Karl Marx
(Foreign Languages Publishing House translation)

Part VI: Interest, Rent, and Labor Use-Values

FUTURECASTS online magazine
Vol. 6, No. 4, 4/1/04.


Karl Marx:
"Capital (Das Kapital)"

Volume 1, Part I: "Abstract Labor Standard of Value."

Volume 1, Part II: "Contradictions in Capitalist Industrialization."

Volume 2, Part III: "Circulation and Expansion of Capital."

Volume 2, Part IV: "Criticism of Adam Smith."

Volume 3, Part V: "Profits."

Introduction to Vol. 3, Parts V & VI


Making value disappear:




  Marx finally confronts his fundamental irresolvable problem in Volume 3. There are numerous processes and incentives in the capitalist system that obviously contribute greatly to its productivity yet don't involve industrial labor. For his propaganda purposes, Marx must disparage them and maintain his view that they are of no "value."

It is impossible to rationally discuss common economic phenomena with "profits" as redefined by Marx.


Both Marx and Engels continuously trip up when applying "profits" as Marx redefines that term to phenomena that can only be explained by  "profits" as normally defined.

  Of course, he fails. He throws up numerous examples of capitalist abuses and confusing clouds of obscuring detail about the business cycle. This provides much grist for Marx's propaganda mill and an emotional smokescreen with which the weaknesses of Das Kapital are hidden.
  "Profits" - frequently now by name -
but still frequently confounded with surplus value - finally comes front and center under consideration in Volume 3. Much of Volume 3 is concerned with the relationship of these two concepts, and with interest and rent - but not ground rent on raw land - as forms of profit.
  "Profits" are redefined in Volume 3
to show its close relationship with surplus value. However, this merely shifts the tendency to confound profits with surplus value to a tendency to confound "profits" as redefined by Marx with "profits" as normally defined. See, "The rate of profit," below.
  It is impossible to rationally discuss common economic phenomena with "profits" as redefined by Marx. His redefinition of the term reduces it to a concept with NO functional applicability in capitalist economics. His definitions and redefinitions of other terms compound this problem. Both Marx and Engels continuously trip up when applying "profits" as Marx redefines that term to phenomena that can only be explained by  "profits" as normally defined.

  Differences in the productivity of individual capitalists also begin to gain recognition in Volume 3. (Capitalist facilities are not homogeneous masses, all of which might collapse together as overproduction and overcapacity squeeze profits.) Yet, he still expects a general collapse. He mentions such differences only in passing while discussing other things.
  He similarly - but just in passing - even provides recognition of the productive importance of the ownership interest - apparently oblivious that this is inconsistent with his continued denial of its value. Repeatedly, Marx perforce acknowledges that his abstract labor theory of value has no visible impact on individual capitalists or industries -- its impacts exist only as broad economic averages for an entire economy. In a desperate tail wagging the dog argument, Marx and Engels assert that this average somehow determines its constituent parts instead of being, as averages always are, a mere mathematical calculation determined by its parts.
  Very conveniently, the impacts of these averages are too attenuated to be demonstrated. Unfortunately for Marx, repeated efforts at demonstrating some functional role for this and other concepts all clearly fail.

  Engels considered Volume 3 the most important of the volumes of Das Kapital. In this, he is undoubtedly correct, although there is considerable doubt as to whether all these assorted notes always included Marx' final considered opinions. In this volume, Marx - supplemented by Engels - finally deals at length with profits in its varying forms as industrial and mercantile profits, as interest and as rent.  In Volume 3, Marx finally attacks the problem of "profits" directly and aggressively. With some semantics slight-of-hand, he radically redefines the terms "profits" and "total capital," and then pretends that they describe the same phenomena as when normally defined. (Needless to say, such an effort inevitably becomes an exercise of extraordinary stupidity.)
  Nevertheless, Volume 3 is the least read - perhaps because it is a daunting 890 pages in length - not counting Engels' usual 20 page Preface. Volume 4, produced well after Engels' death, is primarily an account of the history of the theory of surplus value and - mercifully - of so little import as to be readily disregarded.
  Volume 3 has more of Engels in it than any other volume, although he assures us that his arrangements, supplementations and additions were all carefully in line with the notes and thoughts of Karl Marx. In particular, Marx failed to fulfill his long-standing promise to provide an explanation of financial capital that reconciled its obvious roles in capitalist productivity with the contention by Marx that it added no value to capitalist production.
  For example, Part 2 of Chapter 6 of Volume 3 begins with the acknowledgement that world markets and the credit system are essential to an understanding of the capitalist system, and provides assurance that they will be covered in the "continuation" of Volume 3 after "the general nature of capital" is explained. He does, in fact, herein provide voluminous material on the monetary and financing mechanisms of capitalism and their uses.

The financial system bestows many "benefits" on the productive and distributional systems, but no "value."

  Yet again, a distinction without a difference is the ultimate propaganda ploy resorted to. The financial system bestows many "benefits" on the productive and distributional systems, but no "value." See, Karl Marx, Capital (Das Kapital) vol. 3 (II), "Interest, Rent, and Labor Use-Values," at "I) Interest and Returns on Equity Capital." He fails to explain how these financial mechanisms can be so useful - indeed, admittedly essential - and yet not contribute to the "value" created by the system. He hides this failure behind his usual emotional smokescreen by instead passionately emphasizing the abuses and periodic failures of the system.
  The coverage of rents
is the most logical part of Das Kapital. It is also the subject with which Marx is most in agreement with Adam Smith. Unlike Smith, however, Marx - as is expected - emphasizes the problems and costs of private ownership of land while disparaging the benefits - indeed, the essentiality - of private property.

I) Interest and Returns on Equity Capital

Financial capital:

  Money is lent for the purpose of earning interest, and it is borrowed by productive and commercial factors for use as capital in earning profit. Marx takes about 10 pages to explain this.

  He describes money-capital as a peculiar commodity. Theorizing at length, in minute detail and with innumerable repetitions, he nevertheless quickly falls into fundamental error.

  "The difference is that in a loan the money-capitalist is the only one in the transaction who gives away value; but he preserves it through the prospective return."

  Incredibly, Marx describes a capitalist system in which credit-worthiness has no value. The contract - the promise - to return the loaned sum with interest is of no value. It just sits there - a thing existing without value. The promise to pay is recognized by Marx as the "price" for the loan, but this price consists of no value. Not until interest and/or principle are actually paid, is value given for value.

  But, of course, this absurdity is dictated by the industrial labor theory of value. It is justified by the basic tautology of Marx's reasoning.  The narrow labor definition of value - limited to industrial labor use-values - is exclusive because other things of value in the market - like a promise backed by the credit of the borrower - don't meet it.

  The real price paid for the loan is the interest ultimately paid, not the promise to pay. The interest, being money, has value. But, since the time cost of money has no value for Marx, this "price" is irrational.

  "Interest, signifying the price of capital, is from the outset quite an irrational expression. The commodity in question has a double value, first a value and then a price different from this value, while price represents the expression of value in money. - - - How, then, can a sum of value have a price besides its own price, besides the price expressed in its own money-form? Price, after all, is the value of a commodity - - - as distinct from its use-value. A price which [as a normal matter] differs from value - - - is an absurd contradiction."

  While market prices of normal commodities are governed by the industrial labor use-values around which they on average fluctuate, there are no labor use-values at work in competitive money markets. The forces of supply and demand have no "natural" limits.

  "Whenever competition does not merely determine the deviations and fluctuations, whenever, therefore, the neutralisation of opposing forces puts a stop to any and all determination, the thing to be determined becomes something arbitrary and lawless."

  Then, what determines interest rates? For Marx, supply factors - limited to industrial labor use-values - regulate market prices rather than acting in balance with demand factors. Here, profit rates are viewed as regulating interest rates rather than the two acting mutually on each other.
   Marx correctly points to profit rates as the limiting factor.

  "Interest is regulated through profit."
  "The average rate of profit is to be regarded as the ultimate determinant of the maximum limit of interest."

Profits equilibrate as capital slowly redeploys from low profit sectors to high profit sectors.


Interest rates are set directly by market forces, with clearly defined fluctuations, for all money-capital in the market.

  However, what "profit" is Marx talking about, here? If it is "profit" as Marx defines it, then this is a meaningless truism, since all revenues - including the interest payments themselves - above the sum of industrial wages, and the costs of industrial materials and facilities, and ground-rents, are included in "profits." If it is "profits" as normally defined, then Marx here provides an example of breathtaking ignorance. With yet another example of his "one hand clapping" rationalizations, he totally ignores the readily observable extent to which interest rates, in turn, regulate profits.
  Marx here is clearly tripping  over his own semantics games. This discussion of the relationship of interest rates and profits - extending in his usual style drearily over about 25 pages - is obviously not meant to be meaningless. The term "profits" is frequently obviously being used in its normal sense. However, this doesn't prevent him from returning at particular points to repeat his redefinition of "profits" and attempt to apply it to circumstances for which it is clearly inapplicable.

