1.1 General outline

Part Three of Capital III sets out Marx’s theory of the ‘law of the tendency for the rate of profit to fall’ (TRPF). This is what Marx names it, and what it is called in much of Marxian theory. Although there is nothing wrong with that terminology – so long as a tendency is conceived of as a force, not a trend – the term has connotations de-emphasising what is crucial in Marx’s presentation, namely the cyclical movement of the rate of profit and the dynamics that go along with it. A more accurate label would be the Theory of the Rate of Profit Cycle (TRPC), which is the one I adopt henceforth. In further explaining my terminology and the theory itself I proceed in two stages. In the remainder of this subsection I provide an outline of the theory, leaving to the next subsection a more detailed discussion of Marx’s text.

Part Three, as edited by Engels, comprises the chapters 13–15. In chapter 13 Marx sets out how the compulsion towards profit increase gives rise to the accumulation of capital in the shape of productivity raising techniques of production along with a relative expulsion of labour. We have a tendential rise in the organic composition of capital: the ratio of the value of means of production (K) to the value of labour-power (wL, where w is the wage rate and L the amount of labour). Thus:

(K/wL)⤉ (1)

where ⤉ is the sign for tendential rise. Again, a ‘tendency’ is not a trend in Marx’s view, but a force which may get counteracted by other forces.³

If we restrict the outlay of total capital to means of production and labour-power, denote the rate of depreciation by δ, represent total surplus-value or total profit by the sign R and gross production by Y, we have:⁴

δK + wL + R = Y (2)

and for the rate of profit (r):

r = R / (K + wL) (3)

Marx does not use this notation, though his own notation gives rise to this. Similar ways of presenting capital outlay and the rate of profit have become usual in Marxian theory, though they are not altogether correct (see §3.1).

From equations (1) and (3) it follows that at any given prevailing distribution between capital and labour (R/wL) – put more succinctly if we keep that ratio of distribution ‘momentarily’ constant, that is

R/wL = constant (4a)

the rate of profit must tendentially decline. Or more generally, if we consider a force for the rate of surplus-value to be tendentially rising (R/wL⤉) and if

(R/wL)⤉ < (K/wL)⤉ (4b)

then the rate of profit must tendentially decline, which can be seen from dividing through the right-hand side of representation (3) by wL.

This then is a paramount contradiction of capital accumulation; i.e., that the compulsion for profit increase gives rise to a tendential decrease in the rate of profit.⁵

Chapter 14 of Capital III discusses the counteracting tendencies, most importantly the cheapening of the material elements of capital (the prices of wage goods whence w may decline, or those of means of production whence the rise of K may be tempered or nullified) which, of course, affects representation (4b) as a condition.

Chapter 15 discusses the synthesis of the previous two. Crucially, in my view, Marx indicates in this chapter how the tendential drain on the rate of profit is expressed in a cyclical way. Along with the accumulation of capital and the concomitant rise in organic composition of capital, the rate of profit declines. This gives rise to economic crisis in the process of which the rate of profit gets restored, most importantly because of devaluation and destruction (i.e., scrapping) of capital (cf. section 3 of ch. 15). Marx then writes:

The stagnation in production that has intervened prepares the ground for a later expansion of production – within the capitalist limits. And so we go round the whole circle once again. (Marx 1894F, pp. 363–4)

Thus it seems that the fall in the profit rate is a periodical matter rather than a trend-like phenomenon, contrary to many interpretations.

1.2 Marx’s manuscript and Engels’s emphasis⁶

My interpretation of Marx’s theory is much akin to that of Fine and Harris (1976 and 1978, ch. 4). They rightly say that “a more accurate name for Marx’s theory is ‘the law of the tendency of the rate of profit to fall and of the counteracting influences to operate’ ” (1976, pp. 162–3). Certainly, Marx formulates both the tendential fall (ch. 13) and the counter tendencies (ch. 14) at the same level of abstraction. But, if this interpretation is correct, then one should at least wonder why Marx called his theory ‘tendency of the rate of profit to fall’, and why so many have read Marx’s text as different from the interpretation proposed here. The point is that a careful reading of the text does indeed allow for two interpretations. In the first, dominant weight is given to ‘the law as such’ (ch. 13), over its counteractions; chapter 15 then depicts a ‘trend’ fall in the rate of profit, even if stretched over a long time. The second reading emphasises chapter 15 as a synthesising and concluding text. Contributing to these different readings are very different notions of ‘tendency’. Although I think the ‘trend’ notion of tendency (the first reading) does not fit Marx’s, I will not stress this aspect in what follows.⁷

As far as the text of Capital III as edited by Engels is concerned, I think that we should leave the issue here, giving all room for reconstruction and further development of the theory in either way. However, to the extent that one is also interested in Marx’s ideas it is useful to turn to Marx’s manuscript text from which Engels did his editorial work, and which was published as transcription in German in 1992 (Marx 1894M, manuscripts 1863–67). That is what I will do in the remainder of this section. I will use the following shorthand references (as further specified in the bibliography):

M =	Marx 1894M = German manuscript [= ms.] transcription of 1992;
G =	Marx 1894G = German text of 1894 as edited by Engels;
U =	Marx 1894U = idem in the English Untermann translation of 1909;
F =	Marx 1894F = idem in the English Fernbach translation of 1981.

To begin with my conclusion: it seems that Engels himself had ideas on the issue at hand, which at least resulted in a particular emphasis. (I am not saying that Engels was unfaithful to the text, I am saying that his own ideas made him organise the material in the way he did.)

The current parts of Capital III were devised by Marx as chapters (so current Part Three corresponds to Chapter 3 of the ms.). That is not important. What is important is that Marx’s text is not divided into three; there are no section separations; it runs on without even blank lines between the current chapters. That already makes a different impression: there is no so-called ‘law as such’, or at least there is no particular focus on it.

