Three Books on Marxist Political Economy (Pt 5)

Shaikh’s wrong theory of interest rates

“The interest rate is the price of finance,” Shaikh writes at the beginning of Chapter 10, “Competition, Finance, and Interest Rates.” Shaikh treats the rate of interest as fluctuating around the price of production of the “provision of finance.” Late in Chapter 10, Shaikh indicates he was confused on this subject in the 1970s and the early 1980s but brought to his current views by the Sraffrian-neo-Ricardian Italian economist Carlo Panico. Is this the correct approach to ascertaining what actually determines the rate(s) of interest? I believe it is not.

Do interest rates really fluctuate around a “price” of the provision of finance the way market prices fluctuate around prices of production? Strictly speaking, price is the value of one commodity measured in terms of the use value of the commodity that serves as the universal equivalent—money. According to this definition, interest rates are not prices at all.

It is true that we often use price in a looser sense. For example, we talk about the prices of securities that are in reality legal documents that entitle their owners to flows of income. Another example is the price of unimproved land whose owners hold titles to flows of ground rent. It would be absurd to talk about the price of production of unimproved land if only because unimproved land is a form of wealth produced by nature and not by human labor.

Some other ‘non-price’ prices

Another example of a price that is not a real price is the dollar “price” of gold. This very important economic variable is not really a price at all but instead measures the amount of gold that a dollar represents at any moment. Other examples of “non-price” prices are the “price” of one currency in terms of another—exchange rates—and the price of politicians.

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9 Responses to “Three Books on Marxist Political Economy (Pt 5)”

  1. Boffy Says:

    You say,

    “Marx used the term “price of production” only as it applies to the owners of productive capital. He did not apply it to capitalists who own only commodity and money capital. The latter capitalists are called merchant capitalists. However, the law of the equalization of the rate of profit applies to merchant capitalists just as it applies to industrial capitalists.”

    But, this is not strictly correct. Marx’s explanation of where the commercial profit comes from is that the average rate of profit is calculated on the total capital employed for the circuit of capital, i.e. the production time and circulation, or put alternatively the capital as productive-capital, commodity-capital and money-capital. Merchant-capital, including money-dealing capital, is as Marx explains the commodity-capital phase, and money-capital phase, become independent, as separate capitals.

    Its only by calculating the average annual profit on the total capital advanced that its possible to enable productive-capital, and commercial capital to both make the average rate of profit, and to sell at prices of production. Marx says having shown how this works, and how it is then the rate of profit calculated on this total capital, that it is this definition, which from henceforth he will refer to as the general annual rate of profit.

    Marx says,

    “Thus, merchant’s capital enters the formation of the general rate of profit as a determinant pro rata to its part in the total capital. Hence, if we say in the given case that the average rate of profit = 18%, it would = 20%, if it were not that 1/10 of the total capital was merchant’s capital and the general rate of profit thereby lowered by 1/10. This leads to a closer and more comprehensive definition of the price of production. By price of production we mean, just as before, the price of a commodity = its costs (the value of the constant + variable capital contained in it) + the average profit. But this average profit is now determined differently. It is determined by the total profit produced by the total productive capital; but not as calculated on the total productive capital alone, so that if this = 900, as assumed above, and the profit = 180, then the average rate of profit = 180/900 = 20%. But, rather, as calculated on the total productive + merchant’s capital, so that with 900 productive and 100 merchant’s capital, the average rate of profit = 180/1,000 = 18%. The price of production is, therefore = k (the costs) + 18, instead of k + 20. The share of the total profit falling to merchant’s capital is thus included in the average rate of profit. The actual value, or price of production, of the total commodity-capital is therefore = k + p + m (where m is commercial profit). The price of production, or the price at which the industrial capitalist as such sells his commodities, is thus smaller than the actual price of production of the commodity; or in terms of all commodities taken together, the prices at which the class of industrial capitalists sell their commodities are lower than their value. Hence, in the above case, 900 (costs) + 18% on 900, or 900 + 162= 1,062. It follows, then, that in selling a commodity at 118 for which he paid 100 the merchant does, indeed, add 18% to the price. But since this commodity, for which he paid 100, is really worth 118, he does not sell it above its value. We shall henceforth use the term price of production in this, its more precise, sense.”

    Capital III, Chapter 17

  2. Boffy Says:

    You seem to have fallen into the same trap as Shaikh, and of the Currency School of confusing the rate of interest as a price of money, as opposed to Marx’s definition of the rate of interest as the price of the use value of capital, i.e. its use value of being self-expanding value, and of thereby producing the average rate of profit.

