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That is what happens when a company issues a share or a bond. The rate of interest, Marx then explains is determined by the interaction of the demand and supply for this loanable-money capital. But, the interest like the rent is not an independent self-expansion of value.

It depends upon industrial capital producing profits out of which interest is appropriated, or surplus profits out of which rent is appropriated. That is why, as Marx sets out in TOSV, the rate of interest can never be higher than the average rate of profit. What the industrial capitalist borrows is the use value of capital, i. Its use value is to be able to produce the average rate of profit. If the average rate of interest was higher than the average rate of profit, Marx says, then the industrial capitalist would make losses after having paid the interest, so there would be no point in borrowing the money-capital.

The price of shares, as with the price of bonds is merely the capitalised value of the revenues they produce coupon or dividends. But shares and bonds are merely a legal form of debt instrument. They have no independent value, they have no potential for an independent self-expansion of their value, as industrial capital has. They are entirely fictitious capital.

Yes you are right. What I meant was that not all financial sector profits are fictitious eg bank interest and commissions. Slip of the wording by me. Thanks for your reply. I would also be grateful for clarification on the other point about how you are measuring productivity. But, further on this point about fictitious capital, and fictitious profits, I would still like some clarification. Marx defines money-dealing capital as a form of merchant capital.

As with any other form of merchant capital it claims the average rate of profit on the capital advanced. Those money-dealing services are in relation to firms such as Paypal, the collection and payment of moneys for goods and services bought and sold, or for Forex companies the administration costs etc. Included in this would also be the profits of factors, who take on responsibility of collecting payments from customers, in return for a commission. I would have to think about it more carefully, but I would suggest it also includes the profits of insurance companies who take on and collectivise the individual risks of companies, for a premium.

Other financial services, such as investment advice for which the provider charges a commission, would also come under the heading of money-dealing capital, and the profit obtained would thereby be a commercial profit. As Marx sets out in analysing commercial profit in Capital III, commercial capital does not create additional surplus value, and none of these activities, thereby constitute a production of additional surplus value.

However, what Marx does set out there is the difference between surplus value and profit, and most importantly in this context realised profit. The merchant capitalist does not produce additional surplus value, but by reducing the cost of circulation, they do increase the amount of realised profit. That is why the productive-capitalists hand over this activity to commercial capital — including money-dealing capital — because although it does not increase the produced surplus value, it does increase the mass, of realised profit, and thereby the general annual rate of profit, and its on that basis that commercial capital like any other capital claims its share of that total profit, as average profit on its capital advanced.

Moreover, as Marx explains in Capital III, because this commercial capital, including money-dealing capital, reduces circulation times, it thereby also significantly increases the rate of turnover of capital, and again thereby raises the general annual rate of profit. Some time ago, I referred to an article in the US magazine The Banker, which bemoaned the fact that in the US it took many days to process payments there, compared to the speed of payments through the banking system in Europe.


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By contrast, there is the investment banking activities, i. If we take interest payments on loans by banks. We might want to ask the question, whose money is being loaned. To the extent that banks take in money on deposit from customers, and then lend it out to borrowers, they are again essentially acting as money-dealing capitalists, the difference in the interest charged to the interest paid, being essentially a charge for bringing lenders and borrowers together. But, of course we know that bank credit depends upon the bank itself creating money via its lending operations.

As interest it does not have to be the return of the average rate of profit on the capital advanced, and cannot be for the reasons Marx describes, but is merely an average rate of interest. That applies obviously to the coupon it obtains on bonds, and dividends on shares it buys. These, unlike the actual profits obtained by money-dealing capital, or simply a deduction from total profits produced by industrial productive and commercial capital. Similarly, a considerable amount of what is described as financial profits are not profits at all, but merely capital gains from changes in the prices of speculative assets.

They should be discounted completely. On the question of productivity, my view is that all the issues of use value and value in measuring productivity growth can be overcome with careful analysis of the official sources and several Marxist economists have made considerable progress in identifying productive and unproductive labour and their size, as well as dealing with the issues of so-called services in the official definitions.

The problem in this discussion between Michael and Boffy is the deflator. The BEA does try and reduce output to volume by removing the distortion of price increases generally. Theoretically if a correct deflator is used then prices should be zeroed out thus revealing the volume output on which productivity is based. The real problem is somewhat different.