  Marx is well aware of the extensive literature on this subject already existing in the middle of the 19th century, and of its full complexity. As he gets further into the subject, he discusses it in more logical terms. The rate of interest is "related" to profits. This relationship works as averages, not as particular rates.  Rates of interest, like rates of profit, are governed by the time of turnover. This is an obvious point duly recognized by Marx - but with still no recognition of the significance of the time cost of money and assets.
  During the 19th century, money and money equivalents were precious metals or paper based on precious metals. Marx notes that interest rate fluctuations in many nations remained fairly constant in a narrow range - a "constant magnitude" - as did profit rates. This was an "average" rate that remained fairly stable despite fluctuations in particular rates and during particular times. He discusses the differences in the mechanisms by which profit and interest rate equilibrium levels function.
  But interest rates are set directly by market forces, with clearly defined fluctuations, for all money-capital in the market. Interest rates thus fluctuate like the prices for commodities. However, profits equilibrate as capital slowly redeploys from low profit sectors to high profit sectors. The "general rate of profit appears blurred and hazy."  It may differ for different producers even of the same product depending on factors of production, Marx acknowledges

  Marx does not recognize what this does to his expectation of ultimate capitalist collapse. Overproduction can never be chronic, since creative destruction constantly carries away the weakest and least efficient producers allowing the survivors to thrive.
  The statistics on profits that Marx here relies on MUST have been on profits as normally defined. Nobody calculated or kept statistics on "profits" as Marx defines that term. However, Marx somehow never mentions this. He is quite content to use the available statistics in his analysis - in his usual slipshod style confounding the meanings of his terms with the terms as normally used. Clearly, his redefinitions of terms common in economics make it impossible even for him to intelligently discuss the subject.

Management and superintendence:


"The profit of enterprise" is "profits" - or "gross profits" - minus interest costs.

  The industrial capitalist is no better than the money-capitalist, Marx vigorously asserts. The two just share in the surplus value generated by the industrial capitalist. To discuss this subject, he introduces a new term.

  • "The profit of enterprise" is "profits" - or "gross profits" - minus interest costs. It is to be used when referring to "industrial" or "commercial" profit in the discussion of the interest rate segment of "profits."

The "profit of enterprise" is useful for discussing one subject - the question of the capitalist as worker earning "the wages of superintendence."


Since the industrialist and merchant always have the option of withdrawing capital from business and employing it as money-capital at interest, there is a necessary relationship between interest rates and profit rates,

  However, "the profit of enterprise" still includes all surplus value other than interest. It includes industrial and commercial overhead - such as accounting, clerical, and tax expenses, and storage of inventory, and  transportation for distribution to merchants and consumers. Marx does not state whether it includes ground-rents. It is useful for discussing one subject - the question of the capitalist as worker earning "the wages of superintendence."
  It is NOT useful for discussing the relations observable between interest rates and profits. This relationship is not observable for such "profits of enterprise," Marx acknowledges.

  "In the discussion on interest-bearing capital, we have already shown that the average interest over a long period of years, other conditions remaining equal, is determined by the average rate of profit; not profit of enterprise, which is nothing more than profit minus interest."

  But if i has no relationship to p -i, how can there be a relationship between i and p?

  Since the industrialist and merchant always have the option of withdrawing capital from business and employing it as money-capital at interest, there is a necessary relationship between interest rates and profit rates, Marx correctly notes.

  But that applies only to "profits" as normally defined, not to "profits of enterprise" or "profits" as Marx defines those terms.

  Interest and profits of enterprise are sharply different segments of gross profits, as Marx defines them. They have different characteristics that Marx goes into in his usual detail.

  He denies that "the profits of industry" are a wage for "management and superintendence." When money-capital is used for productive purposes by a borrower, both money-capital lent at interest and the profits of industry take part in the expropriation of surplus value from labor.

Both money-capital lent at interest and the profits of industry take part in the expropriation of surplus value from labor.

  The division of profits into interest and profits of industry makes it appear that the payment and receipt of interest is just a matter between capitalists that doesn't involve the workers, Marx complains. He sharply criticizes the view that the return on capital is the prevailing interest rate, and the remainder - the profits of enterprise - is "the wages of superintendence" that industrial and merchant capitalists earn not as a return on capital but as a result of their labor - "so that the labour of exploiting and the exploited labour both appear identical as labour."

  Complex businesses require skilled management that fully justifies managerial salaries, Marx acknowledges. However, much of this management and superintendence is not needed as a matter of production, but as a matter of the exploitation of wage labor - much as slave systems require extensive management and superintendence of even simple activities - more to manage the slaves than the work.

Much of management and superintendence is not needed as a matter of production, but as a matter of the exploitation of wage labor - much as slave systems require extensive management and superintendence of even simple activities - more to manage the slaves than the work.


Capitalists generally hire managers and do not trouble themselves with the productive details.

  To the extent that management is needed as a productive function, capitalists generally hire managers and do not trouble themselves with the productive details. Such managers are always "readily obtainable" in modern times due to the advances in public education.
  Again, as in Volume 1, Marx cites the productiveness of certain "cooperative factories" as proof that the functions of the capitalist are not needed. Large stock companies also separate management from the ownership interest. Now that capitalism has created the productive system, it can readily be carried on without capital or capitalists.

  "The wages of management both for the commercial and industrial manager are completely isolated from the profits of enterprise in the co-operative factories of labourers, as well as in capitalist stock companies. The separation of wages of management from profits of enterprise, purely accidental at other times, is here constant. In a co-operative factory the antagonistic nature of the labour of supervision disappears, because the manager is paid by the labourers instead of representing capital counterposed to them. Stock companies in general - developed with the credit system - have an increasing tendency to separate this work of management as a function from the ownership of capital, be it self-owned or borrowed. - - - [Since], on the one hand, the mere owner of capital, the money-capitalist, has to face the functioning capitalist [who borrows capital from him, but through intermediaries not directly], and since, on the other hand, the mere manager who has no title whatever to the capital, whether through borrowing it or otherwise, performs all the real  functions pertaining to the functioning capitalist as such, only the functionary remains and the capitalist disappears as superfluous from the production process."
  "With the development of co-operation on the part of labourers, and of stock enterprises on the part of the bourgeoisie [separating management from the ownership interest], even the last pretext for the confusion of profit of enterprise and wages of management was removed, and profit appeared also in practice as it undeniably appeared in theory, as mere surplus-value, a value for which no equivalent was paid, as realised unpaid labour. It was then seen that the functioning capitalist really exploits labour, and that the fruit of his exploitation, when working with borrowed capital, was divided into interest and profit of enterprise, a surplus of profit over interest."

  Engels tells us in 1894 that Marx wrote this three decades earlier. However, Engels does not deign to tell us what happened to these successful cooperative factories in those three decades. Nonmarket socialist systems of all kinds would strive throughout the 20th century to succeed with production on the basis of management and labor alone - without ownership interests or the guidance of competitive markets. They would fail miserably.
  As pointed out for Volume 1, coops of various sorts - and even employee-owned businesses - have on occasion been quite successful in capitalist systems. However, they generally exist in niche markets, are limited in size, and have never amounted to any substantial proportion of any advanced economic system. They also could not - and have not - come close to achieving such success if operating outside the capitalist system. They, too, are dependent on capitalist sources of supplies and commercial factors and various capitalist market signals, without which efficient management is impossible.
  Clearly, there must be some limiting factors at work. One of those limiting factors is the unavailability or limitation of owner incentives. Without that, it becomes very difficult to consistently generate investment decisions that prudently take advantage of opportunities that involve substantial risks - or that conflict with the interests of some of the workers. For example, how could such a coop outsource jobs in order to stay competitive?
  As for stock companies, the problems that arise because of a separation of ownership incentives from management have been notorious from the time of Adam Smith to the present day scandals on Wall Street. The primary incentive for managers is to milk the assets or merely minimally maintain them without rocking the boat. Ambition for expansion - when it exists - is dangerously not constrained by the risk of loss of personal equity - as Marx himself subsequently points out.
  Only the ownership interest has incentives to prudently accept the trouble and risks of growing the enterprise. That public stock companies do as well as they do is a marvel that would have greatly surprised both Adam Smith who first noted this problem, and Marx himself. This success would be impossible without the disciplines - imperfect as they are - imposed by the ownership interest through the price of stocks and risks of lawsuits.

The interest-bearing form of capital:




  Recognizing the element of time - but still totally ignoring the value of time - Marx declares the economic activity of money-capital "meaningless." It is "capital yielding a definite surplus-value in a particular period of time - - - directly, unassisted by the processes of production and circulation." It is "a mysterious and self-creating source of interest -- the source of its own increase." It is "form without content."