    As Marx demonstrates in his long debunking of the Currency School, increases in the supply of money, whether that money be paper money or gold or silver tokens (coins) cannot determine the rate of interest, because it is determined by the demand and supply for money-capital (though he includes here the demand for capital in other forms, but denominated in money prices).

    As Marx points out, quoting Massie and Hume,

    “Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital).

    Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.”

    As Marx reiterates, as with Hume’s argument here, an increase in money supply, be it an increase in paper tokens or gold coin tokens only reduces the value of the currency. Because prices are merely the exchange value of commodities expressed in terms of currency, if the currency is devalued by being thrown into circulation in excess of the needs of commodity circulation, money prices rise – inflation, but this can have no effect on the rate of interest, as Hume correctly states.

    A capitalist who demands £1,000 of money-capital in order to buy £800 of materials and £200 of labour-power, is met with a rate of interest of 6% to borrow this money-capital. In other words, there is a supply of £1,000 of money-capital from the owners of loanable money-capital available in the market at a rate of 6%. If the rate of interest was only 5%, more productive capitalists would demand money-capital, because it would mean that their profit of enterprise lft over having paid the interest charge would be that much greater. But, at this lower rate of interest, fewer owners of loanable money-capital would be prepared to lend it, so the supply would fall.

    Consequently, the demand for loanable money-capital would exceed the supply, and the price of this loanable money-capital, which as Marx says is the price of the use value of capital, i.e. to make the average rate of profit, would rise. The opposite would occur if the rate of interest was 7%.

    Now, if the amount of money in circulation doubles, so that the value of the currency is halved, the consequence is that the nominal value of the loanable money-capital available in the market doubles. Instead of the previous £1,000 of money capital being available at a 6% rate of interest, £2,000 is available. But, the price of materials, and of labour-power that the productive capitalist now has to buy has also doubled. Instead of the productive-capitalist demanding £1,000 of money-capital at a rate of interest of 6%, they now demand £2,000, although this £2,000 only buys as much material and labour-power, as previously £1,000 bought.

    So, now at a rate of interest of 6%, there is a supply of £2,000 of loanable money-capital, and a demand of £2,000, so that demand and supply is in balance at a rate of interest still of 6%.

    Things are not so straightforward in the opposite direction. If the central bank shuts off the supply of currency, as for example it did in 1847, due to the misguided restrictions of the 1844 Bank Act, which followed the erroneous Ricardian Theory of Money, and imposed a gold standard on the quantity of currency put in circulation by the Bank, the consequence is that this shortage of currency is quickly felt. People begin to hoard currency, which makes the currency shortage even worse. Suppliers stop selling goods on the basis of commercial credit, so that the demand for currency increases even more. Anyone short of actual currency must go to the bank to obtain it (either as coins or banknotes) not because they have an additional demand for money-capital, but because they have an additional demand for currency, as commercial credit dries up.

    The person demanding the currency only wants money as currency, but the bank lends it out as potential money-capital, and as the demand for such loans grows, the rate of interest necessarily rises. A credit crunch is put in place, which thereby leads to a contraction of economic activity, and a crisis. As Marx and Engels point out in relation to such crises in 1847 and 1857, the crisis had been caused by a faulty Ricardian theory of money, which imposed a gold standard. It was only necessary as they state for the Bank Act to be lifted, for much of the hoarded bank notes to begin coming back into circulation, which lowered the demand for currency and reduced interest rates, and quickly ended the credit crunch so that the economic boom that had been in place, prior to the financial crisis, was enabled to continue

  3. Noa Says:

    Related to Boffy’s point that it is not the quantity of means of circulation as such but that of loan capital which primarily matters, there will be a translation of an article by Wolf Motylev touching on this in a volume (in preparation) with Marxist essays on the theory of money. Permit me to post the link to its additional materials online and invite all again for comments/suggestions:

    [by the way: The rising interest-rate was mentioned in the pre-WWI gold debate by Karski in order to try to reject gold as a cause of the price rise, since he (wrongly) believed Kautsky/Bauer held to a quantity theory (in other words, he brought up the “Gibson paradox”). In a review of Karski’s (1913) work the (bourgeois) economist Franz Eulenberg expressed his disagreement with Karski’s argument on this account, referring him to his own 1912 brochure on the rise of prices (unfortunately I did not find it online).]

    • Boffy Says:

      Its also interesting to note that Marx also says that if we are wanting to compare the average rate of interest in England and India, it would not be a comparison of the official interest rates, or bond yields in the two countries that we would look at, but he says the interest rate that businesses charge each other for the loan of a machine, etc.

