Madgwick – Angulo

Marx's theory of value explains the origin of capitalist profit and how the dynamic of capital accumulation takes particular forms, resulting in a tendency of the rate of profit to fall. This tendency is what Marx termed 'just an expression peculiar to the capitalist mode of

production of the progressive development of the social productivity of labour' (Marx, 1974c, p. 213). Elsewhere, Marx states that it is 'in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations' (Marx, 1973b, p. 748). It is not my objective here to take part in the debate on the role of the rate of profit in bringing about the world crisis from 2007. Chapter 5 notes some important stages in the historical development of global finance, and other work discusses the question of recent financial trends and profitability (Norfield 2012, 2014). In this section I have the narrower objective of explaining how to include the capitalist financial system in a value-theoretic framework by examining the rate of profit. This is not because I plan to estimate the rate of profit empirically; the point is to discuss the relationships between value production, finance and profitability. The results highlight a dynamic of the financial system, giving a foundation for the later analysis.

I begin with the standard formula for the rate of profit on productive capital and then discuss how this should be modified to include other functional elements of capital. Following the points previously made in Chapter 2, Section 2.2, on productive and unproductive labour, I will not consider state-owned enterprises, state taxation and expenditures or issues related to landed property. Nevertheless, the state as an economic actor is not excluded from this analysis, given both the state's position in the financial system and the role of the state vis-à-vis other countries. One other important issue should also be noted: while the operations of productive capital can be distinguished conceptually from those of commercial capital, money-dealing capital and interest-bearing capital, in practice capitalist companies will often engage in activities that extend beyond one function. For example, industrial companies may also have commercial or money-dealing operations, and banks that should normally be considered under the heading of interest-bearing capital will also usually provide money-dealing capital services. This does not invalidate the theoretical distinctions between the different functions, but the concrete forms taken by capital are liable to involve more than one of them or be hybrids of the two (see Section 2.6 for further discussion of the overlaps).

Productive capital and the rate of profit

In Marx's analysis, the rate of profit, r, is expressed as the total surplus value produced (S), divided by the advance of both constant (C) and variable capital (V), or:

(i) C V

r =

This simple formula is the one commonly used to represent the rate of profit on total social capital. However, it leaves out of account two important qualifying factors. The first concerns the period of turnover of the capital advanced, also allowing for what Marx terms 'fixed' and 'circulating' capital (Marx, 1974b, Part 2). In what follows, I discuss an annual rate of profit.

The second, and more important qualification for these purposes, relates to the advance by private capitalists of funds that do not produce value and surplus value. Such funds need to be allowed for as extra items in the denominator of the rate profit formula as extra capital

advanced. They will also deduct from the numerator because the expenses incurred cannot be recovered from the value added to the social product.

Advances of capital that do not produce value and surplus value fall into two

categories. The first is advances of capital for commercial and money-dealing operations; the second is advances of capital for operations that turn money into a 'commodity as capital', ie interest-bearing capital (see Section 2.6). While particular institutions may well perform both money-dealing and interest-bearing capital functions, the profitability of each is determined differently in Marx's theory.

The standard rate of profit formula can be amended to allow for these advances of capital. Yet this is rarely done in the literature,³ even though the majority of Marxist

commentators would agree that commercial and other financial activities are unproductive of value and a drain on the productive sector of the capitalist economy. Shaikh, for example, uses a number of profitability calculations, each of which excludes the capital advances of the financial sector (Shaikh, 2011, p. 58). This is acceptable for his focus on non-financial corporate profitability, at least insofar as these companies do not engage in financial operations. However, he discusses profit trends in the (US) system as a whole but does not indicate that the financial sector plays a part in the overall calculation except through the impact of interest rate payments taken by the financial sector from non-financial sector profits. Below, I work through the way in which the rate of profit formula for the total capitalist system should be amended.In order to focus on what is important for my argument, I will summarise only the key features of what should be done, leaving other details to Appendix 1 of this chapter.

3 Saros 2012 is an exception, and his approach to profitability has some similarities to the one here.

However, his analysis fails to deal with bank credit creation and the special position of banks.