The first pages are similar to the current text (M, pp. 287–301; U, pp. 211–25; F, pp. 317–32). My reading of these is as follows. Marx sets out a hypothetical example of a falling profit rate. Then he writes: (1) this as a tendency is what we perceive in reality (F, p. 318); (2) it is what the economists perceived and have tried to explain (F, p. 319). Note that in general – throughout the text – Marx’s reference to ‘law’ (thus also the title of his Chapter/Part) is rather ambiguous. At least some of the time his ‘law’ seems to refer to an empirical regularity.

Next Marx moves the emphasis to what he apparently sees as kernel to capitalist development, first, accumulation and concentration of capital go along with rising productivity of labour, and second, a fall in the rate of profit goes along with a rise in the amount of profits. He repeats this over and again (e.g. M, pp. 291, 298, 300). This may seem the law to him: the inverse relation of mass and rate of profit (see also below).

After this Marx – even without one blank line – immediately moves to the counteracting tendencies (the text of ch. 14). Engels, however, first interpolates a text from much later in the manuscript (F, pp. 332–8; roughly M, pp. 316–20). In G, U and F this is marked by a line or an asterisk (e.g. F, p. 332). This interpolation gives more weight to ‘the law as such’. Apart from this, at a crucial point in this text Engels also makes an (unmarked) interpolation of his own. On F, pp. 336–7 (M, p. 319) Marx writes:

Viewed abstractly, the rate of profit might remain the same … The rate of profit could even rise, if …

After this Engels interpolates:

Aber in Wirklichkeit wird die Profitrate, wie bereits gesehn, auf die Dauer fallen. (G, p. 240).In practice, however, the rate of profit will fall in the long run, as we have already seen. (F, p. 337; cf. U, p. 230)

In fact we never saw this. Marx did not talk in terms of ‘long run’. The problem is that, of all three chapters, this (Engels’s) sentence is in fact the strongest statement giving the impression of a ‘trend’ fall. Moreover, it is indeed associated with (Engels’s) ‘law as such’; if in practice the rate of profit will fall, the ‘law as such’ might seem dominant.⁸

The second strongest statement (this time by Marx himself) is at the end of the text/chapter on the counteractions. Note that when Marx sets out the counteracting forces/tendencies he repeatedly indicates that these do “not annul the general law”, but make it operate as a tendency (F, p. 341). He also says that the latter “to a greater or lesser degree paralyse” its operation (F, p. 344; M, pp. 304, 306). This is again repeated in a conclusion on page M, p. 308 (F, p. 346). The final part may readily give rise to the two rival interpretations of trend versus cycle. In the Fernbach translation we have:

The law operates therefore simply as a tendency, whose effect is decisive only under certain particular circumstances and over long periods. (F, p. 346)

The Marx-Engels text reads:

So wirkt das Gesetz nur als Tendenz, dessen Wirkung nur unter bestimmten Umständen ⟨und im Verlauf langer Perioden⟩ schlagend hervortritt. (G, p. 249)⁹

Untermann renders (closer to the German; Fernbach’s “decisive” is rather dubious):

Thus, the law acts only as a tendency. And it is only under certain circumstances and only after long periods that its effects become strikingly pronounced. (U, p. 239)

This can be read in two ways: (1) only in the long run can the rate of profit be perceived to fall; hence ‘the law as such’ is dominant; (2) the rate of profit falls in particular circumstances; that is, when the forces set out in the tendency-law indeed dominate over the counter-tendencies (my take on the German text is this second one).

After this Marx (M, pp. 309–40) goes into the issues that Engels has placed into chapter 15, though in different order. Note again that the text is continuous – there are no indications for chapter/section breaks.¹⁰ I select a number of passages from it that seem important. Much emphasis is on an issue introduced at the very beginning of the text; namely that increases in productivity of labour via increase in the organic composition of capital result in a combined profit increase and rate of profit decrease. He calls this a law: “The law that a fall in the rate of profit due to the development of productiveness is accompanied by an increase in the mass of profit …” (U, pp. 225–6).¹¹ Along this, prices fall.

In M, p. 322 this is repeated, this time leaning to a possible interpretation of trend: ‘[We have seen that] as the capitalist mode of production develops, so the rate of profit falls, while the mass of profit rises together with the increasing mass of capital applied’ (F, p. 356). Next Marx amplifies on the depreciation of capital. One page further on, though, he puts this in a different light, first rephrasing the issue in terms of a contradiction, then developing it into periodical crises:

Simultaneously with the fall in the profit rate, the mass of capital grows, and hand in hand with it goes a depreciation of the existing capital, which checks this fall and gives an accelerating impulse to the accumulation of capital-value. Simultaneously with the development of productivity, the composition of capital becomes higher, there is a relative decline in the variable portion as against the constant. These different influences may at one time operate predominantly side by side spatially, and at other succeed each other in time; periodically [periodisch] the conflict of antagonistic agencies finds vent in crises.¹² The crises are always but momentary violent solutions of the existing contradictions – violent eruptions – which restore the disturbed balance.¹³ (M, p. 323; G, p. 259; F, p. 357; U, p. 249 – translation amended)

Over-production, over-accumulation and devaluation of capital is the theme of the next pages of Marx’s text. An important sentence is:

Under all circumstances, however, the balance will be restored by the destruction of capital to a greater or lesser extent. (M, p. 328; cf. G, p. 264, F, p. 362, U, p. 253).

The balance will be restored! Note that Engels (thus the translators) takes away Marx’s emphasis, though adds: “durch Brachlegung und selbst Vernichtung” – by capital’s laying idle or even by its destruction. (Of course, laying idle implies postponement of a fall in the rate of profit. The “even” emphasises the former.)

