The Natural Rate of Interest and the Secular Stagnation of Capitalism

Let’s get a little technical now. The recent upheaval and gyrations of capitalist industry and finance are now unequivocally attributed to the “secular stagnation” of “the economy” - not, as you can see, of the capitalist economy, but of “the economy” tout court, as if the only economy possible had to be a “capitalist” economy. Thus, bourgeois economic pundits of every hue, from Lawrence Summers to Paul Krugman, admit that there is a stagnation of “the economy” and that this stagnation is likely to endure and may well be terminal, which is what “secular” signifies – something that lasts per saecula, for centuries. But they fail to make the all-important connection between secular stagnation and capitalism – as if the only kind of “economy”, the only kind of human social production possible was and had to be capitalist in essence.

At the heart of this secular stagnation, its manifestation is the inexorable decline of “the natural rate of interest” in “economies” across the world. Now this is the kernel of the question: what exactly is “the natural rate of interest”, is it really “natural”, and why is it in irretrievable decline? Keynes said famously in the General Theory that -

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Behind every entrenched economic policy there lies a totally unknown and obscure economic “scribbler”. But the interaction runs both ways: in other words, it is always essential for us “scribblers” to understand and try to make sense of the “madness” of frenzied politicians. So it is essential that we understand what kind of socio-political presuppositions and realities lie behind these seemingly harmless “scientific” expressions adopted uncritically by both economists and politicians.

In seeking to define “the natural rate of interest” as the centerpiece of his theory of value and capital, and therefore of his monetary theory, Knut Wicksell adopts wholesale the most insidious principles of the negatives Denken that, after Schopenhauer, had allowed Eugene Bohm-Bawerk (known in his time as “the bourgeois Marx”) to develop his theory of interest (in Capital and Interest). Life is essentially “suffering” (Leid), it is “strife” (Streit) or “work” (Arbeit) seen as toil. Human beings are fundamentally and thoroughly selfish. Human being is not a common condition, an ineluctable community (Gemeinschaft). On the contrary, only the intellectual abstraction from the daily struggle for survival can induce feelings of “com-passion” or “shared sorrow” (Mit-Leid) between human individuals. It follows that only those individuals who can “abstain” from pleasure, who can “renounce” the illusive search for happiness – only those superior souls can gain an advantage over other hedonistic spirits. The Askesis is an ascending of the mound of sorrow, it is akin to climbing a mountain (Nietzsche’s Zarathustra ascends to the mountains at the inception of his magnum opus). Every ascetic renunciation (Entsagung) therefore, must lead to a reward in the struggle for survival, in the universal Eris that is social life. There is no community of inter-ests (literally, inter homines esse, to be among human beings, to commune with them): there is only self-interest.

The State therefore – the “public thing” or res publica - is not the highest expression of community (contra Hegel) – far from it! The State is the necessary instrument required to avoid the war of all against all (Hobbes), to control self-interest so that it does not lead to internecine conflict, to the destruction of human society (Gesellschaft). Self-interest and property are prior to the establishment of the State, and therefore the task of the State is to protect the “natural rights” of individuals in society. These natural rights relate, first, to the preservation of private property through free market exchange; and, second, they relate to freedom of expression. Political economy is the science of ensuring that the State acts in accordance with the laws of the market because only the guarantee of the free exchange in the market will ensure the preservation of freedom of expression. This is the essence of liberalism as the paramount political ideology of capitalism. Liberalism and Neoclassical economic theory go hand in hand.

The natural rate of interest is that profit on the part of the capitalist that is consistent with the pre-political state of nature and possession without the interference of the monetary rate of interest set and regulated by the banks. Profit is the just reward in the form of future “consumable output” to the capitalist for postponing the immediate gratification of endless wants: the natural rate of interest is the average profit of all capitalists combined expressed as a rate. Here is how Shackle neatly and accurately summarises Wicksell’s neoclassical theory of the natural rate of interest:

The more highly articulated, specialized and elaborate the system of equipment becomes through which men apply their effort to their natural environment, the larger the ultimate reward to a given effort, but to carry the elaboration from a given degree to a [10] still higher one implies the foregoing of, say, N units of consumable output which would have been available in year T in exchange for the prospect of an extra m units per year in perpetuity, beginning in year T + 1. The ratio m over N then represents, nearly enough, what Wicksell called the natural rate of interest. It is a measure of the 'worthwhileness,' at any stage of the development of the economy's total assemblage of productive equipment, of adding one more 'unit* to that equipment. How are such units to be defined? In making such an addition to their total equipment the people composing the economy are, in effect, postponing the consumption of some of the output which their current input of productive services entitles them to consume. The average time elapsing between the moment when a dose of work or of the services of nature is put into the productive process, and the moment when the dose of consumable product attributable to that dose of work comes out, is thus lengthened, and this average time, Bohm-Bawerk's 'average period of production,' can serve as a measure of the size of the total capital equipment.

It is quite obvious what the non-sequiturs in Wicksell’s reasoning are. He was a mathematician easily deceived by Bohm-Bawerk’s intricate metaphysics. The first non-sequitur is that products for immediate consumption may take a longer production period than products for future consumption – they may involve more “sacrifice” than future products. This is the opposite of the thesis sustained by Bohm-Bawerk and uncritically adopted by Wicksell. Both fail to see that production is also a form of consumption: no production is possible without the consumption of existing resources. The problem then is not one of “sacrifice”, but rather one of “substitution” or choice over which social resources to utilize for which production. If I choose to build a house rather than to plant a tree, I am not in any way “sacrificing” immediate consumption (the tree will yield fruit for immediate consumption) for future production (the house satisfies a less immediate need than the fruit). There is simply no real meaningful connection between the vast variety of human needs and the time it takes to secure their satisfaction! Lionel Robbins’s later redefinition of economic science as the science of the use of scarce means for alternative uses in his famous Essay involves an implicit critique and refutation of Bohm-Bawerk’s theory of interest because, for Robbins, it is not “the average period of production” that matters to economics but rather the “choice” over the use of resources. Robbins sees the absurdity of Bohm-Bawerk’s “metaphysics”, yet his “pure logic of choice” turns economics into a pure disembodied formal “logic” wholly removed precisely from those “choices” that involve material human needs!