Commercial and money-dealing capital and the rate of profit

Fine was the first scholar to present a rate of profit formula that includes commercial and money-dealing capital, one based on Marx's analysis (Fine, 1975, pp. 62-64).⁴ Commercial capitalists are considered as buying commodities from the productive capitalists below value and selling them at value, while achieving the same average rate of profit as the productive capitalists. The advance of money-dealing capital (MDC), to handle other specialised operations for industrial capital such as foreign exchange transactions, also tends to achieve the average rate of profit. In these activities they have to advance cash or other means of payment, and they also need to advance capital to pay for buildings, equipment, the wages of commercial workers, etc. Marx assumes an equal rate of profit between the two types of capital because, in practice, they often overlap and it is considered relatively easy for a producer to move (at least partially) into commerce and money-dealing, or vice versa, if the respective rates of profit are significantly different and attractive enough to induce such a change.⁵ Here I will show how to derive the formula for the rate of profit including this non-productive form of capital in a different way from Fine.

First, consider the value of the output of productive capital in one year and assume this to be equal to C + V + S in the usual notation. Then, because the commercial and money-dealing capitalists do not add any value to the product (if we exclude necessary transport and packaging, etc), all of their costs in the year, from commercial wages to the depreciation of fixed capital – here represented by X – must be a deduction from the total surplus value, S.

Hence, the system's total profit available for distribution or further investment is S – X.

Furthermore, if the latter capitalists must advance a total capital of Y, including their money capital advances for making commodity purchases, their total fixed capital and commercial

4 Fine (1985-86) develops the argument further and covers the theory of interest, but his formulae do not represent the rate of profit including interest-bearing capital. In discussion with him on this question, he would disagree with the approach followed here because he views the key rate of profit calculation as that pertaining to industrial and commercial/money-dealing companies. Interest is then a deduction from their mass of profits and their resulting (net) rate of profit is the relevant factor in capital accumulation. The approach here differs because I would stress that capital also needs to be advanced for companies to perform interest-bearing capital operations. This advanced capital will have an impact on the overall rate of profit for the capitalist system. Nevertheless, I do not argue (see below) that there is a tendency for the same rate of profit to be received by both industrial and commercial companies and by IBC.

5 Vertical integration helps industrial companies manage commercial costs internally. Ford Motor Credit is a case where Ford, a manufacturing company, expanded into financing the purchases of the company's products. GE Capital is also chiefly in this money-dealing capital area, as defined by Marx, rather than operating as a bank. Commercial capital rarely moves directly into production, but it commonly develops supply-chain links with producers. In recent decades the hold of large retailers from imperialist countries over producers elsewhere (eg Wal-Mart and China-based suppliers) has increased with 'globalisation'. But this is a feature of the imperialist world economy rather than one that, in these cases, indicates an equalisation of profit rates between retailers and producers.

wages, etc, then the total capital advances over which the system profit must be measured are C + V + Y, not simply the C + V of the productive capitalists.⁶

Hence, the system rate of profit, including the productive, commercial and money-dealing capitalists is:

(ii) C V Y

X

r =

The implication is that the rate of profit is lower than implied by the simple calculation of equation (i). A qualifying factor is that commercial capital likely reduces turnover time for industrial producers. This would boost the mass of surplus value produced per year and could also raise the annual rate of profit. Most analysts working on estimates of the rate of profit normally use data from national income accounts that groups together 'industrial and commercial' or 'non-financial' companies when measuring annual profits against advances of fixed capital. In this regard, such estimates would broadly correspond with equation (ii). However, there are still important differences between the formula and empirical estimates. For example circulating capital and the commercial capitalists' advance of money capital are normally excluded from empirical estimates because of the difficulty of getting adequate data. Kliman discusses some of the problems of using national accounts data for value-based estimates of profitability, in addition to other important data-related questions not covered here (Kliman, 2012).

Interest-bearing capital and the system rate of profit

The previous methodology can be extended to incorporate interest-bearing capital (IBC) into the calculation of the system rate of profit. IBC operates outside the sphere of the production and circulation of commodities; hence, one question is whether capitalists in the financial sector should be included in the equalisation process for the rate of profit. My analysis argues that IBC should be included in the calculation of the capitalist system's general rate of profit, but that its peculiar mode of operation means IBC will not have a tendency to achieve the same rate of profit as the other sections of capital. The important profitability differences between industrial, commercial and money-dealing capital on one side and IBC on the other will be discussed in more detail in Sections 3.2 and 3.3.

