[OPE-L:7377] [OPE-L:907] Re: Re: Re: interest and accumulation

Gerald Levy (glevy@pratt.edu)
Thu, 15 Apr 1999 08:24:53 -0400 (EDT)

Re Paul C's [OPE-L:906]:

Previously, Paul wrote in [893]:

> My argument was that the rate of interest indirectly sets a floor
> to the rate of exploitation. In setting a floor I was only arguing
> that a rise in the rate of interest cuts back accumulation and causes
> unemployment.

To which I suggested:

> Suppose the economy is experiencing a robust expansion when the rate of
> interest increases. If aggregate demand is growing enough and if
> expectations of profitability are very positive, then the increase in the
> rate of interest may not necessarily cause a decrease in accumulation and
> an increase in unemployment.

Then, Paul came back with:

> Then the bank will raise the interest rate further until it does.

What you seem to be asserting is that there is an inverse relationship
between the rate of interest and the rate of investment. Thus, if the rate
of interest goes up, this will decrease the rate of investment and,
thereby, lead to a decrease in the rate of accumulation and a growth in
the industrial reserve army. The problem that I have with this reasoning
is with the alleged link between the rate of interest and the rate of
investment. Or, expressing the matter somewhat differently, what will
cause changes in investment? If changes in investment demand are
dependent in large part on changes in aggregate demand (i.e. if
investment demand is a "derived demand"), then changes in the rate of
interest will _only_ cause the desired changes in the rate of
investment if there are also (concurrently and previously) changes in
aggregate demand (and, relatedly, expected profitability).

Let me also note that if the rate of interest keeps on increasing until it
is prohibitively high, then firms have other options for still increasing
investment. That is, they can still increase investment even when the rate
of interest is prohibitively high due to CB monetary policy. E.g. they can
finance additional investment out of internally generated funds (which,
btw, is a common practice for increasing capital expenditures by large

btw, other than attempting to restore price stability in the presence of a
high rate of inflation, why would the CB want to slow accumulation? While
it is true than an increase in the industrial reserve army will depress
wages and thereby lower firms' costs of production and increase their
surplus value and profitability, isn't it also true that a depression in
wages will decrease the demand for means of consumption by working-class
families? Can't that also lead to a depression in the demand for the
commodity output?

> Says law not assumed. Interest rate changes aggregate demand itself.

I don't think that changes in the interest rate will _necessarily_ change
aggregate demand. E.g. if the rate of interest went down (the opposite
scenario), will this lead to increased aggregate demand? _Only_ if the
decrease in the rate of interest leads to additional investment,
employment, and consumption. Yet, this need not be the case. Why? Because
investors are considering not only the real cost of the loan but also
whether if they increased supply (or changed the composition of the
commodities produced), would thered be sufficient demand to purchase
the additional output.

In solidarity, Jerry