"It is the capacity of money, - - - to expand its own value, independently of reproduction -- which is a mystification of capital in its most flagrant form."

  In the "interest-bearing form" of capital, "we get the fetish form of capital and the conception of fetish capital." It is a "meaningless form of capital."

  "It is the capacity of money, - - - to expand its own value, independently of reproduction -- which is a mystification of capital in its most flagrant form."
  "[Thus], money becomes a commodity, whose capacity for self-expansion has a definite price quoted every time in every prevailing rate of interest."

  Marx is "mystified" by the ordinary tools of the capitalist system. Yet he explains many of the functions that they fulfill. Why financial tools should be any less meaningful - any less valuable -  than the physical tools on the factory floor is something Marx and Marxists would never be able to explain - except in terms of Marx's basic tautology with reference to industrial labor use-values.
  There is clearly no industrial labor involved in financial values. Financial mechanisms provide many "benefits" for capitalist production and distribution, as Marx acknowledges. However, these "benefits" have no "value." Yet again, Marx is forced to fall back on the weak reed of distinctions without any difference. The efficiency, reliability and resiliency of financial systems would be one of the observable determinants of the productivity of capitalist systems.

  Marx then goes into some of the fantasies about compound interest. He realistically - but in his own twisted terms - notes some of the factors that prevent capital invested for-profit from growing indefinitely at a compound rate. He notes depreciation and obsolescence and the decreasing rate of profit as capitalist systems develop. There is also, he naturally emphasizes, a limit to the amount of labor that capital can squeeze out of the working class. And, all of this exploitation is soon coming to an end.

  "The product of past labour, the past labour itself, is here pregnant in itself with a portion of present or future living surplus-labour. We know, however, that in reality the preservation, and to that extent also the reproduction of the value of products of past labour is only the result of their contact with living labour; and secondly, that the domination of the products of past labour over living surplus-labour lasts only as long as the relations of capital, which rest on those particular social relations in which past labour independently and overwhelmingly dominates over living labour."

  Marx recognizes depreciation and obsolescence. However, he characteristically omits from this discussion the amount of capital routinely destroyed by the processes of competition and creative destruction, and the disciplines imposed on investment rates by the money markets that he in this chapter disparages. Along with the business cycle that periodically cleanses the system of the obsolete, the poorly conceived and the houses of cards, the money markets prevent the accumulation of investments and productive capacity in such universal excess that they might fulfill Marx's predictions of general capitalist collapse.
  Thus - rather than a mere "fetish" - financial mechanisms turn out to be very valuable indeed.

  The details of the crises of 1847 and 1857 repeatedly come in for considerable attention. Marx criticizes official explanations. These crises occurred during - respectively - the great harvest failures of the 1840s - most notoriously in Ireland - and the Crimean War in the 1850s. The prosperous periods that preceded these crises also experienced the usual swindles and speculative excesses that collapsed during the crises - and provide substantial grist for Marx's propaganda mill.
  Here, both Marx and Engels offer their views about the proper definitions of "money" and "capital" in their various forms. It is the material added by Engels - an experienced businessman - that provides the clearer explanation. However, he, too, confounds "profits" as normally defined with "profits" and "profits of enterprise" as Marx defines them.

  Using Marx's definitions, Engels, too, finds it impossible to rationally discuss economic phenomena. However, the spread of such confusion is in fact one result for which propaganda myths are designed.

The irrelevance of the ownership interest:

  The role of the financing mechanism in increasing the efficiency of capitalist processes is readily recognized by Marx. However, he emphasizes instead how it facilitates the swindles and speculation that collapse so spectacularly during economic reversals.

Stock companies and monopolies are viewed as marvelous advances in capitalist development - arranging matters so conveniently for the inevitable communist takeover of productive facilities in the name of the workers.


"It is private production without the control of private property."

  The advantages of stock companies in marshalling vast capital resources for productive purposes are also recognized. However, this divorces the ownership interest from management. Three decades later, Engels adds similar remarks. He correctly notes the evils of the anti-competitive tariffs, cartels and trusts during the 1890s, and erroneously - typically - views the depression of 1893 as a sign of the imminent end of capitalism.
  Stock companies and monopolies are viewed as marvelous advances in capitalist development - arranging matters so conveniently for the inevitable communist takeover of productive facilities in the name of the workers. Marx explains:

  "This is the abolition of the capitalist mode of production within the capitalist mode of production itself, and hence a self-dissolving contradiction, which prima facie represents a mere phase of transition to a new form of production. - - - It establishes a monopoly in certain spheres and thereby requires state interference. It reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation. It is private production without the control of private property."

  Both men are naturally blind to the continuing importance of the ownership interest in stock companies, and the signals provided by financial markets. After WW-II, widespread experiments with nationalized industries would prove disastrous because of the absence of such factors.
  By the end of the 19th century, Engels should have had some appreciation for the natural resiliency of capitalism - but that modest degree of wisdom would escape most of the intellectual elite of socialism and communism for another century - and still escapes many in the left wing intellectual elite today.

  The meager savings of ordinary individuals are concentrated by the financing mechanism and made available to industrialists and merchants - and to adventurers and swindlers. In the stock markets, the wolves wait to devour the lambs. However, the credit system also offers the cooperative factories the ability to expand. Marx expects them to expand "on a more or less national scale" because of their superior attributes. (Chalk up yet another false forecast for the "science" of Karl Marx.)
  Then, Marx offers a remarkable recognition of the productive importance of the ownership interest to show what is being lost due to this increasing separation of the ownership interest from management, .

  "The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself."

  This sentence might well have been written by Adam Smith. However, it can apply equally as forcefully to socialist managers as to capitalist managers. Socialist managers, too, are "people who do not own it and consequently tackle things quite differently than the owner, - - -." And they are never even tenuously answerable to an ownership interest.

  "[The] credit system accelerates the material development of the productive forces and establishment of the world-market. - - - At the same time credit accelerates the violent eruptions of this contradiction -- crises -- and thereby the elements of disintegration of the old mode of production."

Money-capital and the business cycle:




  The difference between money as "currency" and money as "capital" for different participants in commercial flows occupies an entire chapter. Marx introduces more of his fine distinctions - between "money-capital" and "capital," between "money  as a means of purchase" and "money as a means of payment" - and denies that bonds or mortgages or stocks are "real" capital.

  The roles played in the business cycle by the various factors in the financial system come in for extensive - repetitious - elaboration in this part of Volume 3. Fluctuations in financial flows during the business cycle are highlighted.

  The economic scarcities that occur during periods of depression are irrational to Marx. He believes they could all be avoided simply by the issuance of appropriate production and distribution "directives" by socialist authorities. After all, there remains plenty of productive capacity and sufficient goods to fill all needs. What could be more logical than that the facilities should be "directed" to produce and that it should be "directed" that the produce be distributed?

  "The markets are overstocked, swamped with commodity capital. Hence, it is not, in any case, a lack of commodity-capital which causes the stringency."

  Ah, the socialist befuddlement at these periods of "poverty in the midst of plenty." This befuddlement would last well into the 20th century. Most socialists probably still haven't figured it out. However, men are not angels, and the system must have a robust mechanism to cleanse itself of their errors of omission and commission.

The debt obligations of government is "illusory, fictitious capital" for the economy and society since it is not being borrowed for productive purposes.

  Marx parses "capital" into minute segmentations in his usual style. In addition to productive capital and commodity capital, there is "money-capital" - which is gold and other currency - and "moneyed-capital" - which is interest bearing capital such as bonds, mortgages and stocks. Dividends are viewed as just a form of interest.
  Marx is a preeminent confounder of terminology - but he complains about the confounding of "banking" capital with "real" capital.
  The debt obligations of  governments constitute "capital" to the lender, and indeed, such obligations are saleable like other forms of capital. However, to Marx, such capital is "illusory, fictitious capital" for the economy and society since it is not being borrowed for productive purposes. It is consumed and cannot be recalled. It is just a claim on the state's revenue. The illusory nature of such paper-capital is revealed when payments stop and there is not any productive assets or valuable commodities as security. (Credit-worthiness and the promise to pay have no value to Marx.)

 "[After all,] this capital does not exist twice, once as the capital-value of title of ownership - stocks - on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form, and a share of stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it."

  Indeed, all "moneyed-capital" is "purely fictitious capital." "[The] capital value of such paper is - - - wholly illusory." Even when capital is raised or borrowed for productive purposes by issuance of stocks or bonds, the "real" capital resides in the facilities and commodities of the factories, not in the paper in the hands of the money-capitalists.

