Interest and Profit
John Smithin
York University
Purpose of the paper

This paper argues that it important to distinguish between the
real rate of interest on money and the profitability of business
enterprise.

The former is a monetary phenomenon (as claimed by
Keynes) and the latter is in the nature of a surplus over and
above the costs of production, including financing costs.

There must therefore be an inverse relationship between the
real rate of interest and the average mark-up or profit share.

A synthetic theory of profit is presented to illustrate these
points.
What is the relationship between interest
and profit?

neoclassical theory seems confused on this issue
due to ontological uncertainty about both concepts

there is no real theory of profit (as such) in neoclassical
theory; we must therefore turn to (e.g.) the older Marxian
theory and to the (still older) classical theory; then develop
a new (synthetic) theory that avoids some of the problems
found with the earlier theories

the synthetic theory has significant “Keynes/Kalecki”
elements
Surplus value
(1)
y = s + c + v
(2)
s’ = s/v
(3)
p = s/(c + v)
Equalization of profit rates?

Rima (1996)
“(e)conomy-wide equalization is brought about by
inter-industry capital movements. If the rate of profit
is above average in ... (some) ... industries ...
capital will tend to be attracted from industries...
where the rate of profit is lower than average, until
the average is ... (the same) ... for all.”

But, how can this happen in reality? Only “money”
can actually flow freely.
An alternative theory of profit
(5)
ye = s + (1 + i)c + (1 + i)v
(6)
ye = (1 + s’ + k’)(1 + i)v
s’ = s/[v(1+i) - analog to Marxian “rate of surplus value”
k’ = c/v - related to Marxian ‘organic composition of capital”
k = k’ + s’ - “gross” profit share (but net of interest charge)
In standard economic notation:
(7)
P+1Y = (1 + k)(1 + i)WN
(8)
Y = AN
take logs:
(9)
lnP+1 = k + i + lnW - lnA
Reduce to simple “adding up” theory
(10)
lnP+1 - lnP = k + i + lnW - lnP - lnA
(11)
k = lnA + [i - (lnP+1 - lnP)] - (lnW - lnP)
(12)
k = a - r - w
Fig 1: Distribution of income between
wages, interest and profit
Figure 2: Decreasing returns to labor
inputs
Figure 3: Increasing returns to labor
inputs