RE: P.S.

["Devine, James" <jdevine@xxxxxxx>]

Gil writes:
>For what it's worth, mainstream theory suggests another possible
explanation for positive interest rates besides time (and possibly risk)
preference, although it is not one that is typically emphasized:  interest
represents a scarcity rent for capital.  This latter explanation is both
plausible and consistent with the now much-reinforced empirical finding of
interest-inelastic savings.  Gil<

This may be a "much-reinforced empirical finding," it is not treated as such
by the intermediate macro textbooks, at least not all of them. There's one I
read -- was it Abel & Bernanke? -- that (1) said that saving is
interest-inelastic and then (2) consistently drew the supply of saving as
upward-sloping, matching the downward slope of the demand for saving curve
(i.e., investment demand). They did the same for the supply of labor[power]
curve.

BTW, the inelastic saving supply curve fits with Keynes' idea that interest
and profits represent quasi-rents, i.e., temporary scarcity rents. Of
course, that doesn't quite explain why savings never lose their scarcity
value, so that the interest rate zooms to zero.

He adds: >I should have said that mainstream theory suggests another
possible explanation for positive interest rates that, like explanations
based on time or risk preferences, is consistent with the operation of
competitive and complete markets.  Of course nothing ensures that the
relevant markets in which interest rates arise have these "nice" properties.
Leaving that restriction aside, mainstream theory could adduce explanations
based on market power (e.g., collusive rate-setting) or contractual
imperfections (e.g., "efficiency" interest rates, as in the Stiglitz/Weiss
model of credit rationing).<

I don't think that these latter explanations that orthodox theory could
adduce help us with the question at hand. They are microeconomic
explanations, that don't explain the general (macro) rate of interest,
perhaps as measured by the yield on a minimum-risk corporate bond (or by an
average of empirically-existing interest rates). Rather, they explain
differences of interest rates between different lenders or markets.

If I understand Marx's theory correctly, it explains the general interest
rate within the framework of the supply of and demand for loanable funds,
though of course it adds some twists by putting this market into a societal
context (while not assuming full employment as the original theories of
loanable funds did). Interest is one piece of the surplus-value, so that if
workers aren't dominated in society and thus exploited, there is no
production available with which to pay interest. The concept of interest
arises because of the "division of labor" that has developed historically
between industrial capital and money-lending (banking) capital. The
industrial capitalists are willing to share some of the surplus-value that
they've pumped from their workers with the banking capitalists because the
latter provide the service of financial intermediation. (Marx saw that
service as "unproductive," but that's another issue, one I won't touch.) In
this view, the long-run equilibrium interest rate -- a.k.a. the "natural
rate of interest" of Wicksell _et al_ -- would depend on the relative
institutional power of industrial capital and banking capital and would thus
change between historical eras. Supply and demand would lead to fluctuations
about this equilibrium, as in the business cycle (see vol. III of CAPITAL).

BTW, I don't see any significant contradiction between Marx's theory and
that of Keynes. The latter can be used to enrich the details of the former,
while the former provides a more sophisticated understanding of the societal
context.

JD