Does the Rate of Interest Determine the Rate of Profit?
Does the rate of interest on money, as fixed by the Central Banking Authorities, determine the rate of profit? There is a suggestion to this effect in Sraffa (1960, p. 33) and Pivetti (1985) has interpreted this to mean that the ‘normal’ rate of profit, as opposed to the actual rate, will be governed by the effects of the rate of interest on the ratio of money prices to money wages: a fall (rise) in the rate of interest will lower (raise) costs, so will lead to lower (higher) prices, but there will be no similar effect on money wages. So a fall (rise) in the rate of interest will bring a rise (fall) in the real wage; thus the rate of profit will move in the same direction as, and by a magnitude proportional to the change in the rate of interest. In short, ‘lasting changes in interest rates must be followed by corresponding changes in normal profit rates’ (Pivetti, 1985, p. 81). Similar arguments have been advanced by Panico (1985) who finds the root of the idea in Keynes’ Chapter 17, by Vianello, (1985) and by Schefold, (1985), who limits the claim by arguing that the mechanism works only under historical conditions of slow accumulation.
KeywordsIncome Defend Undercut
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