Chapter 14: Interest and Profit
John Smithin1 INTRODUCTION What is the relationship between interest and profit? This question is more likely to arise in the heterodox economic literature, for example, in ‘Post Keynesian’ economics (Davidson 1996; Mongiovi 1996), than in mainstream analysis. In the standard approach, the rate of interest is often identified with the return to capital, so that a high rate of interest means the same thing as a high rate of return to capital. For policymakers and market participants, however, this is highly confusing when applied to practical discussions of monetary policy. In a practical context, the more usual argument is that higher interest rates will tend to reduce profitability by causing an economic downturn. The reason for the inconsistency seems to be a combination of ontological uncertainty about both concepts, interest and profit, and the reflexive use by most economists of competitive marginalist analysis, even in the macroeconomic context, in which demand constraints are pervasive and the existence of large imperfectly competitive firms cannot be ignored (Kaldor 1983, 1985). Even Keynes in The General Theory (1936, pp. 135–46), though he had a clearer idea than most of the difference, was guilty of this error in developing the concept of the ‘marginal efficiency of capital’ (MEC). Nonetheless, discussions within Keynesian and Post Keynesian economics have been helpful in trying to sort out the confusion. At least in these schools of thought the rate of interest on money is seen as specifically a monetary phenomenon and therefore as different in kind from...
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