The analysis here discusses IBC and the system rate of profit by considering the capital invested in banks. Banks are the institutions that have the broadest and most important financial operations, although these can fall under the headings of both MDC and IBC, as previously noted. Banks act as intermediaries, drawing in pools of spare liquidity in the

6 Here and below I assume for simplicity that fixed and circulating capital turns over in one year. The issue of turnover and other factors are considered in more detail in Appendix 1 of this chapter.

economy, especially corporate funds arising from the circuit of capital, to use for loans to industrial and commercial companies. However, their credit operations are far wider than this function would suggest, given their ability to create monetary assets (see Section 3.2). I do not separately consider banks' financial dealings with households, although household deposits will form part of the total funds they can lend to companies.⁷ The operations of insurance companies, pension funds and other financial asset managers are included in this analysis to the extent that they also draw upon social money resources to lend to companies by

purchasing their bond and equity issues.⁸ This will omit some aspects of financial activity, but the dealings that are the most relevant for the key forms of imperialist finance are still

included here.

In order to show how IBC can be included in the calculations of system profitability, it is necessary to define some additional variables. I will limit this to the minimum here;

Appendix 1 discusses some other details.

Let Z be the annual costs of capitalist IBC operations, including depreciation and general running costs such as wages and salaries. As in the case of commercial companies, these costs are not recovered by additions to the total value of annual output. Instead, the costs are a deduction from the sum of total surplus value produced, reducing the numerator of the system rate of profit. If W is the total capital advanced by these capitalists, for their fixed capital, bank equity capital and wages, etc, then this term must also be included in the denominator of the rate of profit for the capitalist system. One final variable needs to be introduced at this stage to reflect the role of IBC in providing funds to industrial and

commercial capitalists for investment. Let D2 be the borrowed investment funds that are used for constant and variable capital (in productive operations) and for commercial and money-dealing capital investment. This results in a general formula for the rate of profit of the total system, including the productive capitalists and the different forms of non-productive capital:

(iii) C₁ V₁ Y₁ W D₂ Z X

r =

In equation (iii), the terms C, V and Y now have a subscript of '1' to indicate that these investment funds are advanced by the capitalists in these sectors, while the D2 term represents externally-funded investment from the financial system, via debt or equity issues or

7 Here, all the revenues accruing to banks are considered to be a deduction from surplus value, despite the fact that the immediate payers of bank interest and fees might be households or other individuals. In the case where workers might pay interest to banks out of their incomes, that interest is not considered to be a deduction from the value of labour power. Instead, assuming that this is a general, social phenomenon, the wage paid by employers would have to adjust to meet the regular deductions made.

(refer back to Chapter 1, Section 1.2).

8 Asset managers and others in control of advancing money capital will potentially be assisting an accumulation of capital by companies only when they purchase new equity and bond issues, not when they buy existing securities from previous purchasers.

bank loans. The costs of the borrowed funds may have an impact on capital accumulation, and will have an impact on the distribution of surplus value between different groups of

capitalists, but the overall system rate of profit can be expressed independently of the rate of interest or other costs of borrowing investment capital.

Equation (iii) is only a static representation of the system rate of profit. It suggests that the costs of IBC operations by banks and others reduce the total surplus value available for distribution among the different groups of capitalists and also produces a lower rate of profit for the capitalist system taken as a whole. However, while it allows for the impact of borrowed funds on the accumulation of capital (D2), it does not directly show the potential extra surplus value that might result from that accumulation. A key point is emphasised, nevertheless: it is only the productive capitalist operations that create value and surplus value.

The unproductive capitalist functions do not even transfer value to commodities: all their costs are a burden on the system rate of profit, both reducing the numerator and increasing the denominator.

The previous expression suggests that MDC and IBC activities are negative influences for the capitalist system's overall rate of profit, although there are potentially offsetting factors, in particular that access to investment funds may boost the amount of surplus value exploited. However, one important implication is that a country that specialises in MDC and IBC operations can appropriate (surplus) value from other countries. This point will be followed up in Chapters 4, 5 and 6. In the remainder of this chapter I will consider some other issues that arise when allowing for the role of finance, which I define as encompassing both MDC and IBC operations.