The BEA seeks to zero prices, but when measured in labour time, prices may be falling because of rising productivity. So the deflator may be too small and thus actual output and hence productivity tends to be underestimated. This is the general case under capitalism. Just to clarify on the point of interest and the rate of interest as opposed to profit and the rate of profit, interest is a deduction from profit, in the same way that rent is a deduction from industrial profit. Both derive from the separation of the owners of these particular use values from industrial capital.

Rent arises from the monopoly of landed property, which enables it to appropriate surplus profits arising in primary production, as the primary producers must utilise the use value of the land to produce. Interest arises from a similar monopoly of ownership of capital — primarily money-capital — whose use value again the industrial capitalist must utilise in order to produce. When capital becomes predominantly socialised capital at the end of the 19th century in the form of cooperatives and corporations this distinction as Marx and Engels describes becomes particularly acute.

And, as Marx sets out there, and further in TOSV, just as when the primary producer is also a landed proprietor they split themselves in two, seeing a part of their profits coming to them, only as the rent they would have obtained on the land they own, the other part deriving from their activity as a productive-capitalist, so too with the industrial capitalist who uses their own capital to engage in production, rather than borrowing it.

They see their profit also dividing in two, a part being the return to capital as capital, i. In fact, as Marx sets out in Capital III, Chapter 23, if it were not for this division of capital into money-lending capitalists and industrial capital there would be no category of interest. That part of financial profits derived from interest, including interest on bonds and dividends on shares, should not be viewed as additional profits, but nor should it be discounted from the total profits of the total social capital, precisely because it is a deduction from industrial profits.

If those interest payments were not deducted from industrial profits, in other words, industrial profits would be larger by that amount assuming that the figure for profits cited is not the EBITDA. As Marx sets out in TOSV III, the industrial capitalist sees both interest and rent as a cost of production — which is why the Riracdians proposed nationalisation of the land, so that all rents went to the state so as to reduce taxes on industrial capital.

This is irrelevant. It only deals with the question of inflation, i. The issue is the fall in the actual value of commodities resulting from rising social productivity.

Investment Financing. An Empirical Study of Indian Manufacturing Sector

It is fundamental not irrelevant. Yes the deflator deals with the money side of the equation. It seeks to correct for the depreciation of money. If the value of money is stable it becomes a reliable standard of price. However rising productivity should result in falling prices not stable prices. Hence concretely, that is in the real world, deflators tend to be understated because their purpose is to zero out prices. It capital has to engage wage-labor to expand.

The relation of finance capital, of financial assets, to capital is no more fictitious in all cases than the relation of money to commodities is always fictitious. Rather money represents the essential abstraction at the heart of commodity production. Options, futures, bonds, stocks, commercial paper markets all play both roles. It can appear as fictitious capital, as worthless paper, when the containership can no longer generate a profit; when it is laid up at anchor. Asset back securities represent real claims on real assets, real revenue generating assets. I agree with all your arguments.

Another thing is total social capital. Logistics, by definition, can only increase profitability by reducing the costs of circulation of commodities.

General Theory of Employment, Interest, and Money, by Keynes : Chapter 11

Hi Michael, you did not unlock a comment from me for the second time. What conclusion should I draw from this?


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  6. Greetings Wal Buchenberg, Hannover. Hi, comrade! Our communist community has been following your articles since February There are country-by-country reasons for some of the productivity slowdown, but the overall problems are conceptual and secular. The main conceptual problem is that productivity is a physical quantity, physical output divided physical inputs, and it is not dollars per hour. Engine power fueled by coal and oil is enormously more productive, and that is not so much because of engine technology, which merely exploits the higher energy density and cheapness of coal and oil wrt food.

    A driver of a tractor can till in 2 hours what a peasant with an ox can till in 6 days, but that enormous increase in productivity is not because of the tractor, but of the petrol that powers it being so much cheaper and more energy dense than hay. A tractor powered by hay would probably not be competitive with the ox. Consider commercial transport with horse carts: first some horse carts are replaced with coal powered railways or truck, than the engines of the latter improve.

    General Theory of Employment, Interest, and Money, by Keynes

    Once all horse carts have been replaced with coal or oil powered vehicles, and their engines have been improved to make the most efficient use of that fuel, productivity stops growing as fast. Or maybe its overproduction. Back in what ? The shift from steam locomotive to diesel locomotives greatly improved ton-miles operated per locomotive hour per crew hour A similar jump in productivity exists when comparing current diesel locomotives to those of the s, despite the use of the same diesel oil as the energy source.