      Marx was well aware that even then bond prices were manipulated, and that the official Bank of England, or other central bank interest rates were pretty meaningless. Engels cites in notes various instances of where the official Bank of England interest rate bore no resemblance to the actual market rates of interest.

      We have a similar situation today with near zero official interest rates, but with many businesses unable to borrow, (which has stimulated the rise of peer to peer lending but at rates of around 10% p.a.), many people needing to borrow against their credit cards at 30% p.a. rates of interest, in order to pay their way from month to month, and millions of people in Britain, also dependent on payday lenders charging 4000% p.a. rates of interest.

  4. Noa Says:

    I’d say we should look simply at the interest rate on gold, which is called the Gold Forward Offered Rate if I’m not mistaken, but there are no figures of this before July 1989 and since 2015 the benchmark no longer exists. Searching a bit for clues I could find only a reference in this (July 1983) article: “Gold’s Monetary Status: Neither Unused Nor Unloved” (transcribed at:, where it just says that:

    “Gold loans or leasing deals. Under these transactions, gold is effectively lent from the vaults of a central bank to a commercial bank or bullion dealer, which will pay an interest rate based loosely on going Euromarket rates.”

    • Boffy Says:

      It is pretty meaningless as an interest rate in Marx’s terms, because it is not a price for the use value of capital, i.e. it is not a price for giving up the potential average rate of profit, on the capital value.

      Moreover, given the gold prices are almost as volatile as bitcoin prices, what would such a yield tell you? One day when speculators have sent gold prices up to $1900 an ounce, as they reached in 2011, the yield would sink to a low level, the next day when speculators had decided that bitcoin was the new money commodity, and gold had had its day, gold prices would sink back to $250 an ounce as they were at in 1999, and yields would sky rocket.

      Unlike the real rate of interest as described by Marx, an interest rate based on gold futures prices would have no bounds, certainly not to the upside. But, as Marx says the real rate of interest is bounded on the downside by zero, because no owners of money-capital will lend it for free (they could simply consume unproductively, speculate, buy land to obtain rent, or use it productively themselves to buy productive capital, so as to obtain profit). And it is ultimately bounded on the upside by the rate of profit, because capitalists will not pay more in interest than they can make in profit on the productive capital they buy with the borrowed money-capital.

      The only exception to this latter point, as Marx describes is during a crisis of the second form, where there is a cascade failure of payments, so that firms are desperate to obtain currency so as to be able to stay afloat, and will pay almost any rate of interest to do so. In these cases, as Marx says, although the firm seeks currency rather than money-capital, what the owner of the money-capital possesses is precisely the use value of capital, and its ability to produce the average rate of profit, and it remains that use value they sell. They are not bothered why the borrower wants to borrow the money-capital, whether they want it to use as money-capital, to use as currency or whatever, anymore than a seller of cucumbers is bothered about what use the buyer will put it to, having bought it.

      So, as the demand for this money-capital rises sharply during a crisis, so the rate of interest rises sharply during every crisis. Then as Marx says, after a crisis, the rate of interest collapses, because the demand for money-capital more or less disappears, because firms do not seek to expand, and finance their activities out of their profits, and the lower level of economic activity also reduces the demand for bank credit. Then as the cycle progresses, the rate of profit rises, because unemployed labour reduces wages, and other input costs are lower. The higher rate of profit, is the main driver of the increased supply of loanable money-capital. So, the supply of money-capital rises from these realised profits, whilst the demand is subdued, which drives the rate of interest down.

      Even as economic activity rises in the prosperity phase, the rate of interest does not rise much, because in this phase, the higher rate of profit is also accompanied by increased economic activity, and larger masses of capital being employed, so that the mass of realised profit also rises. In addition, the changes brought about in the previous phase, a rise in productivity to create a relative surplus population, an introduction of new types of materials, a better way of using materials and so on, reduce material costs, and also the rise in productivity increases the rate of turnover of capital, which releases capital for additional accumulation, and also increases the annual rate of profit, and thereby the general annual rate of profit. So although the demand for money-capital rises, the supply of money-capital also rises because of this higher rate of profit, and release of capital.

      Its when the cycle enters its boom phase, that labour supplies start to get used up once more, so wages start to rise squeezing profits. Investment shifts from mostly labour saving intensive capital accumulation, to extensive capital accumulation, that acts to employ more labour alongside more machines and material, so there is no significant rise in productivity. The rate of profit gets squeezed, but firms have to invest additional sums due to competition, and rising levels of demand, as more workers on higher wages, demand more and a greater variety of wage goods. So, the demand for loanable money-capital rises relative to the supply pushing interest rates higher, which also squeezes the rate of profit of enterprise, thereby reducing the profits available for accumulation, and putting further pressure on the demand for money-capital to finance accumulation.