  "[After all,] this capital does not exist twice, once as the capital-value of title of ownership - stocks - on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form, and a share of stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it."

  The distinction between a "capital asset" and a "title of ownership" is just another of Marx's distinctions without a difference. The actual value of the capital resides in the paper title, even though the asset is being used by the company - exactly as if the asset itself - like a vehicle - was borrowed from the title holder. Today, much business is conducted with temporarily leased assets.

  Marx insists irrationally that any capital that is real can't fluctuate rapidly in value. Real values have been bestowed on real capital by labor power, and continue to reside therein regardless of temporary price fluctuations in the market. On the other hand, these paper titles fluctuate widely with fluctuations in interest rates - the reliability or amount of their returns - and perceptions of business risks.

  Yet, again, Marx views capitalism as a rigid, simple and easily directed system. These sensitively volatile characteristics provide the tools required for effective management.
  Capital is not that difficult to understand. Just concentrate on the purchasing power and recognize its dynamic qualities, and it becomes readily understandable. See, "Capital as Purchasing Power." It includes elements of stability and great strength as well as volatile elements that flexibly, sensitively and rapidly respond to every outside influence. Indeed, it is this flexibility and responsiveness - completely missing in socialist systems - that gives capitalism its dynamic qualities and its ability to thrive in a rapidly changing economic environment.

  However, Marx takes the exact opposite view.

  "All this paper actually represents nothing more than accumulated claims, or legal titles, to future production whose money or capital value represents either no capital at all, as in the case of state debts, or is regulated independently of the value of real capital which it represents."

  But, to whom do all these "values" belong? This is private enterprise capitalism - not socialism - that Marx is professing to explain. The values of private enterprise belong to particular individuals, not to society as a whole, as Marx repeatedly recognizes. Nevertheless, Marx must view these capitalist values as abstractions that belong to nobody - or to the laboring society as a whole.
  The attempt to divorce ownership from capital - to find "value" as a factor independent from those for whom the value exists - dooms Marx's analysis of financial capital right from the start. This is, after all, capitalism that Marx is spending 1800 pages professing to describe. The word "private" in private enterprise capitalism has real functional meaning - unlike most of Marx's terms.

The banking system and the business cycle:



  English banking and financing practices and abuses during the middle of the 19th century are reviewed at length by Marx. In his usual style, this presentation is repetitious and minutely detailed, and burdened with his usual irrationalities and errors of omission. However, his multitude of statistics are interesting in that they show the rapid growth of capitalist production from cycle to cycle.
  The entire banking industry is based on fictitious capital, Marx insists. Moreover, it is based not on the meager fictitious capital owned by the banks, but on that of the business entities and the general public that is deposited with them. Marx provides a reasonably accurate description of banking operations, and the tenuous nature of banking operations in particular and financial commerce in general. He quotes Adam Smith's description of the circulation of financial capital.

"Not only does profit consist in the appropriation of other people's labour, but the capital, with which this labour of others is set in motion and exploited, consists of other people's property, which the money-capitalist places at the disposal of the industrial capitalists, and for which he in turn exploits the latter."

  The banking system receives money accumulations from a myriad of sources - both savings and temporary accumulations - and makes it available for use by industrial and merchant capitalists - and by adventurers and swindlers. There is always a plethora of money-capital thus available for loan. Most of commerce and production is financed with other peoples money.

  "On the one hand, the capital of the industrial capitalist is not 'saved' by himself, but he has command of the savings of others in proportion to the magnitude of his capital; on the other hand, the money-capitalist [bankers and other financiers] makes of the savings of others his own capital, and of the credit, which the reproductive capitalists give to one another and which the public gives to them, a private source for enriching himself. The last illusion of the capitalist system, that capital is the fruit of one's own labour and savings, is thereby destroyed. Not only does profit consist in the appropriation of other people's labour, but the capital, with which this labour of others is set in motion and exploited, consists of other people's property, which the money-capitalist places at the disposal of the industrial capitalists, and for which he in turn exploits the latter."

  The inconsistency here escapes Marx and his followers. The interest payments that money-capitalists extract from borrowers is an unjust enrichment at the expense of the borrowers - yet the borrowers benefit immensely from access to such borrowed money-capital - "other people's property" - which finances their activities. But this is in fact a key to capitalism. Swindles aside, nobody merely exploits others. All exploit all - society exploits them all and all exploit the activities of society - something missed in Marx's typical concentration on "one hand clapping."

  Banking operations have an expansive impact within the financing mechanism. "The same pieces of money may serve as the instruments for any number of deposits" or loans or other transactions - expanding the "assets" in commerce many times above the value of the money involved in the transactions that create them. Marx demonstrates how relatively small sums of currency support vast "deposits" in the banks.

  "Just as everything in this credit system is doubled and trebled and transformed into a mere phantom of the imagination, so it is with the [bank] 'reserve fund,' where one would at last hope to grasp on to something solid."

    Marx then outlines the reserve system operating through the Bank of England. Reserves of the various banks at that time varied at between approximately 10% and 15%. These ultimately depended on reserves held by the Bank of England, which were periodically threatened during periods of crisis by expenditures of its gold to meet foreign obligations. However, the Bank of England as a last resort can always obtain Parliamentary approval to print unsupported paper money.

  Yes, the whole system depends on promises to perform and to pay - on business and financial ethics - including that of the government, backed by the revenues of the state. That this should all look so tenuous and fictitious to Marx and Engels is not surprising - since ethics and promises to pay and perform have no value to them.
  NOTE that it was this financial system that provided the wherewithal for England’s imperial wars, including the massive two-decade struggle against Napoleon and subsequent conflicts through World War I. Marx is obviously missing something here.

  Bills of exchange that finance actual  commodities in commerce are, however, another matter. This type of commercial credit - drawn on real values - facilitates the production and circulation of commodities.

  "Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of markets."

  These bills of exchange do not depend on idle financial capital. They are drawn - when legitimate - on the actual values in the commodities in production and circulation. Their extent is limited by the value of goods actually produced, and expands with the natural expansion of capitalist production.
  However, "if there is a disturbance in this expansion or even in the normal flow of the reproduction process, credit becomes scarce." Products - and their use-values - are in superabundance - a glut in the market - that now must be sold at discount prices to meet obligations.

  "Factories are closed, raw materials accumulate, finished products flood the market as commodities. Nothing is more erroneous, therefore, than to blame a scarcity of productive capital for such a condition. It is precisely at such times that there is a superabundance of productive capital, partly in relation to the normal, but temporarily reduced scale of reproduction, and partly in relation to the paralysed consumption."
  "But as money-capital as such, as potential money-capital, [commodity-capital] is subject to continual expansion and contraction. On the eve of a crisis, and during it, commodity-capital in its capacity as potential money-capital is contracted. It represents less money-capital for its owner and his creditors - as well as security for bills of exchange and loans - than it did at the time when it was bought and when the discounts and mortgages based on it were transacted. If this is the meaning of the contention that the money-capital of a country is reduced in times of stringency, this is identical with saying that the price of commodities have fallen. Such a collapse in prices merely balances out their earlier inflation."

  These fluctuations are no mere balancing of extremes. They observably play a key role in regulating the business cycle - which is more than can be said for Marx's rigid industrial labor use-values.
  During periods of economic decline, the "value" in commodities that glut depressed markets is most valuable to both commodity owners and society in general if sold at a discount - which is exactly what happens. It would be "irrational" to hold them and insist on receiving full "value" for them as Marx defines that term.

  Such crises are normal in capitalism because consumption is unnaturally limited by the limited ability to pay of the masses - and the blind urge to expand production on the part of the capitalists. The credit mechanism does more than just facilitate production and distribution. Marx points out that it also finances the glut until the glut becomes totally unsustainable, making the crisis worse.

  Marx is absolutely correct here. Financial excesses are clearly major factors in the business cycle. The financing mechanism is a part of a nation's monetary system, and must be appropriately regulated. Modern capitalist nations have improved such regulation efforts greatly - but still have trouble getting it right. Improvements are constantly being made - but the system may actually be too complex and its evolutions too rapid to ever permit perfection of regulatory systems. 

  As a crisis approaches, authoritative voices proclaim that all is well and congratulate one another "on the prosperity and soundness of business." (Nothing has changed - the confidence game always shifts into high gear just before a collapse.) Increasingly desperate capitalists start manipulating bills of exchange, maintaining the appearance of "a very solvent business with a smooth flow of return" at the expense of swindled money lenders and suppliers. (Again, nothing has changed. Overextended businesses and houses of cards are always involved in sometimes spectacular collapses during periods of economic decline.)
  In 1847, along with the failed harvests, there was a great boom and bust in railway securities, and an East India trade swindle collapsed. However, many legitimate businesses with substantial assets were also ruined by lack of cash and liquid assets with which to meet immediate obligations. (Again, nothing has changed.)
  In 1857, according to Marx, the crisis began in the U.S., and then spread internationally to one nation after another due to the interconnected world markets for goods, money and finance. When the economy of a major nation collapses, the contagion spreads through the international payments system to other nations. (Still another area where nothing has changed.)

