[OPE-L:356] Re: Interest as the price of money

Gilbert Skillman (gskillman@mail.wesleyan.edu)
Fri, 27 Oct 1995 18:26:52 -0700

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In response to Paul's PEN-L invitation, I'm writing to extend the
following remarks....

> Gil says
> ---
> To which I now add that first, Paul's arguments for the irrationality
> of interest considered as a price having nothing whatsoever to with
> Marx's arguments for same. Paul advertises this himself when he says
> the irrationality he speaks of has nothing to do with
> the connection of prices to
> values. For Marx, as noted in the passages I referred to, it has
> *everything* to do with the connection of prices to values. So if
> Paul has a critique here, it's of Marx, not me.
> Second, the following sense of interest as price surely remains:
> granting
> everything Paul says, an interest rate is a market entity (e.g., it
> characterizes "money markets") which establishes a *rate of exchange*
> between "dollars today" and "dollars tomorrow", in much the same way
> that a price *ratio* (note the difference from simple "price")
> establishes a rate of exchange between some good x and some other
> good y.

....in light of Paul's comments:

> Marx was not wrong in saying that the formulation of interest as
> a price of money was irrational on grounds derived from the theory
> of value.

This is not at issue.

>But there are deeper grounds for the formulation being
> irrational.

Possibly, but again, they are not Marx's reasons.

> In discussing this we are touching both upon a substantive issue
> that would have to be dealt with in any outline of political economy,
> and upon a more general issue of method. Gil says that an interest
> rate is a market entity that characterises money markets. But feels
> that he has to put the term money markets in quotation marks. This is
> revealing. The fact that something is called a market in the bourgeois
> common parlance does not mean that what goes on there is the same
> set of social relations as in commodity markets.
> Political economy must distinguish the real social relations from
> their ideological understanding by their participants, if we fail
> to do this we will sink into vulgar economics. I have to act as a
> computer consultant to various banks and notice that bankers blythely
> talk of 'the banking industry' and of their 'products'. If we
> accept common parlance we end up with absurdities like this.
> I may be pedantic, but I feel that we have to be very precise in
> our use of language.

Of course I agree with all this. None of it is contradicted by
referring to the interest rate as a "price", just as Marx did: it
may be a price in a special ("irrational") sense, or a price and
something else, which would in any case have to be investigated.
I never challenged this.

> Is Gil right in saying that an interest rate establishes an exchange
> ratio between "dollars today" and "dollars tomorrow", in much the same
> way
> that a price *ratio* (note the difference from simple "price")
> establishes a rate of exchange between some good x and some other
> good y.
> Even if we take his own formulation, it is not so, since an exchange
> ratio between x and y, is dimension y/x, whereas a rate of exchange
> between dollars today and dollars tommorow is a dimensionless number.

Yes, but *only* because "dollars" are both in the numerator and the
denominator, "cancelling" in shorthand fashion to reach to
"dimensionless number." If one insisted on being "precise in our use
of language", we would instead, and more correctly, say that the
interest rate represents period-t+1 dollars relative to period-t
dollars (or whatever monetary unit), just as we speak of dollars per
unit of commodity x, or units of commodity y per unit of commodity x.

This has a parallel in futures markets for any commodity, say pork
bellies: we could express the exchange rate as period-t+t pork
bellies per period-t pork bellies. If one ignored the time dimension,
one could cancel "like" terms to get the equivalent of an interest rate.

> But a second objection is that a rate of interest is not, as a I
> argued in a previous post, a ratio, but an exponential operator
> over time. As such it defines an infinity of such 'exchange ratios'.

I don't see this. The "exponential operator" only emerges by
allowing length of time periods to approach zero; in real world
divisions the relevant expression is P(0)(1+r)*t, where t, number of
time periods, is the exponent, and r is as I've expressed it. In any
case, the fact that it would have this *additional* property in the
special case of infinitesimal time periods doesn't negate its
*original* interpretation as shorthand for a price ratio.

> To me this seems to indicate several things.
> 1. The formulation of the law of value as conservation law is useful
> in that it clearly allows us to distinguish a non-linear phenomenon
> like interest as being phenomena of a quite different order.
> 2. Since the rate of interest is dimensionally congruent to the rate
> of profit, this indicates that rather than treating it as a market
> exchange phenomenon one should treat it as being in some way
> associated
> with the non-market, non-exchange process of the production of
> surplus value.

This is a non-sequitur.
> 3. That if we reject the notion of interest as the price of money,
> and reject the notion that there are money markets, then
> we must be very cautious about accepting the ideological associates
> of the idea of the market - supply and demand - as an explanation
> of the rate of interest.

I don't see how any of this follows, especially since no "law" of
value has been established in Marx. Further development on this
awaits a separate discussion, just as I await something from Paul
detailing his notion of the "law" of value, its meaning and

So, until then.

Gil Skillman