Next Marx sets out how crisis and its aftermath restores the rate of profit and writes: “And so we go round the whole circle once again” (M, p. 329; G, p. 265; F, p. 364; U, p. 255 – my italics). This is, of course, strong enough to make the point that we have a cycle of decrease and increase of the rate of profit – along with increase and decrease of the mass of profit et cetera. Two sentences further on Marx makes the point even stronger by talking of a “Zirkel vicieux” (cf. the French: “cercle vicieux”) which Engels renders as “fehlerhafte Kreislauf” and the translators as “cycle of errors” (F) and “vicious circle” (U). Marx – in otherwise fully German texts – apparently feels constrained to make use of the French “vicieux”, since in French “cercle vicieux” has a double meaning, namely that of the English “vicious” (also the one Engels picks up in his German term) and that of an “endless circle”, of lasting recurrence.

Again, one page further on (F, p. 365), Marx, back to discussing fall in the profit rate, sets out how it is “accompanied by a temporary rise in wages and a further fall in the profit rate, deriving from this”. Clearly this must be a reference to the boom phase of the cycle and the labour-shortage accompanying it.

1.3 Conclusions

In current Marxian theory there are two interpretations of Part Three of Capital III: secular trend fall in the rate of profit, versus cyclical development of that rate. The text as edited by Engels allows for either one. I have indicated that the text of Marx’s manuscript is much less ambiguous and that it leans more to the cyclical view. I have shown this in particular for some of the phrases in the text that suggest the secular trend interpretation. Therefore, Marx’s name ‘law of the tendency of the rate of profit to fall’ is very misleading. However, his allegiance to that title may well have to do with his general method of ‘immanent critique’, since indeed ‘this’ law (not ‘his’?) was seen to be a very important empirical law of the Classical Political Economy of his day. Anyway, Marx’s text can be consistently read as a theory of parallel increase in the mass and decrease in the rate of profit (upswing of the cycle); turning into a restoring decrease in the mass and increase in the rate (downswing of the cycle); brought about by recurrent ‘revolutionising’ of the composition of capital, resulting in increased valorisation along with devalorisation and in accumulation along with devaluation of capital. A Zirkel vicieux.

2.1 Introduction and overview: capital’s falling apart

Up to Part Three of Capital III, capital was presented as an organic unity in opposition to labour. Even if capitals compete for the highest profit and rate of profit, even if forced to expel competitors from the race, all capital is indifferent or identical in that respect. All capital is (potentially) valorising capital by subsuming and exploiting labour.¹⁴

In Part Four and Five of Capital III the organic unity of capital falls apart, apparently without restoration.¹⁵ First, Marx conceptually demarcates ‘commercial capital’ as an ‘independent’ offshoot from capital, the latter now termed ‘industrial capital’. Commercial capital specialises in the metamorphosis C´–M´ (and M–C), and so accomplishes a centralisation of the sales process. Second, ‘money-capital’ is identified as an ‘independent’ offshoot from industrial capital. Or, as Arthur (2002) highlights, Marx shows how from the point of view of ‘capital in general’ capital externalises in industrial, commercial and money capital.

Banks (or bank-like institutions) specialise in money-dealing activities (related to the circulation of money) and the bringing together of money-capital (M) for either commercial or industrial capital.¹⁶ Their activity and that of money capital generally, is that of M–M (plus interest). Herein lies the great difference between the first and the second offshoots of industrial capital: whereas the first (commercial capital) engages in a particular metamorphosis within the circuit of industrial capital, the second does not. Money capital merely engages in a uniform transfer, turning money into money – or, as we will see later, money into money-capital.

Thus we see, at one and the same time, a falling apart of the general individual circuit of capital (Volume II, Part One) and a particular social synthesis in the shape of a recomposition of constituent parts of capital. In Part Four, Marx merely posits this recomposition (as ‘functional’, but also ‘conceptual’ in the sense of particularisation) without explicitly showing the conflicts to which this might give rise. For example, he explicitly states that both commercial and industrial capital normally share equally in the general rate of profit as per their respective capital investment (U, p. 395). For money-capital, this is less obvious; indeed, while industrial capital and commercial capital are organically unified by the, tendential, ‘one for all, and all for one’ general rate of profit, money capital seems to separate itself off in this respect. In this sense, capital seems to fall apart. Or is this a mere appearance, and can capital hope for restoration of unity (as Marx seems to suggest)? If capital does fall apart, it is no longer clear what capital is, or perhaps what strives to be Capital (i.e., capital Capital).

Whereas commercial capital is not returned to in Volume III, money capital and its relation to industrial capital receives thorough (though I think incomplete) treatment in the sixteen chapters of Part Five. Besides, Marx shows how the relation of separation between these two capital constituents, as based on the fact that they do not each specialise in a phase of metamorphosis of the circuit – as is the case of commercial capital – impacts on crises and cycles of production.

The object of this section is to extract out of Part Five of Capital III how Marx posits the interconnection of industrial capital and money capital. Is this interconnection one of inherent unity, one of separation-in-unity (as Hilferding conceived it), or one of opposition-in-unity and so conflict? Or can we perhaps lay bare epochal conditions for unity or conflict; that is, conditions implied by, or grounding, a particular regime of accumulation? (cf. §3.2) My aim will be a further articulation of the connection between these two constituents of capital as set out by Marx.

Especially the text of Part Five – as edited by Engels from Marx’s notebooks – is in the shape of a phenomenal analysis rather than that of a systematic-dialectical presentation.¹⁷ Even bare elements of the latter are missing. I will not endeavour any reconstruction of the dialectic, but rather bring out the conceptual analysis that Marx seems to develop. I will not go into Marx’s analysis of credit and credit money, as set out in the same Part Five (on this see Campbell 2002).