  "[Commodity-capital] during crises and during periods of business depression in general, loses to a large extent its capacity to represent potential money-capital. The same is true of fictitious capital, interest-bearing paper, in so far as it circulates on the stock exchange as money-capital. Its price falls with rising interest. It falls, furthermore, as a result of the general shortage of credit, which compels its owners to dump it in large quantities on the market in order to secure money. It falls, finally, in the case of stocks, partly as a result of the decrease in revenues for which it constitutes drafts and partly as a result of the spurious character of the enterprises which it often enough represents. This fictitious money-capital is enormously reduced in times of crisis, and with it the ability of its owners to borrow money on it in the market. However, the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

  Marx states that expansion of money-capital in the form of capital available for loans "does not indicate a growth in productive capital - - -.:"

  "As long as the scale of production remains the same, this expansion leads only to an abundance of loanable money capital as compared with productive. Hence the low rate of interest."

Interest rates and the business cycle:

  The general rise and fall of interest rates during the business cycle is discussed by Marx.

  He recognizes that declining interest rates tend to promote increased securities prices and an increase in the availability of credit for productive purposes, yet he somewhat inconsistently disparages the role played by interest rates.

  During the depths of a depression, low interest rates may indeed not be enough to stimulate economic expansion, since there still may be fundamental problems to resolve and few profitable opportunities to justify borrowing. It is thus that low interest rate policy resembles “pushing on the end of a string.” Fundamental problems often involve political policies that political leaders do not want to admit or confront. Thus, they prize Keynesian policies that involve little more than throwing money at the economy, something political leaders never grow tired of doing.

  However, when expansion resumes, even Marx concedes that low interest rates and abundant capital for loans facilitates and accelerates recovery. But Marx again emphasizes the negatives - the abuses of credit by speculators and swindlers. Then, interest "reaches its maximum again as soon as the new crisis sets in."

  Remarkably left out of this discussion is the extent to which interest rates do not just respond to the business cycle, but regulate production and the business cycle. High interest rates contribute to bringing periods of excess to a halt, so that the economy may thereafter resume growth on a sound basis - stimulated by low interest rates. This is hardly a perfect mechanism - but there is nothing better available.
  Even modern regulatory efforts have failed to remedy the natural human frailties that afflict private and government economic policies. The business cycle - regulated in substantial part by interest rates, profit rates and other pricing mechanisms - is essential for economic progress. Socialist systems - lacking any similar forced cleansing of the outmoded and poorly conceived - invariably become swamped in value-draining economic dinosaurs and white elephants.

  Marx reasonably excludes from his discussion of the business cycle the economic impacts of crop failure or shortage of essential industrial commodities. For him, the natural business cycle is a matter of "over-production promoted by credit and the general inflation of prices that goes with it." (This view is not wrong, just grossly simplistic.)

  A crisis involving an extensive credit mechanism must resolve itself into "a tremendous rush for means of payment,"  he correctly notes. He also here correctly recognizes that there are fundamental problems involved - such as over-extended and over-expanded business entities, and inevitable swindles. (Unfortunately, those are the only fundamental problems he recognizes.) Thus, such crises cannot be avoided by "giving all the swindlers" paper money with which to continue their operations, or by supporting the prices of excess commodities by buying them with paper money.

  The fundamental problems must first be resolved before a recovery can be successfully financed. In the 20th century, Keynes - who admittedly took much from Marx - would fail to heed this bit of wisdom. The attempts by his followers to spend the business cycle into oblivion would fail miserably in the 1970s - and may soon lead to similar results in the 21st century. See, Keynes, The General Theory (I), "Elements of The General Theory," and Keynes, The General Theory (II), "Interest Rates, Aggregate Demand and the Business Cycle."

  The various factors affecting the rate of interest and the interrelationships of these factors at various points in the business cycle are parsed by Marx.

  He continues to apply his terminology to phenomena to which it clearly does not apply. Here, too, he is discussing relationships with "profits" as normally defined, since many of these relationships clearly do not apply to "profits" as he defines that term.

So vital is mere money to the capitalist system, that everything else must be sacrificed to restore the money supply.


The interests of money-dealers are thus placed above those of industrialists, merchants, and the public as a whole.

  Money is an essential tool of capitalist finance. When there is a drain on monetary reserves due to domestic factors or to adverse international payments balances caused by crisis or other factors, the money supply contracts, with multiplying impacts throughout the financial system. So vital is mere money to the capitalist system, that everything else must be sacrificed to restore the money supply.
  The entire credit system - all the financial paper - the "credit money" - is secure "only as long as money is secure." "For a few millions in money, many millions in commodities must therefore be sacrificed." There is a "universal depreciation of commodities, the difficulty or even impossibility of transforming them into money, i.e., into their own purely fantastical form." The interests of money-dealers are thus placed above those of industrialists, merchants, and the public as a whole.
  Much of these chapters involve Marx's disagreements with the arcane definitions of "capital" and "money" employed by various banking officials, and his criticism of the way the Bank of England ties the money supply to the gold in its reserves.

European protectionist policies in the 1890s are "preparations for the ultimate general industrial war, which shall decide who has supremacy on the world market."

  Engels adds a footnote about conditions in the 1890s. He incorrectly senses in the depression of 1893 the imminent collapse of capitalism. However, he correctly senses in the growth in Europe of industrial competitors to England - and their protectionist policies - "preparations for the ultimate general industrial war, which shall decide who has supremacy on the world market."

  This "industrial war" would break out in the 1920s. The U.S. as the world's primary creditor nation would be the primary aggressor nation. Because of the impacts of the two world wars, the U.S. would be the ultimate victor - and one of the primary causes of the miseries and bloodshed of the Great Depression and WW-II.. See FUTURECASTS "Great Depression Chronology Series," starting with "The Crash of '29."

The Bank Acts of 1844 and 1845:



  The issuance of Bank of England bank notes was tied to gold reserves pursuant to the Bank Acts of 1844 and 1845. This was done pursuant to monetary theories originating with David Ricardo. Many asserted that the regulation of the money supply by means of gold inflows and outflows would make economic depressions impossible. By the time Marx is writing, this has clearly not been the case.

  Ricardo's monetary theories are mere tautology, exclaims the premier practitioner of tautological reasoning, Karl Marx.  Ricardo offers no real explanation of causal relationships.

  "Whence comes the periodic general fall in commodity-prices? From the periodic rise of the relative value of money. Whence the general periodic rise in prices? From the periodic decline in the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall."

  However, with mid 19th century credit systems, the issuance of bank notes "is not exactly regulated by the laws of metallic currency," Marx points out. He notes that the commodity price statistics for the 19th century to that point don't conform to Ricardo's theory. Their random movements clearly reflect supply and demand factors in individual markets rather than fluctuations in Bank of England gold reserves.

  Marx and Engels judge Ricardo's monetary theory on the basis of practically instantaneous price fluctuations in commodities in response to transitory fluctuations in gold reserves. There was, of course, no evident connection. Such pricing responses do in fact happen, but with a delay that can vary depending on a variety of factors.
  Price inflation is not an instantaneous response to monetary inflation. That's one of the reasons why monetary inflation is so attractive to political leaders - who appreciate the ability to spend in excess of revenues for awhile without apparent consequences. Because of such delays, fluctuating gold or other reserves will not result in corresponding changes in general price levels as long as the fluctuations are orderly and within a reasonable range. See, Understanding Inflation.
  Economics is not a laboratory science - or any kind of "science." The evidence from economic statistics must always be carefully evaluated rather than just taken at face value. That there are other reasons for price and interest rate fluctuations than the amount of gold and bank notes in circulation is hardly surprising. These general theories are always presented on an "all other things being equal" basis - which in practice never occurs.

  The history of the Bank Acts is provided by Engels. During the Napoleonic Wars, gold payments were suspended and the money supply rested on the paper bank notes of the Bank of England - a privately owned bank that operated with a public purpose and under government regulation. The result was, in fact, price inflation - the memory of which haunted England for the rest of the 19th century.
  Those who favored the Bank Acts clearly over-promised the results, as both Marx and Engels assert. There are many fundamental causes for periodic economic crises that have nothing to do with monetary policy. Criticizing Ricardo, Engels properly emphasizes the effectiveness of suspensions of the Bank Acts in bringing the crises of 1847 and 1857 to a close.