    It would help. A further comment from me, in response to your 12th May 8. To him, the economy was always in traverse.

    Bibliographic Information

    If capitalist entrepreneurs lacked sufficient current or retained profits to support their investment schemes, there were always plenty of capitalist rentiers on hand to extend money loans on the promise of future profits — provided, of course, the entrepreneurs had sufficient collateral. Lack of collateral was the only thing preventing frugal workers from becoming capitalists. It was too risky for the working class to use them as collateral for rentier loans and set up as capitalists on their own account. When capital accumulation was strong weak , wages rose fell and the reserve army of labour shrank expanded.

    Whenever an investment boom carried the economy onto its PPF, this did not usher in a stationary state because, for Marx, this frontier was forever moving outwards, due to net investment that embodied the fruits of 19th century technical progress. In Chapter 11, Keynes argues that, if equilibrium prevails, then aggregate investment must have been pushed to the point where the economy-wide MEI has reached equality with the ruling rate of interest.

    Kalecki included this to reflect his principle of increasing risk, whereby more internal financing means less recourse to risky external borrowing, contra the Modigliani-Miller theorem discussed later in Section 7. Effectively, he returns to his starting point, equation 1. He shows how the consumption and output aggregates favoured by neo-Keynesian investment theorists depend upon the total investment and consumption outlays of all entrepreneurs.

    Then he uses the classical assumption concerning propensities to save out of wages Wt and profits Rt viz. The output accelerator also can be derived using standard neoclassical profit-maximisation analysis with perfect competition. Gapinski , pp , generalising an earlier derivation by Hamberg , pp , shows that changes in the factor price ratio — the wage rate relative to the profit rate — can alter the capital-labour and capital-output ratios when a constant elasticity of substitution production function is assumed.

    Linearity is not a prerequisite for linking accelerator theories to the profitability gap, however. Neoclassical Investment Functions 7. Associated with each possible value of capital stock is some maximum capacity to produce output Z t. The option with the highest net present value NPV is also the one with the greatest excess of the internal rate of return IRR or expected profit rate rte over the normal profit rate nt. So, if all managers are striving to maximise the NPVs of their firms, the q-ratio theory reduces to the profitability gap theory.

    Note that the use of stock market valuations in the numerator of the q-ratio implies that the opinions of those who own the firm its shareholders are assumed to be identical with the knowledge of those who control the firm its managers , this symmetry being a common situation in the 19th and early 20th centuries when most business firms were managed by their owners. Modern corporations, however, are characterised by asymmetry between shareholding outsiders and managerial insiders.

    Section 7. Rentier share trading, he remarked, was comparable to the farmer who, having tapped his barometer, withdraws all his capital from agriculture during a few days of expected bad weather. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. Andrew Abel argues that the marginal q-ratio is a more relevant measure than the average q- ratio discussed above. Marginal qt is defined as the ratio of the market value of an additional piece of capital equipment to its replacement cost.

    Consider a neoclassical analysis of the underlying determinants of capital stock adjustment. The underlying process depends on estimating the net present value of the annual flow of gross profits that entrepreneurs expect to earn on their capital stock. Rtg is that part of operating revenue annually accruing to entrepreneurs, i.

    T years and the nominal capital stock is subtracted as a lump sum, not in a series of annual depreciation charges. The price and quantity of output are denoted by pt and Yt r respectively, whilst wt is the wage rate and Lt the labour force. The future values of all these variables are expectations, but their e-superscripts are dropped to avoid cumbersome notation. The rate of return and the life of the capital asset are given by r and T respectively. Assuming output consists of a single good that may be consumed or accumulated, pt must be identical to st.

    Productivity, investment and profitability

    But resemblance is not enough. This equivalence implies that neoclassical user cost investment functions also contain the profitability gap gene. One implication of the MM theorem, which Jorgenson and Tobin accepted, is that the opportunity cost of capital for a firm is independent of both its financial structure i.


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    8. Perched at the top of this financing heirarchy are retained earnings least risky and cheapest , then share floats which dilute equity and, finally, bond issues most risky and dearest. The key finding of the MM theorem was that firms can never increase their own capital value through purely financial operations because, if this were possible, rentiers could profit through arbitrage by replicating such operations in their own portfolios. To do this, the rentiers would need to possess precisely the same data as the managers of corporations. To compensate for their lack, or mistrust, of what information is available on the real investment opportunities confronting firms, rentiers tend to raise the price of external finance above the opportunity cost to managers of using cash flows generated within their own firms.