Marx’s analysis of ‘money capital’ may be seen to be developed in three phases – as summarised and commented upon in §2.2–§2.6 below: (1) the development of industrial capital’s money-dealing into an autonomous money-dealing capital (§2.2); (2) the development of interest-bearing capital as a separate entity which has ‘functioning capital’ in the shape of the enterprise as its counterpart (§2.3); (3) the development of interest-bearing capital into interest-bearing capital and joint stock capital, hence the development of enterprise into the management of ‘functioning capital’ (§2.5). At this stage we will see capital completely sublimated as M–M´.

In §2.8 I will indicate that Marx’s analysis of joint stock capital is deficient and come up with elements for a reconstruction, which initiates oppositions within capital, particularly between Finance Capital (interest-bearing capital and joint stock capital) and Managerial Capital as set out in the concluding §2.9.

2.2 From industrial capital (IC) to: IC and Money-Dealing Capital (MDC)

Given the turnover time of capital (developed in Capital II, Part Two) a part of capital must always exist as a hoard, repeatedly dissolved into means of circulation and means of payment. This is what Marx calls “money capital in the process of [its] technical functions”, that is the functions of money arising from monetary circulation associated with commodity circulation. It “acquires autonomy as the function of a special capital”, that is, “money-dealing capital” (III-Four-19, F: 431–32, 438).¹⁸ Note that Marx (F, p. 435) casts this ‘intermediary function’ of money-dealing capital (MDC) in terms of an institutional separation indicating, in my view, not a necessary separation (i.e., doubling or bifurcation), but ‘merely’ functional separating out of money capital from industrial and commercial capital. (In fact big industrial and commercial companies may adopt money-dealing roles themselves during the course of development of capitalism.)

It should also be noted that Marx considers money-dealing in what he calls its “pure form”, that is, separate from the credit system (and particularly from credit money).¹⁹ Further, at this stage MDC is treated in abstraction from the functions of lending and borrowing money-capital (to be treated in Part Five). Thus MDC ‘pure’ bears only on the technical functions mentioned. This by itself, Marx writes, “distinguishes money-dealing quite fundamentally from dealing in commodities, which mediates a metamorphosis” within the circuit of capital, i.e., M–C–M´–C´ et cetera. However, with money-dealing too we have:

the general form of capital M–M’. The advance of M means that the person advancing it receives M + ΔM. But the mediation between M and M’ involves only the technical aspects of the metamorphosis, and not its material [sachlichen] aspects. … It is equally clear that their profit is simply a deduction from surplus-value, since they are dealing only with values already realized … (III-Four-19, F, pp. 437–8; G, pp. 333–4).

Contrary to commercial capital in this respect (III-Four-17, F, p. 395), Marx does not say that money-dealing capital must yield the average rate of profit, though both of these capital factions share in surplus-value.

2.3 From money to: Interest-Bearing Capital (IBC); and from industrial capital to: functioning capital in the shape of the enterprise

In chapter 21 (Part Five) Marx introduces ‘Interest-bearing Capital’ (IBC). It is not developed from money-dealing capital but rather from the general commodity form and the conversion of money into capital, whence money’s ‘use-value’ consists in

the profit it produces when converted into capital. In this capacity of potential capital, as means of producing profit, it becomes a commodity, but a commodity sui generis. Or, what amounts to the same, capital as capital becomes a commodity. (III-Five-21, U, pp. 338–9)

Because of this apparent capacity for potentially producing profit, a ‘price’ is offered for commanding it, that is, extra money above its value, or an interest.²⁰

(B)eing loaned out as capital, money is loaned as just the sum of money which preserves and expands itself … This relation to itself, in which capital presents itself when the capitalist production process is viewed as a whole and as a single unity, and in which capital appears as money that begets money, is here imparted to it as its character, its designation, without any intermediary movement. And it is relinquished with this designation when loaned out as money-capital. (III-Five-21, U, p. 345)

This then is the ultimate sublimation of capital in the form of money-capital: to acquire the character of begetting money as an external thing, without the requirement of any intermediary movement.

The characteristic movement of capital in general, the return of money to the capitalist, … assumes in the case of interest-bearing capital a wholly external appearance, separated from the actual movement of which it is a form. (III-Five-21, U, p. 348)

Whereas from the point of view of IBC, capital may have the character of “money that begets money”, to the “functioning capitalist” or the entrepreneur (industrialist or merchant) the interest on loan capital represents nevertheless a share in the gross profit of their enterprise, leaving for them what Marx calls the (net) “profit of enterprise” (III-Five-23, U, p. 373)

It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, [and] that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest. (III-Five-23, U, p. 370)²¹

Here we see indeed the introduction of two competing points of view of capital; in the one money capital and interest is the starting point, in the other entrepreneurial capital and profit.²²

From all of Part Five (recall that for Marx the material was largely in notebook form) one gets the impression that whereas Marx struggles with the question of what point of view should be given priority in his analysis of Capital, he decides for the priority of IBC. This is most clear for the determination of the rate of interest. Whereas in the first chapter 21 of the Part he states that there is no law of interest, “no law of division except that enforced by competition” (21, U, p. 356), the next chapters are in many respects a qualification of that view.²³ Early on in chapter 23, for example, he firmly states that given the processes related to the general rate of profit (i.e., the gross profit of enterprise as set out in Parts One to Three of Capital III), “the size of the [net] profit of enterprise is determined exclusively by the rate of interest” (23, U, p. 373). Here IBC is clearly given the dominant weight in the balance of competitive power.

The quantitative aspect of the rate of interest in connection to the business cycle will be briefly expanded upon in the next subsection. In the rest of the current subsection I will be concerned with the qualitative separation between interest and profit of enterprise. Given the theme of this article, it is important that the existence of interest in the eye of the entrepreneur is not merely the consequence of the brute power of one faction of capital (the moneyed) over other; but is rather seen as both the legal and due reward for a function of capital (cf. §2.8–§2.9).