  This criticism of Ricardo is clearly misplaced. He was fully aware of problems with panics, since they were common and extensively discussed even in Adam Smith's work. Ricardo clearly recommended the issuance of Bank of England notes to deal with panics as a superior alternative to actually shipping large amounts of gold to the country banks.
  However, that doesn't mean that the gold standard or similar form of monetary discipline isn't worthwhile. Despite numerous periodic reversals, the 19th century - with money managed according to a gold standard much maligned by Marx and Engels, among others - somehow saw England propelled into unparalleled economic superiority, with benefits by the end of the century even observably spreading to those who worked in the factories. Indeed, the vast confidence reposed in the Bank of England, and its ability to act to alleviate such crises, undoubtedly was materially strengthened by its disciplined behavior at other times. By the end of the century, all of the major nations that were most advanced in economic development were on a metallic standard.
  Today, monetary policies are not constrained by the gold standard - yet the business cycle continues - and inflation is the rule rather than just a wartime exception - and the average rates of economic growth do not exceed those of the 19th century - and it is the money markets rather than gold that periodically ruthlessly force monetary discipline on reluctant political leaders.

  Marx goes on at great length providing interesting detail about banking and monetary arrangements and beliefs in mid-19th century England. During crisis periods, everything rests on the gold reserves. However, these are too small to bear such burdens even without the domestic drain on such reserves as banks and others react to uncertainty and withdraw gold to protect themselves. He views the whole monetary and credit system as a "swindle."

  "[This] whole swindle has absolutely no other reserve but the bullion reserve in times of stringency -- and this reduces the reserves, because the notes which come in to replace the outgoing bullion must be cancelled -- and thus every reduction of this reserve by drain on gold increases the crisis."

  Some bankers and financiers advocate that the Bank of England provide its notes during such crises - provide monetary "liquidity" in modern terms - regardless of its gold reserves. The choice is between maintaining specie payments or maintaining "the industry of the country."
  However, as Marx seems to be aware, this raises the modern problem of "moral hazard." Is the Bank of England to guarantee the bills of exchange of adventurers and swindlers? If everyone believes the Bank will always bail out the economy, won't that just increase the incentives for various forms of excess? (Then, as now, there seems no good answer to this conundrum.)

  At times of impending crisis, it is very easy for a few major speculators to withdraw sufficient amounts of notes from circulation to contract the market and make a quick killing at the expense of those caught unawares. However, Marx notes, even the biggest financiers can zig when they should have zagged, and find themselves bankrupt.
  While bills of exchange collapse during crises, not so the bank-notes of the Bank of England, "at least thus far in England, - - - because the nation with its total wealth backs up the Bank of England."
  Local banks create credit by issuing their own bank notes in an amount about three times the amount of their reserves, writing 21 day drafts on London, and discounting bills of exchange for commodities in storage or shipment. The bills are rendered negotiable like money due to the endorsement of a bank.
  However, when a crisis develops, all these arrangements become suspect, and everything becomes dependent on Bank of England notes. The markets adjust to bring gold reserves into the system, but not without significant delays during a period of panic.

  Always, the primary burden falls on industrialists and merchants, and some inevitably lose everything during such crises - as do their workers. However, some bankers and financiers who manage to anticipate events win - and win greatly - as a result of the high interest rates and volatile price fluctuations. Although limited in its actions, the Bank of England invariably comes out well ahead because of the high interest rates, and its officers and owners reap substantial monetary rewards.

  "Talk about centralization! The credit system, which has its focus in the so-called national banks and big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner -- and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers."

  In an extensive discussion of international monetary movements, Marx examines how interest rates and exchange rates fluctuate sensitively to adjust to imbalances and restore equilibrium - but not without periodic adverse economic ramifications in severe cases. Again, Marx dedicates an inordinate number of pages in demonstrating the confusion of contemporary officials over various aspects of international exchange.
  Marx and Engels correctly puts their fingers on a couple of central truths, at the end of over 250 pages of often arcane discussion of the minutia of the financial and monetary systems, both domestic and international.

  • Like religion - it all depends on faith - on confidence.
  • The Bank of England is the lynchpin of a vast system of money and credit, which it supports with a fragile reserve of precious metal - but also with the revenues of a powerful and growing English economy.

  Given the vast productive energy generated by the 19th century British free enterprise economy, the system is not as fragile as Marx believes it to be. Bloodied and somewhat altered - it would survive the hammer blows of 20th century history - under which the concepts of Karl Marx would crumble.






Usury does not alter the mode of production, but attaches itself firmly to it like a parasite and makes it wretched. It sucks out its blood, enervates it and compels reproduction to proceed under ever more pitiable conditions.

  Marx then launches into a sweep of pre-capitalist economic history, attributing thousands of years of increasing economic wretchedness to the money lenders - the "usurers."

  "Usury centralises money wealth where the means of production are dispersed. It does not alter the mode of production, but attaches itself firmly to it like a parasite and makes it wretched. It sucks out its blood, enervates it and compels reproduction to proceed under ever more pitiable conditions. Hence the popular hatred against usurers, which was most pronounced in the ancient world where ownership of means of production by the producer himself was at the same time the basis for political status, the independence of the citizen."

  It's wonderful how simple human history can become when you can remove all complexities in favor of a single all-powerful malign influence.

  The development of the 19th century credit and banking systems and their relationship to and promotion of capitalist production follows. Marx concludes that these systems can never be detached from their foundations based on monetary precious metals and on capitalist private property rights. 

  The financial mechanism would indeed be detached from monetary precious metals, but not without major negative results. Moreover, an absence of legally enforceable private property rights would prove to be one of the impenetrable barriers to the development of many undeveloped nations.

  Usury prepares the way for capitalism by building up concentrations of money-wealth, and pauperizing small independent producers who then have no recourse other than wage labor. However, something else must have driven people into the hands of the money lenders - circumstances that would have pauperized them if money lenders didn't even exist. Marx actually recognizes several such factors - being drafted for war - the competition of slave labor - the ruination of their feudal lords.

 Undoubtedly history provides many more such causes. Money and credit are not the root of all evil. Indeed, they offer many benefits - but certainly not enough to overcome the many afflictions that man imposes on man.
  Here we have come to the end of this massive segment on capitalist finances - several hundred pages in length - explaining the benefits, and emphasizing the weaknesses and abuses. However, neither Marx nor Engels have fulfilled their promise to rationally explain how such substantial "benefits" - concededly essential for capitalist production and distribution - can have no "value."

J) Rent

Property interests in land:

  Capitalist agriculture is viewed by Marx as the same thing as capitalist industrial production. Supplemented by Engels, Marx discusses land rents primarily in relation to agriculture.

  Dealing with "rent" in general, and "ground-rent" in particular, Marx is at least using terms as they are normally - functionally - defined. He can thus discuss this subject somewhat more rationally than profits and interest, whose observable relationships obviously do not exist with "profits" as defined by Marx. The discussion of the relationships between rents and profits - primarily in terms of 19th century agricultural use - avoids the problems that arise from his definition of "profits" and "surplus value" and even "total capital."
  His primary examples are based on wheat, which already had a national and world market, but bread was baked locally. Thus, the merchant activities that brought wheat efficiently to markets could be considered "transportation as a part of production" that added value to the wheat. And there was little or no "overhead" expense in 19th century farming to mathematically mess up these relationships. Agricultural produce sold during the 19th century through local farmers' markets would also avoid most of Marx's definitional problems.

  Nevertheless, Marx introduces "the price of production" - another in his menagerie of indeterminate, functionless concepts - to explain his views and conform them with his basic propaganda myth.

  • "The price of production" of commodities is another of his vague averages. It is average "profits" plus the average value of "constant capital." The latter is the average "value" level of industrial or agricultural material, and wear and tear of industrial facilities. (Since both "profits" and the "values" of "constant capital" as Marx defines them are indeterminate, the "price of production" is also indeterminate and explains nothing.)

  Marx asserts that this "price of production" is regulated by the "values" produced by industrial or farm labor. However, he readily admits that it has no observable impact on any particular commodities, which will generally be above or below the average of such "values."  This is just as well since it is just as impossible to determine what those "values" are. Like such "values," nobody knows that the "price of production" exists or pays any attention to it, and Marx readily points out that it has no impact that can be observed on anything. Yet somehow, these indeterminate and unknowable phenomena that have no observable impacts are supposed to work under the economic surface to regulate all capitalist production.
  Why some labor-intensive production produces less "profits" than capital-intensive production can supposedly be explained by this concept. After all, only labor adds value to commodities, according to Marx.

  "In other words, because [labor-intensive capital] employs more living labour, it produces more surplus-value, and therefore more profit, assuming equal exploitation of labour, than an equally large aliquot portion of the social average capital."

  With "the price of production," we have a rationale why some labor intensive commodities are sold below "value" - and why some capital intensive commodities are sold above "value" - not just temporarily, but persistently. It all supposedly works out on average. (Well, doesn't everything?)

