The influence of the interest rate in capitalist competition: capital differentiation and structural change

Abstract

We contribute to the Marxist discussion on the role of the interest rate in the investment and financing decisions of firms, a crucial dimension that has not received sufficient attention in the literature. The market rate of interest acts as a benchmark for the profit rate of each capital, allowing firms to decide how to allocate their funds between industrial accumulation and financial valorization. Once they resolve to invest, the interest rate also influences their choice on how to finance the investment between their own and borrowed capital. Considering capitalist competition as a process resulting in the differentiation between ‘normal’ capitals - that appropriate the general rate of profit - and ‘small’ capitals - that appropriate a lower-than-general rate of profit -, we show that changes in the interest rate have different consequences for these two types of capitals. ‘Normal’ capitals invest if the general rate of profit is higher than the interest rate and borrow capital to finance their investment, thereby appropriating a higher rate of profit of enterprise. Meanwhile, ‘small’ capitals are regulated by the interest rate. If the rate of interest increases, even if it remains below the general rate of profit, it could push them into bankruptcy and turn them into interest-bearing capital. Moreover, they face restrictions to access credit, further widening the gap between their rate of profit of enterprise and that of normal capitals. Finally, the paper presents some ideas to build a framework to analyze the consequences of different interest rate regimes for structural change in the context of capital differentiation, and argues for state direction of credit.