The interest he [the entrepreneur] pays to the latter [the owner of money-capital] thus appears as that portion of gross profit which is due to the ownership of capital as such. As distinct from this, that portion of profit which falls to the active capitalist appears now as profit of enterprise, deriving solely from the operations, or functions, which he performs with the capital in the process of reproduction, hence particularly those functions which he performs as entrepreneur in industry or commerce. In relation to him interest appears therefore as the mere fruit of owning capital, of capital as such abstracted from the reproduction process of capital (…) as though they originated from two essentially different sources. (III-Five-23 U, pp. 374–5)

(Marx points out that whereas an individual money-capitalist may have the choice of lending out capital or using it as productive capital himself, this cannot be applied to “the total capital of society”. It would be absurd, he writes, “to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value” (U, pp. 377–8).)

The separation of capital into IBC and functioning capital indeed shapes the sublimation of capital referred to. Interest-bearing capital as mere ownership of capital, which begets money, does not even confront labour:

[the] antithesis to wage-labour is obliterated in the form of interest, because interest-bearing capital as such has not wage-labour, but productive capital for its opposite. (III-Five-23, U, p. 379)

The entrepreneur, the functioning capitalist, on the other hand steps down to perform a labouring function himself, so mediating between Capital and labour:

his profit of enterprise appears to him as distinct from interest, as independent of the ownership of capital, but rather as the result of his function as a non-proprietor – a labourer.

He necessarily conceives the idea for this reason that his profit of enterprise, far from being counterposed to wage-labour and far from being the unpaid labour of others, is itself a wage or wages of superintendence of labour, higher than a common labourer’s … because the work is far more complicated … (III-Five-23, U, p. 380)²⁴

This view represents till today one important strand for the explanation of profits within the neoclassical economics literature (see the analysis of current textbooks on this issue by Naples and Aslanbeigui 1996).

2.4 Interest and profit of enterprise: fluctuation over the cycle of production

In chapter 21, as I indicated in §2.3, Marx states that there is no law of interest. Again in chapter 22 he writes that the “circuit described by the rate of interests during the industrial cycle” falls outside the scope of his inquiry, since that “requires for its presentation the analysis of the cycle itself … which cannot be given here” (22, U, p. 358). Chapter 30 (Part Five) nevertheless describes at least elements of the fluctuation of the interest rate during the cycle, though indeed in the absence of an analysis of the cycle itself. At least it is not a complete analysis, but rather one from only one aspect, that is the general expansion of Industrial Capital (again revealing the notebook character of the text: industrial capital instead of enterprise is a conceptual retreat; the same goes for ‘money capital’). Table 1 provides a schematic excerpt of Marx’s findings (cf. 30, U, pp. 488–90). He lets the cycle start at the end of the crisis period.

In chapter 31 (Part Five), Marx indicates that in the prosperity phase “the industrial and commercial capitalists now prescribe terms to the money-capitalist” (U, p. 495). That is, the relative abundance of loan capital (which, of course, also existed in the slack, but without effect) provides a power base to IC. The expansion of accumulation in this phase, writes Marx, “is promoted by the fact that the low interest – which coincides … with low … and … slowly rising prices – increases that portion of the profit which is transformed into profit of enterprise” (U, p. 495). That is, the low interest functions as leverage to the profit of enterprise. In contrast, during over-exertion and especially crisis, “the rate of interest may rise so high that it temporarily consumes the whole profit of some lines of business” (U, p. 502).²⁵

These passages bring out the conflict of ‘interest’ within factions of capital. This will be the theme for the remainder of this article.

2.5 From IBC and the enterprise to: IBC and Joint Stock Capital in the form of IBC and the management of functioning capital

Capital’s division between IBC and the enterprise is highlighted in the institutional existence of the joint stock company and joint stock capital (JSC). Marx initiates this movement at the end of chapter 23 (U, p. 387 ff.) and further expands on it in chapter 27.²⁶ With astonishing foresight Marx does not view the JSC as essentially different from IBC, but rather as a developed form of it. This is key to the rest of the current article. Joint stock companies entail the

transformation of the actually functioning capitalist into a mere manager, administrator of other people’s capital, and of the owner of capital into a mere owner, a mere money-capitalist. Even if the dividends which they receive include the interest and the profit of enterprise, i.e., the total profit (for the salary of the manager is, or should be, simply the wage of a specific type of skilled labour, whose price is regulated in the labour-market like that of any other labour), this total profit is henceforth received only in the form of interest, i.e., as mere compensation for owning capital that is now entirely divorced from the function in the actual process of reproduction, just as this function in the person of the manager is divorced from ownership of capital. Profit thus appears [stellt sich so dar] … as a mere appropriation of the surplus-labour of others, arising from the conversion of means of production into capital … (III-Five-27, U, pp. 436–7, emphases added)

This quotation brings out two important issues. First, dividends take the form of interest, and share capital takes the form of interest-bearing capital (external capital). (Note that this is much the way joint stock capital has further developed in the twentieth century: for the investor shares are just a portfolio alternative to bonds and other fixed interest-bearing investments; they differ merely on a scale of risk – as is also the case for varieties of IBC proper.)²⁷

Second, and related, we seem to have a complete separation of ownership of capital and the management of the process of reproduction of capital. All distributed profits (interest plus dividends) take the form of interest and are lapsed into one category. (We see this reflected in twentieth-century neoclassical economic equilibrium theory in which interest and profit are treated as identical.)

Here then we see the complete sublimation of capital: all capital takes the form of interest-bearing capital (M) → (M + ΔM).

Along with this complete sublimation, we see capital in one of its roles, the entrepreneurial, stepping down to adopt a labouring role, so seemingly forming an alliance with labour, in opposition to interest-bearing money capital.

