rate of interest is 5%, the annual labour-power is equal to a capital of £1,000. The insanity of the capitalist mode of conception reaches its climax here, for instead of explaining the expansion of capital on the basis of the exploitation of labour-power, the matter is reversed and the productivity of labour power is explained by attributing this mystical quality of interest-bearing capital to labour-power itself. In the second half of the 17th century, this used to be a favourite conception (for example, of Petty), but it is used even nowadays in all seriousness by some vulgar economists and more particularly by some German statisticians.[1] Unfortunately two disagreeably frustrating facts mar this thoughtless conception. In the first place, the labourer must work in order to obtain this interest. In the second place, he cannot transform the capital-value of his labour-power into cash by transferring it. Rather, the annual value of his labour-power is equal to his average annual wage, and what he has to give the buyer in return through his labour is this same value plus a surplus-value, i.e., the increment added by his labour. In a slave society, the labourer has a capital-value, namely, his purchase price. And when he is hired out, the hirer must pay, in the first place, the interest on this purchase price, and, in addition, replace the annual wear and tear on the capital.

“The formation of a fictitious capital is called capitalisation. Every periodic income is capitalised by calculating it on the basis of the average rate of interest, as an income which would be realised by a capital loaned at this rate of interest. For example, if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually. For the person who buys this title of ownership, the annual income of £100 represents indeed the interest on his capital invested at 5%. All connection with the actual expansion process of capital is thus completely lost, and the conception of capital as something with automatic self-expansion properties is thereby strengthened.

“Even when the promissory note — the security — does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such paper is nevertheless wholly illusory. We have previously seen in what manner the credit system creates associated capital. The paper serves as title of ownership which represents this capital. The stocks of railways, mines, navigation companies, and the like, represent actual capital, namely, the capital invested and functioning in such enterprises, or the amount of money advanced by the stockholders for the purpose of being used as capital in such enterprises. This does not preclude the possibility that these may represent pure swindle. But this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form, and a share of stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it. A may sell this title to B, and B may sell it to C. These transactions do not alter anything in the nature of the problem. A or B then has his title in the form of capital, but C has transformed his capital into a mere title of ownership to the anticipated surplus-value from the stock capital.”

It remains the case that in Volume 3, Karl Marx is constantly referring back to Volume 1, and reminding us that whatever “financial” profits (as we would now call them) there may be, these are only portions of the surplus value generated at the point of production by the capitalistic exploitation of living labour-power.

Picture: Max Keiser, of Russia Today’s “Keiser Report” television programme, in a London taxi. Keiser is particularly eloquent about the insane role of “fictitious capital” in present conditions, which appear not to have changed at all from the time of Karl Marx, where finance capital is concerned.

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20 October 2011

Money-Dealing Capital


Money-Dealing Capital

Capital Volume 3, Part 4, Conversion of Commodity-Capital and Money-Capital into Commercial Capital and Money-Dealing Capital (Merchant's Capital)

Since 2008 in particular, the world has been described as being in a “global economic meltdown”. This crude bogey is not in fact a new phenomenon. The nature of banking and money-dealing has been well known since the publication of Capital Volume 3, as was noted in various publications at the start of the “meltdown”. One good example is an article by Dave Lindorff in CounterPunch on 3 October 2008, which quotes Chapter 30 in Part 5 of Capital Volume 3 (“Money Capital and Real Capital”) to show that Marx had in that chapter described the working of the “meltdown” very completely and very concisely.

Here is the quote, with Lindorff’s edits:

"In a system...where the entire continuity of the...process rests upon credit, a crisis must obviously occur -- a tremendous rush for means of payment -- when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realized again. The entire artificial system of forced expansion of the [economy] cannot, of course, be remedied by having some bank, like the [Federal Reserve], give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London [or New York]...the entire process becomes incomprehensible."

Broadly it appears that the ability of bankers and of traders in financial instruments to create money is unrestrained. In Marx’s time there was a link between money and gold and silver, and this link remained officially until the 1970s. The de-facto position of gold remains, but even gold has now been fictionalised to an extent, so that there is a lot more gold “on the books” than physically exists.

This is therefore another area wherein the writings of Karl Marx, particularly here in Capital volume 3, speak directly to the bourgeois economists of today. Marx is however quite explicit in saying that the source of increase of wealth in capitalist society remains one and the same as before: surplus value extracted by the exploitation of labour power paid for with wages at the point of production.

In Chapter 19, on “Money-Dealing Capital” download linked below) Marx states at the beginning:

“A definite part of the total capital dissociates itself from the rest and stands apart in the form of money-capital, whose capitalist function consists exclusively in performing these operations for the entire class of industrial and commercial capitalists. As in the case of commercial capital, a portion of industrial capital engaged in the circulation process in the form of money-capital separates from the rest and performs these operations of the reproduction process for all the other capital. The movements of this money-capital are, therefore, once more merely movements of an individualised part of industrial capital engaged in the reproduction process.”

There is nothing in the above to suggest that the identification of the extraction of surplus value in Capital Volume 1 as the essence of capital has been surpassed or rendered obsolete. On the contrary, Capital Volume 1 is hereby confirmed as continuing to be the essential and necessary basis and foundation in reality upon which the ever-more-fantastic world of money-dealing is erected.