      In hindsight, it was Kenneth Arrow who initiated the option value investment theory by introducing the concept of irreversibility, whereby capital goods either cannot subsequently be resold to other firms or can be resold only at a significant loss. Thus investments which are more or less firm-specific may be classified as completely or partially irreversible. To build or purchase the necessary capital equipment immediately that opportunity is identified would kill the real option value of waiting, i. In a world of uncertainty, there are positive probabilities of future upward or downward revisions to the profitability expected from any eligible investment project.

      But the option value of avoiding losses by waiting must increase if there is bad news. Good news has no effect on the option value because all it does is confirm the wisdom of investing now — which kills the option anyway. The former faced downside risk — hence their option value of waiting to invest was always positive — whereas the latter were protected from losses by government supports. With an option value near zero, any Japanese firm that had identified an investment opportunity never waited. The existence of a real option value of waiting drives a wedge into the right-hand side of the NPV rule.

      As such, the insights they afford are equally relevant to all other investment theories that contain the profitability gap gene. The required embellishment is simply: alter e. Concluding Remarks Investment theory, particularly in relation to the explanation of business cycles, has long been a central concern of economic theorists ranging from Smith, Marx, Spiethoff, Keynes and Fisher, to Kalecki, Tobin, Jorgenson and beyond. It has evolved in diverse ways and generated a rich variety of perspectives. We have examined four influential approaches to investment theory - classical uniform profitability; Keynesian marginal efficiency; neo-Keynesian multiplier-accelerator; and neoclassical q-theory and user cost — to determine whether, amongst this profusion of ideas, they share a common trait.

      Depending on how one specifies the profitability expectation function of entrepreneurs, the conclusion of this paper is that they do. Their common gene is the profitability gap. The gene is common to the ergodic neoclassical universe of general equilibrium in logical time and the non-ergodic post-classical universe of fully-adjusted stationary and steady states, plus disequilibrium traverse phenomena, in historical time. Thus, the differences between our various investment theory approaches are more apparent than real. Optimal investment under uncertainty, American Economic Review, vol.

      Consumption and investment, in Friedman, B. Akerlof, G. The market for lemons: qualitative uncertainty and the market mechanism, Quarterly Journal of Economics, vol. Arrow, K. Optimal capital policy with irreversible investment, in Wolfe. Baddeley, M. Behind the black box: a survey of real-world investment appraisal approaches, Empirica, vol. Bernanke, B. Irreversibility, uncertainty and cyclical investment, Quarterly Journal of Economics, vol.

      Brainard, W. Chirinko, R. Tobin's Q and financial policy, Journal of Monetary Economics, vol. Business fixed investment and 'bubbles': the Japanese case, American Economic Review, vol. Courvisanos, J. Dixit, A. Investment and hysteresis, Journal of Economic Perspectives, vol. Eisner, R. Determinants of business investment, in Eisner, R. Fisher, I. The Theory of Interest. New York, Macmillan. Gapinski, J. Macroeconomic Theory: Statics, Dynamics, and Policy.

      Tokyo, McGraw- Hill.

      Marginal Efficiency of Capital (HINDI)

      Goodwin, R. The non-linear accelerator and the persistence of business cycles, Econometrica, vol. Gould, J. Adjustment costs in the theory of investment of the firm, The Review of Economic Studies, vol. Haavelmo, T. A Study in the Theory of Investment. Chicago, University of Chicago Press.

      Models of Economic Growth. Harrod, R. The Trade Cycle: An Essay. Oxford, Clarendon Press. Hayashi, F. Tobin's marginal and average Q: a neoclassical interpretation. Econometrica, vol. Hicks, J. A Contribution to the Theory of the Trade Cycle. Jensen, M. Theory of the firm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics, vol.

      Jorgenson, D. Collected Works, Volume I. Kalecki, M. Proba Teorii Koniunktury.

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      Studies in Economic Dynamics. Theory of Economic Dynamics. Trend and business cycle reconsidered, Economic Journal, vol. Selected Essays on the Dynamics of the Capitalist Economy, Cambridge, Cambridge University Press. Keynes, J.