  "[The] existence and concept of price of production and general rate of profit, which it implies, rest upon the fact that individual commodities are not sold at their value. Prices of production arise from an equalisation of the values of commodities. After replacing the respective capital-values used up in the various spheres of production, this distributes the entire surplus-value, not in proportion to the amount produced in the individual spheres of production and thus incorporated in their commodities, but in proportion to the magnitude of the advanced capitals. Only in this manner do average profit and price of production arise, whose characteristic element the former is. It is the perpetual tendency of capitals to bring about through competition this equalisation in the distribution of surplus-value produced by the total capital, and to overcome all obstacles to this equalisation. Hence, it is their tendency to tolerate only such surplus-profits as arise, under all circumstances, not from the difference between the values and prices of production of commodities, but rather from the difference between the general price of production governing the market and the individual price of production differing from it."

  Notice that the above is NOT about profits as normally defined or exchange values or costs of goods sold that can be reasonably measured or estimated and actually observed in action. The functionality described above is solely in the Alice in Wonderland economic world of Karl Marx - and even there, only as averages that have somehow escaped their status as dependent variable.

  Marx has created a whole system of nonfunctional indeterminate concepts that are supposed to fit together - but they fit together only indirectly as a result of nonfunctional indeterminate averages. These are concepts that are suitably mythological for the construction of his propaganda myth.
  Marx is here primarily moving the furniture - moving certain elements from the cost to the profit parts that make up the "price of production." "Rent" is what is left over.

Ground rents:

  Raw land has no value, according to Marx, since no labor is involved in its production.

  However, individual plots of land have natural advantages over other plots. These include location, fertility, minerals, water and waterpower. These increase the productivity of various activities using the land. These "advantages" have no "value" but are worth money in the markets. He demonstrates weaknesses in Malthus and Ricardo’s theories on ground rents

  Yet another distinction without a difference. Did people actually take this kind of rationalization seriously? Perhaps the truth is that only a few of the most ideologically addled Marxists ever read this far into Das Kapital.

  The ground rent appropriates such productivity advantages, and the price of the raw land is based on a capitalization of the ground rent. These differences need not be natural ones. Taxes, regulations, infrastructure, and regional differences in economic conditions also impact ground rent. Marx goes into his usual lengthy detail to show how ground rents rise to absorb all the benefits offered by the raw land in its natural and economic environment, and how property with different degrees of advantage yield different ground rents.
  Extraordinary length and detail is provided to demonstrate how rents appropriate benefits from various permutations of soil fertility and capital investment. Why, then, should the tenant farmer be concerned with any long term maintenance or improvements in the land? Engels explains:

  "Thus, the more capital is invested in the land, and the higher the development of agriculture and civilisation in general in a given country, the more rents rise per acre as well as in total amount, and the more immense becomes the tribute paid by society to the big landowners in the form of surplus-profits -- so long as the various soils, once taken under cultivation, are all able to continue competing."

Landlords - without lifting a finger or taking any risks - appropriate surplus value from those "active" in agricultural production - their capitalist tenant farmers and the laboring farmhands.

  Marx provides over 100 pages of minutely detailed reasoning just to show how landlords - without lifting a finger or taking any risks - appropriate surplus value from those "active" in agricultural production - their capitalist tenant farmers and the laboring farmhands.
  In typical fashion, this analysis concerns only supply-side factors. Extensive detail is provided on a wide variety of permutations. Demand is a given, the particulars of which are mentioned only occasionally in passing.
  The analysis is thus predominantly restricted once again to a rigid system. All changes in production are "assumed - - -  required to meet demand." "Price" is extensively mentioned - but only as "price of production," not as the market price of wheat. The term "cost of production" is not favored.

Returns on land are reasonably divided into "ground rents" on the land itself and "interest on fixed capital incorporated in the land."

“[As capitalist production develops], landed property acquires the capacity to capture an ever-increasing portion of this surplus-value by means of its land monopoly and thereby, of raising the value of its rent and the price of the land itself. Th e capitalist still performs an active function in the development of this surplus-value and surplus-product. But the landowner need only appropriate the growing share in the surplus-product and the surplus-value, without contributing anything to this growth.”

  Again, we have a distinction without a difference—between “active” and “contributes” on the one hand and “valuable” on the other. The capitalist is “active,” takes risks, and “contributes” but nevertheless adds no “value.” Of course, as Marx elsewhere notes, industrial capitalists, too, benefit without additional eff ort from society’s general facilitation of commerce. And—as Marx neglects to recognize—so do the workers as even subsistence rates rise.

“[Rent is extracted by the land owner despite] the palpable and complete passiveness of the owner, whose sole activity consists—especially in mines—in exploiting the progress of social developments, towards which he contributes nothing and for which he risks nothing, unlike the industrial capitalist.”

  Owners gain a "monopoly - - - over definite portions of the globe." Marx reasonably divides returns on land into "ground rents" on the land itself and "interest on fixed capital incorporated in the land." Ground rents eat up all the benefits bestowed by nature and the general economic environment. Marx goes at length into the familiar problems of tenant farming and other landlord and tenant relationships.

  These problems can be especially severe in places where landlords enjoy favored legal and tax treatment. Where there are active real estate markets open equally to all, these problems tend to disappear.

  Standard rates of capitalized income are used to determine values in competitive real estate markets as in other competitive markets. Both ground rent and interest on capital assets affixed to the land and capital invested in the land are capitalized together to fix land prices.
  Marx predictably finds such value "irrational, since the earth is not the product of labour and therefore has no value." "[The] monopoly of the so-called landed proprietor of a portion of the planet enables him to levy such tribute and impose such an assessment" as if it were interest on any form of capital. He approves of Adam Smith's harsh view of landlord interests, and goes on at length into evidence that the landlord interest does indeed benefit at the expense of reductions in both farmers returns and the agricultural wage level.
  Since rent is a part of "surplus-value" to Marx rather than a part of costs, and the farmer will not work the land if his share of the "profits" is less than he can obtain elsewhere, the agricultural activity of the tenant farmer must yield a "profit" above the average "profit" - as Marx defines that term - in order to cover the rent. Since property in capitalist systems is privately owned, and landlords demand a rent for nothing more than permission to use the land, rent is a barrier to production on some lands that could otherwise be productive enough to yield an average profit for the farmer. (Of course, it is the easiest exercise to isolate any particular cost and view it as such a barrier.)
  Marx goes into extraordinary detail to explain what can be simply expressed by acknowledging that rents - including ground rents based on the particular advantages of individual plots of property - are costs of production whenever land is not so abundant as to be practically free. However, his propaganda purposes lead him into confusion.

  Because of rents, agricultural prices are always sold at a "monopoly price" - even when sold below "value" - because their market price is "higher than their price of production" as Marx defines that term.

  "Their monopoly would consist in the fact that, unlike other products of industry whose value is higher than the general price of production, they are not levelled out to the price of production."

  Since both "value" and "price of production" are indeterminate, nonfunctional concepts, this statement applies only in the mythical economic world of Karl Marx. Even there, he has conceded that such leveling out need not occur for particular commodities or even for particular classes of commodities.
  Marx notes that, for industrial property, location produces benefits that yield ground rents. These, too, are not "levelled out" in terms of "profits" as Marx defines that term. Yet somehow, "profits" as normally defined manage to tend to equalize when including as costs the capital expenditures for real property. Somehow, the real world does not need such elaborate explanations.
  Most startup businesses would never get off the ground if initial expenses had to include the purchase of real estate.

  However, landownership is not in fact without risks. Writing in the 1890s, Engels revels in the plummeting rents that are at that time ruining the great landlords of Europe "from Scotland to Italy" as grains flood in from the great plains of the U.S. and Argentina and Russia. Engels enthusiastically states that imports from these sources should continue long enough "to ruin all the big landlords of Europe and the small ones into the bargain."  

  Ruination, of course, just replaces current landlords with new ones at lower levels of investment who can thus thrive within contemporary competitive conditions. Individual capitalists or classes of capitalists can be and routinely are ruined without doing any lasting damage to capitalism.
  At any rate, powerful landed interests would obtain tariff and other assistance that would permit most to survive - in the process doing far more damage to the capitalist system than if they had just been permitted to become ruined. The right to fail is as important as the right to succeed.

Property ownership provides "the basis for the development of personal independence."

  Indeed, the benefits of "yeoman" and "free peasant" agriculture where farmers own the land are readily recognized by Marx. Such property ownership provides "the basis for the development of personal independence."
  However, he assumes that freehold agriculture is limited to "small-scale operations" that are inherently too inefficient to survive competition with large scale capitalist agriculture. He assumes that the historic course of capitalist agricultural development - outside the "colonies" - has to be towards a separation of land ownership from the capitalist farmers who actually work the land as tenants. "[This] separation is precisely the prerequisite for the capitalist mode of production." Usury, taxation, fluctuating agricultural prices, all impose capitalist burdens on agriculture that the small proprietor has not the resources to bear.

