Commentary on Political Economy

Tuesday 1 November 2016

The Natural Rate of Interest As "Universally Free Competition"

The nature of the natural rate of interest on capital, and the causes that are responsible for determining its level, should by now have been made sufficiently clear—on the assumption, of course, of universally free competition. No distinction has been made between the original (uncontrolled) rate of interest and the contractual (lending) rate of interest. (Wicksell, Interest and Prices)

Bourgeois hypocrisy when it comes to capitalism as a social system is encapsulated in the notion of “capital” – because, on one hand, for the bourgeoisie the word capital describes the wealth owned by them expressed in monetary terms, whilst, on the other hand, it applies also to the “physical” objects that make up both the means of production and the products. The hypocrisy involved concerns the undying belief of the bourgeoisie that it is “capital” that creates “wealth” – and that therefore it is the “owner of capital” who is entitled to “its” product. But anyone with a slice of brain can see that “physical” production and “legal” ownership and entitlements are two categorically different things: the one cannot ever lead to the other conceptually or in any other way. Yet it is the necessity for the bourgeoisie to believe in this totally inexistent “link” between “physical” production and “legal entitlement” to it that makes it impossible for the bourgeoisie to penetrate the real and essential political meaning and function of money in a capitalist society. The “veil” of money befogs the bourgeois theory of money – and necessarily so because a true understanding of the meaning of money as capital would lead to a thorough immediate demystification and debunking of capitalist social relations of production – something that the bourgeoisie understandably opposes and eschews.
As can be clearly discerned from the quotation above, Knut Wicksell – who was a mathematician and engineer long before he became an economist – the “real” link between the contractual rights to capitalist production (lending) and the physical production (which is “uncontrolled” politically) lies ultimately in the existence of “universally free competition”. In other words, it is only when the ideal goal of “universally free competition” is achieved that the natural and the monetary rates of interest coincide – only because the “lending” or “controlled” or, if you like, political and “artificial” monetary rate of interest is “compressed”, “crushed” if you will, into the “natural” rate of interest by the forces of “universally free competition”. Competition between individuals in society therefore must be “universally free” for “the economy” to function “naturally”, that is, “universally free” from all political and monetary interference with “the real economy”.
Here the crushing brutality of bourgeois economic theory is revealed in all its stark bestiality. To put it with “the bitch”, Margaret Thatcher, in this view “society is nothing”: there is no “society” apart from a “contract” freely entered by all “individuals” to set up a State or political convention that protects their “natural rights” to any “capital” or more broadly “estate” or “property” they possess.

It is the existence of “contract”, then – this convention of civil society, this legal fiction, this political interference with the “original” or “uncontrolled” human economy – that determines the divergence of the monetary interest rate from the natural rate. For Wicksell, money exists only as a social fiction, as a convention; it does not belong to the real economy. And it is this contractual aspect, this political side of the economy that determines and effects a deleterious divergence between monetary and natural rates of interest. And money arises only because of “lending”, only because individuals are willing to let others borrow their capital instead of utilizing it directly. Lending and money effect therefore a “separation” between production and individual utilities. Were it not for this “separation, this “veil” between “real” production and individual utilities, there could be no divergence between rates of interest. Indeed, on the assumption of “universally free competition”, there would be only one rate of interest, the natural rate of interest. It follows therefore that the natural rate of interest is one that is calculated and depends on the existence of such competition. And it follows that money and credit interfere fictitiously with such naked competition, with the “state of nature” of naked conflict: Here is the Hobbesian state of nature opposed to the state of society based on a social contract.

Here therefore, clearly there arises an unbridgeable hiatus between the “real” nature of interest expressible in quantitative terms of physical consumable output or “product”, and the “contractual” side that determines individual rights to products that are made through the contractual separation of means of production and output. And yet, once again, if we reflect but an instant, it is clear that all “production” is contractual in nature because there will always be a separation between the act of production and the social legal claim to its output. Wicksell totally fails to comprehend that the “natural” or physical consumable output or product has no “natural” relation to the means of production, but has only a social or political or legal and contractual relation. Wicksell tries at every step to turn what is a social political reality into a physiological one in terms of subjective utilities and then even into a physical or real objective one based on the marginal contribution of physical objects called ‘capital’ to productivity. And this real side of capitalist production, Wicksell attributes as the ultimate reality of universally free competition! What can he mean by this curious phrase?

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