Marx concludes the chapter as follows:

“It is evident that the mass of money-capital with which the money-dealers operate is the money-capital of merchants and industrial capitalists in the process of circulation, and that the money-dealers' operations are actually operations of merchants and industrial capitalists, in which they act as middlemen.

“It is equally evident that the money-dealers' profit is nothing but a deduction from the surplus-value, since they operate with already realised values (even when realised in the form of creditors' claims).”

“Nothing but a deduction from the surplus-value” is as plain a statement as could be, and this corresponds to the current jargon of “the real economy”, or otherwise “Main Street” as opposed to “Wall Street”.

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13 October 2011

Tendency of the Rate of Profit to Fall


Tendency of the Rate of Profit to Fall

Capital Volume 3, Part 3, The Law of the Tendency of the Rate of Profit to Fall

The most well-known insight of Capital Volume 3 is the Law of the Tendency of the Rate of Profit to Fall, often abbreviated to “TPRF”.

Chapter 13 (linked below) describes the Law very directly and simply.

The TPRF is not a mystical law. The TPRF is in the first place a consequence of the simple fact that surplus value extracted from wage-workers is the only source of increase, and profit is surplus value less the capitalists’ other costs, or what Marx calls “constant capital”, where wages are “variable capital”.

The tendency for these other costs to increase over time in relation to the amount of labour-power used, is what causes the TPRF, the tendency of the rate of profit to fall.

The constant capital includes technology and the cost of technological inputs rises as more scientific methods are used, in relation to the amount of labour applied.

This produces an apparent paradox: When productivity rises, profits fall. The more “capital-intensive” is a business, the less profit is made in proportion to the amount of money invested.

Does this mean that capitalism is going to fade away? Does it mean that there is an entropy in play for capitalism, like the winding-down of the solar system? So that profits will eventually reduce almost to zero, and the capitalist relationship therefore become unsustainable and cease to exist?

Perhaps Kautsky might have thought so, but there are “counteracting influences”, some of which Marx describes in the following Chapter 14 of Capital Volume 3. Wikipedia (here) lists Marx’s ones as follows (and then follows with some additional ones of its own):

  • more intense exploitation of labour (raising the rate of exploitation)
  • reduction of wages below the value of labour power
  • cheapening the elements of constant capital by various means
  • the growth and utilization of a relative surplus population (the reserve army of labour)
  • foreign trade reducing the cost of industrial inputs and consumer goods
  • the increase in share capital which devolves part of the costs of using capital on others.

Do the “counteracting influences” balance out the TRPF and produce a capitalist equilibrium?

No, not exactly. Instead, what we actually have is a very dynamic, unstable, and finally political, living world. We have constant crises, contradictions, and conflict.

“Marxism” is for many purposes a hidden science in capitalist society. For example, the business pages of newspapers seldom relate what is happening in businesses from day to day to theories of surplus value. Marx gets a nod now and again but mostly he is ignored.

But it is not the case that in the world of economic theory, Marx is never consulted by bourgeois economists. The terrain on which the parlay happens is here, in Capital Volume 3. The TRPF and its countervailing tendencies are familiar to bourgeois economists. They have their own variations on the problematisation of the TPRF, or its equivalent as they see it, such as “the law of diminishing returns”.

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06 October 2011

The General Rate of Profit


The General Rate of Profit

Capital Volume 3, Part 2, Conversion of Profit into Average Profit

The source of increase under capitalism is surplus value. This is the truth that is revealed in exhaustive detail in Capital, Volume 1, and it is not going to be contradicted here in Volume 3.

But what is called “profit” is not the increase as a whole, but the increase in relation to all costs of production.

Marx’s definition of the rate of profit is “the ratio of surplus labour (s) to necessary labour plus the value of components and materials used in production (v + c) – the capitalist’s costs of production.”

Labour power is paid for at cost, but yields more labour than is required to reproduce labour-power. The extra labour thus found (i.e. surplus labour) generates surplus value

All other inputs such as materials, equipment and general overhead expenses are inert costs that have no regenerative power. They are simply consumed in production and their cost is passed on directly to form part of the commodity price of the resultant product.

Only labour can produce surplus value. All other inputs, even if their cost is passed on in full into the selling-price, neither add nor take away from profit, but go to reduce the overall rate of profit. When labour and the corresponding surplus-value it produces become a smaller proportion of the whole, the rate of profit on the whole outlay is less.

It follows that the only way that profit can be made is by the employment of people. This is in turn is why the threat of employers to employ machinery instead of people is hollow. To make more money, the capitalist must generally employ more people.

The jargon used today is “labour-intensive” versus “capital-intensive”. In a capital-intensive business, the costs of other inputs are higher in proportion to the labour-power employed, and the rate of profit is consequently lower.

This is shown in the table given at the beginning of the well-known Chapter 9 of Volume 3 (download linked below).

This chapter is full of quite simple examples, interspersed with categorical general statements. It is readable to people with a business background.

In general, the chapter is about the development of the overall “economy” out of its individual-capitalist parts, so that we now enter the world of “financial markets”, with an idea of what comes through from the basic relationships and what begins to feed back from the overall (social) level so as to affect individual enterprises.

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