It is tempting, following one of Hegel’s favourite metaphors, to cast this in terms of the Trinity. God the Son steps down to mediate between God the Father and human beings, apparently becoming one of them. The perennial question being of course: is he human or God? Or perhaps both? The entrepreneurial mediator between Capital and labour, where does s/he stand? We return to this question in §2.8.

2.6 Ideas of profit

In the differentiation of capital shown by Marx, we discern the following succession in ideas of profit:

• First, from the standpoint of naive capital (manufacturing capital), profit is produced by labour through surplus-labour but it ‘naturally’ accrues as a just reward to the owners of means of production (functioning capitalists). (This is also the point of departure of Classical Political Economy, for which profit is at once produced by labour and a ‘just reward’ of ownership in work.)²⁸

• Second, from the standpoint of (sophisticated) undifferentiated industrial capital, profit is seen as springing from capital – i.e., the undifferentiated ownership of capital together with capital in process. (This is the focus of twentieth-century mainstream Neoclassical Economics, though with ‘interest’ substituted for profit.)

• Third, from the standpoint of capital differentiated into IC and IBC (i.e., industrial capital, or enterprise, and interest-bearing capital), profit is differentiated into profit of enterprise as springing from the labour of the functioning capitalist (the entrepreneur) and into interest as springing from the ownership of money-capital. (This is the point of view of Institutional as well as Management Economics.)

• Fourth, from the standpoint of capital completely differentiated into ownership and management, profit=interest springs from ‘the surplus-labour of others’ but accrues as sublimated to the ownership of money-capital. Thus we have the developed state of the point of departure.

2.7 Money capital and Finance Capital (FC)

Marx, we have seen, calls the guises of capital in its circuit (M–C …P… C´–M´) production capital, commodity capital and money capital. For the capital externalisation (Arthur) he has the names industrial capital, commercial capital and – again – money capital (sometimes also loan capital and credit capital, with somewhat different connotations and meanings). Although for the first two we have different names for different aspects, this is (mostly) not the case for money capital.

So far in this section I have followed Marx’s terminology current in his day, but in what follows I will generally adopt the term finance capital for the meaning of externalisation (that is, finance capital for financing proper, and financial capital for financing including money-dealing).²⁹ The term finance capital also has the advantage of connecting to contemporary everyday usage of the term.

In terms of the previous discussion, we thus have Finance Capital (FC) which consists of two factions, IBC and JSC. These differ, first, in degree of risk bearing and consequent degree of reward. Second, JSC has at least the formal ownership of the company. FC is alike in that it is an interest-bearing capital (in the case of IBC) or takes the form of interest-bearing capital (in the case of JSC).

Institutionally financial capital includes: (1) banks; (2) insurance companies; (3) pension funds; (4) investment companies; (5) individual investors. They all make portfolio decisions concerning their investments and cannot be categorised institutionally into either IBC or JSC. They all invest money as capital. The first four, each for different purposes, also collect money from companies and individuals (including labour) so as to invest this either as capital or as money (see footnote 21).³⁰ In this particular sense they are money-dealers or rather financial intermediaries. The role of money-dealing in the technical sense of §2.2, however, is predominantly the domain of banks (though, as mentioned, other companies can also adopt this role). The crucial differentia specifica of banks is that they are legally granted to create credit money (that is, under authority and the umbrella of a central bank). This vests in them a financial power beyond the mere money collecting activity of the rest of FC.

2.8 Finance Capital and Managerial Capital (MC)

Marx does not develop the issue of ownership of capital versus management (§2.5) any further. With JSC, apparently, interest-bearing capital is the standpoint of Capital. The category of capital management is underdeveloped within Marx’s analysis. In this subsection I briefly set out a further conceptualisation as relevant for the theme of this article.

In view of the separation between ownership and management that he outlines, Marx consistently amplifies on the JSC from the point of view of the capitalist mode of production generally, in particular the potential consequences of joint stock companies for social transition. He sees, with rare over-optimism, the JSC as a prefiguration of associated production:

This result [the complete divorce of ownership of means of production and labour] of the ultimate development of capitalist production is a necessarily transitional phase towards the reconversion of capital into the property of producers … of associated producers, as outright social property. (III-Five-27, U, p. 437)

Indeed this is one way a system contradiction can get resolved. The other is a system internal transcendence. What Marx could not see, at a time when the joint stock company was still in its infancy, was the emergence and development of managerial capital as a separate category of capital.

Remarkably, managerial capital stems precisely from joint stock capital as a highlighted form of interest-bearing capital – that is, just the point so accurately emphasised by Marx. But whereas shareholders, as against loaners of capital, are the legal (juridical) owners of the company’s capital, they are not necessarily the economic owners. The management not only commands share capital and loan capital (together, in the current finance jargon, ‘external capital’) but notably also the capital grown out of retained profits. This latter category may usefully be called managerial capital.³¹ (In the current finance jargon it is called ‘internal capital’.)

As long as the management satisfies the shareholders with an as-if-interest dividend, the growth of managerial capital may continue (to the extent that it drives up the price of their shares so that shareholders perceive it as being in their own interest). Although managers, as Marx emphasises, indeed view their work as the result of labour, this managerial capital grants managers an actual stake in capital. As long as they serve the company, they are the holders of this capital, and they may acquire a legal ownership in it through (combinations of): bonuses and share options; buying up shares and balance sheet reorganisations, so manipulating share prices and the exhibited rate of profit. On top, to the extent that the managerial capital is relatively large, there is no need for new share capital. Thus there is (at least) a potential conflict of interest between shareholders (JSC) and these holders of management capital, not because they are labourers – though they conceive of what they do as work – but because they are functioning capitalists, rather than ‘mere manager, administrator of other people’s capital’ (cf. the indented quote in §2.5).³²

Thus the mature JSC involves the movement of a separation between legal and economic ownership, whence the management of functioning capital develops into the separate category of ‘functioning managerial capital’.