      And that takes us back to the crisis phase, whereby the rate of interest is sent sharply higher once more.

      What has to be understood is that the supply of additional money-capital comes primarily from a rise in the mass of realised profits. The additional supplies as Marx describes can come from the non-worker recipients of revenues – money-lending capitalists (interest), landlords (rent), private capitalists (profit of enterprise) – being persuaded to reduce their consumption, and divert a larger portion of their revenue into loanable money-capital. It is why as marx and Engels set out, in more mature economies those that have stores of such loanable money-capital built up over decades, tend to have lower interest rates, because they have this stored up supply available to be lent. And, as they also set out, as joint stock companies are developed, there is a larger proportion of former private capitalists (like Engels himself) who retire from business, and use their private wealth, simply as money-capital, lent out at interest. Finally, there are changes in arrangements such as marx describes with banking whereby lots of small pots of money in the hands of small traders and workers, are accumulated in bank accounts, which can then be used by the bank as loanable money-capital.

      What cannot affect any of that is increases in the money supply, which only devalues the currency in the hands of lenders, and raises the nominal price of commodities to be bought by capitalists for use as productive-capital, and thereby nominally raises their demand for money-capital. So that as Marx says, quoting Hume, the result is a wash, all that changes is the nominal value of demand and supply for capital. It is the same as measuring length in feet rather than yards, and expecting that the proportion, between the length and width of a football pitch would thereby have altered..

  5. Noa Says:

    I don’t know if there is a connection between the interest rate on gold (you can easily find the chart) and the gold-dollar exchange rate (i.e. “gold price”) either way. But as you mention the latter, Shaikh has used it to make a chart of golden prices (ie commodities in terms of ounces of gold) which he uses as an indicator (not causal factor) to predict the conjuncture (see this lecture at 49.38 to 51 min: For Shaikh the problem (which he puts out there for someone else to solve) would be rather to filter out state intervention on the “gold price” (ie during the gold standard, which kept the gold price flat).

    • Boffy Says:

      Its not just a matter of the gold price in dollars though is it? In 1970, the gold price stood at $30, and by 1980 had risen to $800. A lot of that was driven by the devaluation of the dollar, but the fact is that the dollar prices of other commodities had not risen by that much of the same time period. In fact, I saw a chart some years ago that said that the gold price peaked in terms of other commodities in 1960.

      Similarly, the dollar price of gold in 1999 was $250 and rose to around $1930 in 2011. Again other commodity prices had not risen by anything like that amount in the intervening period, nor had the cost of production of gold itself.

  6. J. Zeratsky Says:


    I’m a big fan of your blog on the whole. Can I ask a couple of questions? The first is simple: when’s that e-book coming out? I’d love to read it.

    The second is more substantive; it concerns part six (not five) of this series, but comments appear to be locked on part six. A lengthy caveat: I am pretty much with you on Marx’s critique of political economy with some minor differences of interpretation in places. And I’m fairly sure I understand it well enough; I’ve read all three volumes of Capital and have published a critical review essay of Samir Amin’s book on value (which I mostly admire) in a peer-reviewed journal, though I part ways with him on the monopoly stuff. Shaikh is good on this, IMHO.

    All that said–I am not sure that I get the commodity money stuff. I know that in the past some other commenters have challenged you on this; I’m not sure I’ve ever seen you respond directly. It seems pretty important for your take, and you even say (in a post that’s quite old now, from 2010) that an improper understanding of this question lies behind a lot of revisionist readings of Marx.

    Any chance you’d ever be willing to write a post directly touching on this? A lot of your posts reference your argument on this, but it’s hard to find one place where you really confront opposite view (or spell out its fateful consequences) head on. Although to be fair, I don’t suppose I have any objections–I’m just not sure I understand your argument. Why can’t value be represented by fiat money? It has a use value in a certain sense, after all — at least in the States, it’s the only currency in which taxes may be paid. I understand the political objection to Keynesianism, although I think it can be “economically” effective within certain limits, but I’m not convinced by the argument that only gold production is directly social.

    Any chance you’d be willing to, say, directly address an argument like that contained in Michael Williams’ “Why Marx Neither Has Nor Needs A Commodity Theory of Money”? I’d be especially appreciative if you could contest the second species of argument — I’m agnostic about Marx’s own view, but I don’t think he *needs* a commodity theory of money either way.

    Thanks in advance. Truly grateful for your project!


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