The development of the credit system splits profit—total surplus value—less rent into two parts, interest and profit of enterprise. What determines the division of the relative shares of interest and profit of enterprise?

Suppose the rate of profit is 10 percent. Unless all the profit goes to interest, the rate of interest cannot be higher than 10 percent. Indeed, the rate of interest in the long run cannot be as high as 10 percent, because at a 10 percent rate of interest there will be no additional profit from carrying out an industrial or commercial enterprise. Therefore, an interest rate of 10 percent, assuming a rate of profit of 10 percent, will destroy the incentive to *produce* surplus value. And without production of surplus value, there is neither ground rent, interest nor profit of enterprise.

Therefore, the rate of profit establishes an *upper* limit to the rate of interest. But what then determines the lower limit? The rate of interest cannot fall to zero, because if it did the money capitalist would turn miser. There would be no advantage in loaning money. Why take a risk of not being paid back, or being paid back in devalued currency, for no “reward” whatsoever?

At an interest rate of zero, the money capitalist will simply hoard money in the form of bullion and gold coins. Therefore, the rate of interest must be somewhere above zero but below the the total rate of profit. It is quite possible to have a low rate of interest with a high rate of profit, though it is not possible to have a high rate of interest with a low rate of profit.

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This entry was posted on April 3, 2009 at 2:08 pm and is filed under Crisis Theory, Economics, Falling Rate of Profit, Money, Profit of Enterprise. You can follow any responses to this entry through the RSS 2.0 feed.
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