This obviously complicates the picture of capital. JSC seems indeed, as Marx emphasises, the most developed form of capital. Legally we indeed have a complete separation between capital ownership and capital in process – labour in process of production of surplus-value. Indeed as the mere ownership of money-capital can be shown to breed no extra money, surplus-value must flow from capital in process, that is, the labour of management and the labour of the workers. Thus for Marx the JSC, as we have seen, seems to lance the ideology of the productivity of (money-)capital.³³

As indicated, however, there is no complete economic separation between ownership and process. If for managers, managerial capital is the heart of the matter – and finance capital just an external bother of nuisance – we seem to have landed in a reworked third stage of the idea of profit, described in §2.6: in ideology part of gross profit springs from capital in process. Hence the term ‘economic profits’ in some of the neoclassical textbooks (see Naples and Aslanbeigui 1996). With it the ideology of the productivity of capital seems in part restored, to be effective both in theory and practice.

In this perspective we have a complex multitude of oppositions and alliances within and between capital and labour.

2.9 Summary and Conclusions: Finance Capital and Managerial Capital – unity or opposition?

In Marx’s incomplete drafts for Part Five of Capital III, discussed in this section, an opposition between money-capital (loan and credit capital) and industrial capital is mainly addressed in his treatment of the industrial cycle (cf. §2.4), when the interest rate, and consequently the remaining net profit rate, rises and falls according to the shortage or abundance of money-capital vis-à-vis the needs of industrial capital.³⁴

In Marx’s presentation (or rather mere analysis) this is an opposition between the entrepreneurial industrial capital on the one hand, versus the interest-bearing capital (IBC) on the other. However, that opposition gets (or should get) superseded when Joint Stock Capital (JSC) enters and when therefore (in Marx’s view) we have a complete legal and economic separation between ownership and management; that is, when all capital is furnished by IBC and JSC. In this constellation all gross profit goes to the financiers anyway – thus there is no conflict over the cycle. (From Marx’s own point of view, therefore, chapter 27 on JSC is probably ill placed by Engels – or another new chapter should have followed.)

In Marx’s view of complete separation there is no conflict within capital over the division of the general rate of profit. The only conflict is that between labour and ‘Capital = finance capital’, since the management of capital in process is the work of labour. The interesting upshot of this is that the initial externalisations of capital get, so to say, re-internalised into capital in general.

For finance capital (in the absence of managerial capital), we indeed have the complete sublimation of capital as M–M´ on the one hand and the transparency of ‘interest=profit’ being the product of labour. In this perspective Marx’s euphoria about the transitional potentiality of JSC is understandable.

Indeed this completely sublimated fourth stage of the idea of profit (§2.6) seems ideologically untenable, in as much as the first was.

From this point of view (Marx’s) there is not much reason to reconsider the TRPC (Part Three) in the light of any oppositions within capital: with a fully developed JSC there is no conflict over the division of the profit governed by the, one for all, general rate of profit.

However, with the opposition between Finance capital and Managerial capital as set out in the previous subsection, there is ample room for such conflict within capital, which also complicates the capital–labour relation generally. Capital, the amalgamate of Finance capital (FC) and Managerial capital (MC), is first of all a unity-in-opposition to labour, representing the (economic) ownership of the means of production in the form of capital. It is an indirect opposition for FC and a direct one for MC (as emphasised by Marx in the context of the entrepreneur and profit of enterprise).

Second, not only is capital a unity-in-opposition to labour, it also is an internal opposition-in-unity which goes beyond and deeper than any normal conflict among capitals. With ‘competition in general’ all capital is in principle alike – even if relative power positions are in movement all the time (cf. capital’s stratification). With the separations set out, however, capital is rather internally in opposition since capital factions are not alike: i.e., finance capital versus managerial capital. Whereas ‘capital in general’ is indifferent to branches of production – and can in principle flow from the one to the other and back – and whereas, within finance capital, it can flow to become either IBC (in strict sense) or JSC and back, with FC versus MC this is distinct. Although the management of enterprises can strategically manage the proportions between MC and FC (and within the latter IBC and JSC), MC cannot flow to become FC unless it abolishes itself. FC equally cannot flow to become MC, or it would equally abolish itself.³⁵

The conflict between FC and MC comes to the fore first of all in the context of the cycle of production generally – Marx’s analysis in this respect (§2.4) so regains relevance.³⁶ Second, and more important, amongst capital there is also a triangulated complex opposition-in-unity concerning the general monetary state of the economy: between MC and FC, within the latter between JSC and IBC, and again between IBC and MC.

In this light Marx’s TRPC will briefly be reconsidered in the remaining part of this article.

3.1 The concretisation of MDC and CC considered as capital in general

In Capital III, Part Four, we have seen, Marx introduces Money-dealing capital (MDC) and Commercial capital (CC) as offshoots from what he then calls Industrial Capital. Here he also makes explicit that part of ‘capital in general’ is accumulated in money-dealing and commodity dealing. In discussions of the TRPC this is usually neglected.³⁷

In the first section of this article we saw that, at the level of capital in general, the capital accumulated is usually presented as (K + wL) in this or a similar notation (e.g. Marx’s C + V; cf. equations 2 and 3 in §2). However, once capital’s dealing in money and commodities has been made explicit, this is no longer adequate, since part of capital is accumulated in those dealings. In addition to accumulation in means of production (K) we have the following three capital items.

First, part of capital is accumulated in a hoard of currency money (M_ch).³⁸

Second, part of capital is accumulated in commodities. Although commodities as raw materials and commodities in process may be considered to have been included in K, this is not at all obvious for commodities as ready product (C). Anyway, the latter have a different status from K especially when we consider technical change.