The other non-sequitur, underlined unwittingly by Shackle when he enucleates Wicksell’s theory, is the wholly groundless assumption that production is an individual pursuit where the proprietary right to a product is determinable. Shackle says that producers “postpone” immediate consumption to which they are “entitled”. Yet no such entitlement exists in reality because human production is entirely co-operative and it is absolutely impossible to draw any link between the diversion of social resources to alternative uses and any “entitlement” to the consequent product.

Let us now get back to the natural rate of interest. M then stands for that part of “consumable output” that is diverted to production for future needs: m is “profit” which divided by N over time, a given year, gives the rate of profit or “natural rate of interest” which in turn, as is apparent from Wicksell’s elaboration, is really the average rate of profit for aggregate capital investment. But Wicksell does not consider that under capitalism it is not m that is important. Rather it is m/N, that is, the rate of profit itself! Capitalists are not interested in “ultimate consumption” or “consumable output” as Wicksell puts it above. They are not interested in the physical pro-duct for its use value and least of all for its personal consumption. Or rather, the capitalist is interested in “consumable output” not for personal consumption as a concrete object, as a use value, but rather as a pure exchange value for the political power it may give her or him over the productive capacity of a society, or its “consumable output…in perpetuity”. That is to say, the capitalist is “interested” only in the product as abstract wealth that can be used to perpetuate profit and to accumulate capital. The accumulation of capital on the part of capitalists – their aim to increase the rate of interest or the average rate of profit – has nothing to do with the eventual consumption of “consumable output”. Instead, it is the pursuit of greater production of consumable output with the aim of obtaining growing political control over the social resources involved in production through its exchange.

But this power over production is not and cannot be expressed over “things” because “things” do not bestow political power: things are mere inert objects. It is proprietary or legal power over things as abstract wealth, as a means to political control over people involved in production that grants power to the capitalists. Mere ownership of things and consumable output and means of production does not constitute capitalism. Capitalism is the use of privately owned social resources for the sake of accumulating “value” through profit expressed as a rate over time. The average rate of profit is “the natural rate of interest”. But the capitalist’s aim in accumulating capital is to ensure greater political control through production – in other words, greater political control over means of production and their output. The essential element of producing for profit is therefore control over living labour through the exchange of “consumable output” and the means of production used to produce that output with that human living labour used in the process of production of that consumable output. The “exchange” of consumable output or dead labour with living labour – through money wages – means that workers are legally separated from the means of production and from production itself, both in terms of ownership and in terms of deciding what is produced and how.

Because Wicksell does not see the difference between “consumable output”, that is, produced “things” in capitalist industry, and profit as an end in itself, that is, money as a measure of profit, he cannot see the difference between the “natural” rate of interest and the “monetary” rate of interest – because he believes that ultimately money can only stand for “consumable output” - because that for him is the true aim not just of the capitalist economy but of every possible economy! Wicksell cannot see that money does not just distort some “real, natural” economy: instead, money is the expression of the fact that a capitalist economy is a political reality that can be affected by the manipulation of money as the most powerful immediate tool of capitalist relations of production.

THERE is a certain rate of interest on loans which is neutral in respect to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital. (Interest and Prices, at p.102)

But then, why is money different? Why does it make a difference? Indeed, if money is only a “veil”, only a means of exchange and nothing more, pnly a “token”, why is it not possible to eliminate it altogether and simply have an economy that transacts “in kind”? Wicksell does not address this essential matter – despite the fact that he realizes just how “essential” the question of money is!

It is possible for a considerable difference between the uncontrolled rate and the contractual rate to persist, and consequently for entrepreneur profits to remain positive or negative, as the case may be, for a considerable period of time. It has already been mentioned that this possibility arises out of the fact that the transfer of capital and the remuneration of factors of production do not take place in kind, but are effected in an entirely indirect manner as a result of the intervention of money. It is not, as is so often supposed, merely the form of the matter that is thus altered, but its very essence. (Interest and Money, p.135)

Wicksell is saying that the natural physical rate is more “binding”, more “physiological” in terms of social resources and individual choices than the artificial monetary rate which can be altered through fiat money by central banks – and is therefore more political or arbitrary or manipulable. The natural rate is “uncontrolled”, whereas the money rate is “contractual” and therefore controlled.

Yet Wicksell still does not even pose himself, let alone answer, the “essential” question: why is monetary rate different from the natural or physiological rate? He can only opine that

[t]he two rates of interest still reach ultimate equality, but only after, and as a result of, a previous movement of prices. Prices constitute, so to speak, a spiral spring [136] which serves to transmit the power between the natural and the money rates of interest; but the spring must first be sufficiently stretched or compressed. In a pure cash economy, the spring is short and rigid; it becomes longer and more elastic in accordance with the stage of development of the system of credit and banking. (Interest and Money, pp.135-6)

This is rank and arrant nonsense, of course, quite typical and indeed distinctive of all bourgeois economics. Because money is not this or that piece of physical machinery or merchandise which economists loosely call “capital” and “goods”, or of consumable output. Money is value itself, it is the social cipher fungible for the control of social resources that can be used as means of production and consumption by living labour – and therefore for the political command over living labour on the part of the profit-seekers, the capitalists.