Money & Interest (fwd)

glevy at glevy at
Fri Aug 25 14:17:35 MDT 1995

Jim D. asked me to forward this post to the list. -- Jerry

From: James Devine <JDevine at>
To: glevy at
Subject: Money & Interest

Awhile back, before Jerry Levy's posh (;-)) vacation, I posted
some stuff to the marxism list that said that Marx had a theory
of interest rates in terms of the supply and demand for loanable
money-capital (or what's nowadays termed loanable funds). The
interest rate helps determine the distribution of the
surplus-value (if the interest rate is higher, all else constant,
a larger share of surplus-value goes to the money-lenders). But
the supply and demand for loanable funds does not explain why the
rate of surplus-value is positive, allowing interest rates to be
positive. To understand this, we have to examine capitalist
production, as Marx did in vol. I of CAPITAL.

Anyway, there were three comments on what I said. I replied to
them, but my replies didn't get posted to the marxism list. So
here goes:

1. Carrol Cox writes:>>Perhaps there can be a theory of interest
rates, but in that case Marx was flatly wrong in an instance
where he made his statements pretty strongly. I don't have time
to look it up now, but someplace in Vol. 3 of Capital he flatly
states that there is no principle whatever governing interest
rates--that they are purely contingent.<<

I think that Marx was trying to say that interest rates were not
ruled by the law of value in the way that physical commodities
are. In the simple transformation problem framework, the "price
of production" of loanable money capital (what Adam Smith might
have called its "natural price") cannot be derived from its
"value." In fact, though it has a market price, loanable money
capital has neither a value nor a price of production. To say
that interest rates are purely contingent is to say that they are
determined on the level of the competition among capitals (vol.
III) rather than on the level of class relations (vol. I). See
the comments by Steve Keen and the quote from Blake by Rakesh.

Marx himself applies supply & demand analysis to talk about the
determination of interest rates. In several chapters of vol. III,
he talks about how interest rates move over the business cycle.
(In a financial crisis, interest rates soar to the moon; after a
recession, interest rates hit the floor, etc.)

2. Paul Cockshott writes:>> I am skeptical about the
appropriatness of the concept of supply and demand applied to
interest rates. With a commodity one at least has some material
thing that could be called a supply - so many cars made per
month. What is the equivalent for this in terms of the supply of
loanable funds?<<

One can think of the quantity of loanable funds supplied as
simply the volume of funds flowing from the lenders to the
borrowers during a specific time period. The supply of loanable
funds would then be the amount of LF supplied at each given
interest rate (a supply schedule or curve). (This ignores the
different kinds of LF: we should think of _many different_
markets for LF, with porous boundaries between these markets;
these days, these boundaries are breaking down. See below.)

>>I prefer to look at it from the stanpoint of the imbalances
that are generated between agents in the circulation process -
which imbalances must express themselves as debt. I would look
for an explanation of interest rates in terms of ratios between
different forms of money - canonically in terms of the reserve
ratios of the banks.<<

I think of this as _what's behind_ supply & demand for loanable
funds. This is of course is the key question, since supply &
demand by their lonesome really tell us nothing.

>>I view the notion of the supply and demand applied to money as
the projection of a pretty inadequate theory from the one domain
where it has some limited explanatory power, onto a completely
different and inappropriate one.<<

Supply & demand works to explain why wheat prices are lower after
the harvest than before, right? The problem is not supply and
demand _per se_, but its role. The neoclassicals want S&D to
explain everything (production is "exchange with nature" and
similar crap); they want to see everything as having a price
simply because of scarcity and demand, given the pre-existing
distribution of assets. But if we see the market for loanable
money-capital as working within the structure of an exploitative
social formation and the drive to accumulate capital (that cannot
be reduced to supply, demand, scarcity, the distribution of asset
ownership, etc.) then it's very different. Also, as I said
before, we want to go beyond _simple_ S&D to more sophisticated
views (e.g., Minsky).

3. Jerry Levy writes: >>There isn't one interest rate, there are
many. It is one thing to have a general theory of interest rate
determination, it is another thing to explain how these more
specific interest rates are modified at more concrete levels of
determination. For instance, if we are to understand the discount
rate, we have to understand monetary policy and the Fed. If we
want to understand the prime rate, we have to understand the
relationship between finance capital and corporate capital.<<

Absolutely! What this says to me is that after one has an
understanding of the general, abstract, determination of interest
rates (as I believe I have), it is important to move to a lower
level of abstraction than Marx got to. We have to bring in the
specific instititutions of our day and place.

However, it seems to me that the progress of capitalism is
homogenizing financial institutions across the world and breaking
down barriers between them, so that the main distinctions between
interest rates depend on relatively abstract forces such as risk,
liquidity, time to maturity, and tax treatment. It seems that the
real world is moving to fit the abstractions, which fits with
Marx's perspective.

for socialism from below,

Jim Devine      jdevine at
Los Angeles, CA (the city of your future: the modern home of slavery)

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