Third, money-dealing involves credit – even if this function is not adopted by a special category of capital.³⁹ At the level of capital in general the credit between capitals may be considered to cancel out. However, this is not so for the credit between capital and labour.⁴⁰

On the other hand, even if the presentation of capital as (K + wL) or as (C + V) has the obvious advantage of bringing out labour’s organic part in the production of capital, capital is in fact never invested or accumulated in a wage fund (though the amalgamate of money hoarded serves for that). Labour is always a service in flow; in the balance sheets its production result can only appear in commodity form or money form.

Total (active) capital accumulated (Č), therefore is to be represented as:

Č = K + C + M_ch + O (5)

where:

For the rate of profit on ‘capital in general’ (with these modifications preferably called the macroeconomic rate of profit) we have:

r = R / [K + C + M_ch + O] (6)

Dividing this expression through by wL we have:⁴¹

r = [R/wL] / [K/wL + C/wL + M_ch/wL + O/wL] (7)

In the light of §1 the components R/wL and K/wL need no further comment. Suffice it to say that, as before, K/wL is a measure for the technique in use, or a measure for the relative expulsion of labour, and that it develops roughly in line with the cycle of the rate of growth of production, i.e., pro-cyclical. For the newly added components I restrict to the following notes, each time taking the cycle of production as reference point.

First C/wL. Generally, the ratio of commodity stock to wages moves counter-cyclically (though with changes in commodity stocks ahead of changes in wages). Thus the C-ratio has always exerted some counteraction to the K-ratio. Apart from that there is always structural pressure for a relative decline of commodity stocks (C) which is not particularly affected by the cyclical development. This is highlighted in ‘just-in-time-production’ (Smith 2000). With just-in-time-production we seem to have reached a limit for a structural decline of C/wL. Along with it goes a dampening of the cyclical counteraction of the C-ratio to the K-ratio.

Second M_ch/wL. Similarly the ratio of currency hoards to wages moves counter-cyclically, so exerting some counteraction to the K-ratio. Along with it there is a structural pressure for decline of the M_ch-ratio (which gained new momentum with the cutting loose from precious metal standards).⁴² Its limit will, of course, be reached when all ‘world money’ has become money of account. So here too the cyclical counteraction dampens.

Third O/wL. In the numerator we have net credit between capital and labour. Cyclically this credit to wages ratio seems approximately constant. (So we can neglect any structural trends – that is, in reference to the K/wL ratio; generally these loans (O) will contribute to the rate of profit.)

Two conclusions can be drawn from this short discussion. First, capital’s dealing in commodities and money has exerted important influences on the development of the general rate of profit. The three factors discussed cannot be neglected in historical or contemporary empirical studies. Second, we have also seen that in a developed capitalist system the counteracting effects of these factors on that of the K/wL ratio gradually fade away. This might seem to underline the force of Marx’s abstraction in his presentation of the cyclical development of the general profit rate.

3.2 Finance Capital versus Managerial Capital in context of the TRPC

The theory of the rate of profit cycle (TRPC), we have seen in §1, is formulated at the level of capital in general. In §2, I discussed Marx’s view of the concretisation of capital-in-general into, on the one hand, the ownership of finance capital, as interest-bearing capital (IBC) or in its form (JSC), and on the other the labour of management of functioning capital. If this view is correct, a further development of the TRPC, at the more concrete level of the externalisation of capital (beyond §3.1), is not very pressing: forces acting on the profit rate are, before and after the externalisation, at the fore of the sharp opposition between capital and labour. Marx’s capital differentiations do not affect this, which was indeed Marx’s view (III-Three-12, F, p. 320).

However, in §2.8 and §2.9 when setting out the category of managerial capital (MC), we have seen that capital is an internal opposition-in-unity. How is the TRPC concretised in this perspective?

Let us start with recapitulating the abstract determinants that are not modified by the internal separation of capital. First, we have the requirement for production of surplus-value, hence the capital to labour opposition generally.⁴³ Second, the forces giving rise to pro-cyclical change in the organic composition of capital are not affected. Third, we have the contradiction that the drive for a higher rate of profit generates a pro-cyclical decline of that rate; it is restored through the cyclical restructuring of capital whence part of capital gets destroyed, and ‘we go round the whole circle once again’ (Marx, as quoted in §1.2).

For Marx an intimate part of the cyclical development of the profit rate is the devaluation/depreciation of capital that goes along with (a) the cost decrease related to the rise in the composition of capital, and (b) the restructuring of capital. At the same time, however, processes of general price change – say price deflation and inflation – are bracketed by Marx. He can do this due to the fact that in his hands the labour theory of value operates – at least also – as an analytical measuring device.⁴⁴ The point is that bracketing processes of price change is a useful abstraction both when considering capital in general and when the externalisation of capital is played out in the way Marx sets it out (as indicated in the first paragraph of this subsection). However, if capital operates as an internal opposition-in-unity with Finance Capital and Managerial Capital as poles, this bracketing will not suffice. In the remainder of this section we will see how the playing out of this opposition depends on the monetary regime in operation. I will broadly distinguish two such regimes, a deflationary and an inflationary monetary regime, though without going into their institutional determinants (subsections A and B below).

Before setting these out let us first recall the profit rate decrease captured by the TRPC. The upturn processes associated with the TRPC result in the newly accumulated capitals – i.e., those with relatively high K/wL ratio and low unit costs – to realise relatively more profit in comparison with previously accumulated capital – i.e., those with relatively low K/wL ratio and high unit costs. For the latter the actual labour productivity of profit decreases, and they are confronted with an intertemporal devalorisation: they realise less value-added than before since prices have been driven down. Thus we have a ‘redistribution’ of value-added from old to newly accumulated capital (at an, on average, higher K/wL ratio).