  "Proprietorship of land parcels by its very nature excludes the development of social productive forces of labour, social forms of labour, social concentration of capital, large-scale cattle-raising, and the progressive application of science."

  Here, too, Marx's scientific expectations have gone awry. The small farmer would indeed tend to disappear, but Marx was necessarily blind to the advantages of ownership incentives in agriculture.
  Because of the incentives of ownership, the freehold farmers would prove superior stewards of the land, and some would prosper and increase their farms to impressive size. In corporate agribusinesses, capitalism would find a way to join even large scale agricultural operations with ownership of the land. Flexible small farmers responsive to market signals would continue to thrive in many agricultural niche markets. The tenant capitalist farmer has not in fact become the dominant form of capitalist agriculture.

  Even when "big landowners" buy land and act as their own "tenant farmers," Marx predicts inevitable failure. The price of the land "forms a weighty element of the individual unproductive costs of production." (At last, Marx is using "costs of production" - an objectively determinable factor - to deal logically with his subject matter.)

Communal property would permit "conscious rational cultivation of the soil as eternal community property" without regard to limiting capitalist factors like market prices, profits and payments of rents and interest costs, and did not depend on the exploitation of wage laborers.

  Indeed, Marx sees only "barriers to production" in land ownership. Freeholders are burdened by the purchase price of the land. Tenant farmers are forced to pay rent. And all are slaves to the dictates of the market.
  If the land were all "communal property,"
it would all be so much better. Communal property would permit "conscious rational cultivation of the soil as eternal community property" without regard to limiting capitalist factors like market prices, profits and payments of rents and interest costs, and would not depend on the exploitation of wage laborers. If society were organized "as a conscious and planned association," all the ground-rents and profits could be eliminated or transferred to the association government for other uses, Marx asserts.

  This, of course, is the incredible basic naďveté of Marx - totally without a clue about the impossibility of a superior "conscious rational cultivation" outside the capitalist system of private property, profit incentives and market signals.The allocation of land in a productive and reasonably fair manner is in fact something that the private system of land ownership does far more effectively than any administered alternative.

·        Who in such a "conscious” planned association gets to farm on the most fertile fields?

·        How is it determined who gets the use of the most advantageous property?

·        Who in such a planned association would have a personal interest in determining and putting each plot of land to its best use?

·        Who would have a personal interest in maintaining the land and the facilities on it? In communist and authoritarian socialist states of all kinds all around the world, the answer would be - "no one." In capitalist states, governments would prove to be grossly inefficient and careless stewards of the land, and especially of facilities affixed to land.

In fact, the alternatives to legally enforceable individual property rights are so unproductive that modern economic development has proven impossible without the full panoply of property rights - including the rights to buy and sell, lease, and encumber. For some reason, the "scientific investigations" of Marx failed to disclose this or explain it. And, how can a people live reasonably free lives and achieve reasonable levels of economic well being if they cannot build their lives upon rights in property? Without that, as Chinese peasants today repeatedly discover, we are all dependent on the whims of the politically influential.

K) Economics Based Only On Values Produced

The trinity formula:

  In the last hundred pages of Das Kapital, Engels throws together some segments of manuscript that he couldn't fit anywhere else. Some of them are incomplete, and there are some gaps.
  Primarily, the material attacks other values-based theories which assert that market values are composed of profits, rent and wages. Most of these segments - in the usual style of Das Kapital - just repeat material previously repeated several times.

  Interest, rent, and wages as returns respectively for capital, land and labor, form an "economic trinity" that Marx derides as based on "absurd" and "contradictory" capitalist systems. He - of course - laboring under the intentional ignorance of his propaganda myth - finds that these factors contribute nothing to the creation of economic "values," yet constitute demands for major shares of the produce.

  "In - - - this economic trinity represented as the connection between the component parts of value and wealth in general and its sources, we have the complete mystification of the capitalist mode of production, the conversion of social relations into things, the direct coalescence of the material production relations with their historical and social determination. It is an enchanted, perverted, topsy-turvy world, in which Monsieur le Capital and Madame la Terre do their ghost-walking as social characters and at the same time directly as mere things. - - - It is therefore just as natural that vulgar economy, which is no more than a didactic, more or less dogmatic, translation of everyday conceptions of the actual agents of production, and which arranges them in a certain rational order, should see precisely in this trinity, which is devoid of all inner connection, the natural and indubitable lofty basis for its shallow pompousness. This formula simultaneously corresponds to the interests of the ruling classes by proclaiming the physical necessity and eternal justification of their sources of revenue and elevating them to dogma."

  Here, Marx - the premier creator of propaganda myths of the modern age - accuses "vulgar economists" of doing exactly what he is doing, and the functioning, thriving capitalist system based on observable determinable factors of  being as mystical as his Alice in Wonderland economic world of nonfunctional, indeterminate, invisible and ridiculously narrow supply-side concepts.

  As Marx notes:

  "Whether the commodities are sold at their values or not, and hence the determination of value itself, is quite immaterial for the individual capitalist. It is, from the very outset, a process that takes place behind his back and is controlled by the force of circumstances independent of himself, because it is not the values, but the divergent prices in every sphere of production, which form the regulating average prices in every sphere of production."

  An elaborate analysis of wages, profits and ground rents follows. Unfortunately, they are analyzed on the basis of Marx's narrow theory of labor values. He purports to examine these factors on the basis of "competition" - but only on a basis that assumes an equilibrium of supply and demand - thus yet again eliminating demand-side factors from his analyses.

  "When carried out more or less consistently, [this analysis] makes profit and rent merely appear as definite extra charges added by unaccountable laws to the price of commodities, a price primarily determined by wages. In short, competition has to shoulder responsibility of explaining all the meaningless ideas of the economists, whereas it should rather be the economists who explain competition."

  How competition can be analyzed without its impact on the factors of demand as well as of supply is a question Das Kapital would leave unanswered. And this is just the beginning of what Das Kapital leaves unexamined. It is well here to repeat several observations.
  After 1800 pages of turgid analysis, there is still no sign of consumer services in the capitalism that Marx has examined. Services that are mentioned are mentioned just in passing. Factors of variety and quality are almost totally ignored. Das Kapital is an analysis that accepts as legitimate nothing more than the material needs of people content to live like monks. If it takes Marx 1800 pages to explain a system for the distribution of simple fungible staples based on their "values," how many pages would it take him to explain the production and distribution of discretionary goods and services?
  The capitalist system described by Marx is run by capitalists who are blindly driven to expand production into the teeth of ruinous competition - without the slightest ability to differentiate their products or respond to - or even recognize - the demands of particular segments of the public. It is a system so narrow and simple, that it can be more than adequately replaced by communal production managed by means of appropriate "directives." Unfortunately, no such economic system has or could ever exist. His views of this living system are based on "scientific investigations" limited to a guinea pig that is blind and has just one leg.
  Capitalism is not an utopian system. It does not produce utopian
results. Capitalism is merely, by far, the best and fairest economic system that is available and robust enough to function with real people who are far from angels. It is always easy to criticize the practical best by highlighting its limitations and comparing it to some impossible utopian alternative, as Schumpeter does.
  A century before Marx, Adam Smith could already discern in the economic statistics that England's "subsistence" wage laborers were undoubtedly subsisting at improved levels. Soon after Marx's death, studies would begin to demonstrate that laborers were indeed visibly improving their material conditions. Concentrating only on the worst examples, Marx and his followers would remain blind to this trend - a trend that would gather increasing force in the 20th century - but only in capitalist systems.

  The fundamental, practical task of economics is the allocation of scarce resources. Rigid national averages of indeterminate and unknowable "values" can't play any role in allocating scarce resources. Sensitively fluctuating market prices very successfully allocate scarce resources. Administered alternatives - including socialist "directives" - have always proven grossly inefficient and ultimately unfair.
  Nevertheless, the propaganda myth
constructed by Marx was an outstanding success - convincing those who wanted to be convinced and confusing most of the others. It successfully served as the ideological excuse for some of the worst and bloodiest despotisms in world history - and the exploitation of labor in conditions not equaled in scale and severity in the worst slave-owning societies. That is the legacy of Karl Marx.

  See, Marx, "Capital (Das Kapital)" Volume 1, Part I: "Abstract Labor Standard of Value," and Volume 1, Part II: "Contradictions in Capitalist Industrialization," and Volume 2, Part III:  "The Circulation & Expansion of Capital," and Volume 2, Part IV: "Criticism of Adam Smith," and Volume 3, Part V: "Profits."

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