A Marxist view of interest rates

Vanguard June 2011 p. 6

Broadly speaking, the interest rate measures the exchange value of money.

It is affected by the existing supply and demand for money in the market, associated with the quantity and prices of commodities in circulation and the quantity of money in circulation. The higher the supply relative to demand, the lower will be the interest rate, and vice versa.

In times of crisis, where the circulation of commodities is not operating as it should, when there is both overproduction and less capacity for consumers, the tendency is for interest rates to fall. In boom times it is the other way around.

The money supply
Today there are two additional factors. One is the widespread use of computer technology has brought a situation where virtual money is created. The other, and not unrelated, has been the explosion of credit. They affect the money supply.

Working against this is that the banks and other financial institutions have monopoly power over the supply of money. Because of this they can artificially alter the interest rates that they charge their customers. They can also have an effect on the supply of money. Most importantly, they decide whether investment will be in production or in other areas.

Production and Circulation
On a deeper level, the driving force is that there is a relationship between production and circulation. In the process of production investors use money to buy inputs in order to produce a commodity, and then exchange it in the market for money.

Karl Marx explained these transformations with the expression M-C-M. Money is transformed into a commodity, and the commodity transformed in the marketplace back into money, incorporating an additional sum on the original outlay. When the movement of these processes in the economy as a whole alters, there is an effect on the interest rate.

In these processes, money takes the form of capital, which breaks down into two parts - productive capital (we will include in this capital for the purchase of machines, raw materials and semi-finished commodities and labour) and circulating capital.

The proportion of one relative to the other being used in an economy is important. In times of expanding production there is a shift towards productive capital, and during a time of contraction a shift towards circulating capital.

All other things remaining the same, a relative rise in productive capital will lead to a rise in the interest rate. A rise in circulating capital will lead to its lowering. Here is the connection between commodities and money in circulation.

Connecting with Surplus Value
A rising interest rate lowers the rate of surplus value. There are a number of reasons for this. The value of labour power will rise because the cost of maintaining the working class and producing the next generation of workers will rise. This means that wages will go up and squeeze the proportion of the proceeds going into the hands of the capitalists, unless of course, measures to reverse this are applied.

Rising wages cause the cost of variable capital to rise. Rising prices for machines or raw materials, for example, increase the cost of constant capital. This affects the rate of surplus value by lowering it.

This can be shown mathematically.

Surplus Value is the Surplus, divided by Constant Capital + Variable Capital
SV= S/C+V

Rising prices of raw materials raise C and higher wages raise V.
For example, if we have;
8/4+4 = 1

Assume a rise in the costs of machines (constant capital) and wages (variable capital). This would give;
8/ 5+5 = 0.8

Surplus Value has declined

The importance is that with a fall in the rate of surplus value, capitalists have the incentive to cut back on the application of productive capital, unless they can find means to employ this capital more efficiently. This means spreading the constant capital over a larger number of commodities (increasing the intensity), speeding up the pace of work, or a combination of both. The measure to which this is impossible is, roughly, the measure by which the demand for productive capital will fall.

Foreign trade and monopoly
Foreign trade enters the picture through its effect on the circulation of commodities and capital on a world scale. Changes in these circulations lead to a change in the economic relationship between nations. Here too, there is competition and contradiction between productive and circulating capital. There is an impact on the global interest rate.

Increased monopoly lowers the cost of constant capital expended on a commodity. This in turn, will add to the volume of profit. But if there is a fall in the volume of productive capital overall, this will lead to an increase in the volume of circulating capital.

A rise in the volume of circulating capital in excess of the rise in the value of commodities will cause a fall in the interest rate.

Here we see a direct link between the process of production and the operation of circulation. The smooth transformation M - C - M is interrupted. Interest rates go down.

Government intervention
This is the point where government policy can have an influence. By expanding the circulation of government bonds, raising the statutory reserves imposed on banks or raising lending rates by decree, a portion of the circulating capital can be soaked up, or indeed, released by reverse action. Injecting or removing circulating capital from the market has an impact on demand/supply conditions.

Expansion of credit
Another important factor to consider is the speed of circulation of capital. The quicker the turnover, the greater the volume of circulating capital there is. The expansion of credit is important in this respect. Where there is already an excess of circulating capital, relative to the volume of commodities in the economy, the expansion of credit will further pull down the rate of interest.

Australian economy
There is a great deal of evidence to suggest that the effects referred to here have been operating in the Australian economy for some time. Regardless of short-term anomalies, the trend has been continuous over the decades.

For the last 20 years or so, the rate of interest has been historically low. It is a pointer to the extent of the growth of circulating capital. With the proportional and quantitative expansion of circulation capital, the fall away of productive capital is expressed in the decline of the manufacturing base.

In the present conditions, although the interest rate remains historically low, it is extremely vulnerable to any rise. This is because the margin between getting on, or getting into serious trouble is very thin. Action is necessary to protect the vulnerable. Action is also needed to pull back the excess of circulating capital.

Politicians often grandstand over what they do to maintain the rate of interest. When it is low, it is because of their goodness and skill. When it is high, it is usually said not to be their fault. The reality is that they do not have the control they claim. This is not to say they have no influence at all. They do.

Monetary and Fiscal policy
Monetary policy refers to measures that influence the quantity of circulation capital, through a number of instruments, such as taxation, the Reserve Bank interest rate, bonds, statutory reserves etc. Giving some users concessions and penalising others can have an impact on productive capital.

Fiscal policy refers to government acting as either a provider or consumer of commodities and services. This can be used as an indirect way to influence the amount of productive and circulating capital.

Whatever policy is applied it cannot be done in isolation from the prevailing conditions that are inherent in the anarchic nature of capitalism.

For a better understanding of what is going on today and where we are heading to, a great deal of further investigation needs to be undertaken. Vanguard can and will assist in this.