MPKE-2024-0033 Proof Hi

Journal of Post Keynesian Economics
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Banking sector, distributive conflict and monetary theory of

distribution
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Journal: Journal of Post Keynesian Economics
Manuscript ID MPKE-2024-0033
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Manuscript Type: Original Article
interest rate, profit rate, monetary theory of distribution, distributive

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Keywords:
conflict, NIRP
This paper analyses the implications of distributive conflict for the

monetary theory of distribution. After a brief discussion of the literature
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on the subject, the paper discusses the ability of this approach to explain
the coexistence of near-zero (if not negative) interest rates and low real
wages. The difficulty in explaining this economic phenomenon opens the
way to a more general discussion of the dynamics inherent in the
Abstract:
contrast between workers and capitalists and between financial and
productive capitalists. Thus, the analysis shows that 6 different
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distributional configurations are possible, of which only 2 can be

explained through the monetary theory of distribution. The other 4 can
be explained by elaborating more recent approaches that continue,
enrich and develop Marx's ideas.
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URL: https://mc.manuscriptcentral.com/jpke E-mail: jankregel@yahoo.com, wray@bard.edu

Page 1 of 27 Journal of Post Keynesian Economics
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Banking sector, distributive conflict and monetary theory of
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27 Abstract: This paper analyses the implications of distributive conflict for the monetary theory of
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distribution. After a brief discussion of the literature on the subject, the paper discusses the ability of
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30 this approach to explain the coexistence of near-zero (if not negative) interest rates and low real
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32 wages. The difficulty in explaining this economic phenomenon opens the way to a more general
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discussion of the dynamics inherent in the contrast between workers and capitalists and between
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35 financial and productive capitalists. Thus, the analysis shows that 6 different distributional
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37 configurations are possible, of which only 2 can be explained through the monetary theory of
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39 distribution. The other 4 can be explained by elaborating more recent approaches that continue,
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enrich and develop Marx's ideas.

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52 Disclosure statement: The author reports there are no competing interests to declare.
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57 Keywords: interest rate; profit rate; monetary theory of distribution; distributive conflict, NIRP.
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59 JEL: E11; E43; E50.
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Journal of Post Keynesian Economics Page 2 of 27
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3 Introduction
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7 The monetary theory of distribution of Pivetti (1991) is a very interesting explanation of
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distribution, in which the central bank plays a key role in the division of income between capital and
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10 labour. According to this approach, the profit rate is divided into two components: the interest rate,
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12 which is the risk-free return on capital,1 and a given risk premium. Since capital could be lent out at
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14 a return equal to the interest rate or invested as equity by obtaining the full profit rate (sum of
15 interest rate and risk premium), the interest rate is considered the opportunity cost of equity
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17 investment. It is also assumed that the monetary wage is given but not the real wage, with the result
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19 that as the central bank changes the interest rate, the profit rate and thus the real wage will vary.
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This approach has been the subject of various criticisms to which the author has often responded
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22 and is still quite widespread in the classical-Keynesian and post-Keynesian schools. Many of these
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24 criticisms concern a certain automaticity in the transmission of a change in the interest rate into a
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26 change in the real wage (Wray, 1988; Nell, 1988; Mongiovi and Rühl, 1993; Hein, 2006, 2019).
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Comparing the monetary theory of distribution with other approaches that are 'opposite', insofar as
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29 they are based on a causal relationship between the rate of profit and the interest rate going from the
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31 former to the latter, it is also necessary to analyse the ability of these approaches to explain more
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33 recent economic-financial phenomena. In fact, in the last decade, central banks in many important
34 world economic areas (such as the ECB, the BoJ...) have used negative policy rates, transmitting
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36 these negative values to other financial rates (especially government bonds), but real wages have
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38 remained rather stagnant, especially in Europe. Pivetti's approach (Pivetti, 2019) seems to have
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difficulty explaining these recent economic phenomena.
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41 Taking into account not only the conflict between capital and labour, but also between groups of
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43 capitalists, depending on social, economic and institutional political circumstances, it may be more
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45 appropriate to take the interest rate or the real wage as the independent variable in the distributive
46 conflict. This analysis takes up some of Garegnani's insights (Gregnani, 1978-1979; 1984) on which
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48 variable to consider independent between the interest rate and the real wage, as well as the
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50 elaborations of the banking and financial system by Shaikh (2016) and Zolea (2022a).
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Considering the power relations between workers, productive capitalists and financial capitalists,
53 from a theoretical point of view six scenarios can be identified, of which only two are easily
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55 explained by the monetary theory of distribution. In the other cases, it seems more appropriate to
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57 consider the real wage as an independent variable. In the appendix, then, we try to elaborate on a
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This approach takes up the idea of the classics that the loaned capital is insured (Smith, [1776] 1904; Mill, [1848]
1965). Guarantees are usually demanded before the loan is made.
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3 point not explored by Pivetti but rather relevant fort the monetary theory of distribution, namely the
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5 role of the banking system.
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7 The paper is organised as follows. The first section introduces Pivetti's approach. The second briefly
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examines the debate on it. The third discusses the difficulties of Pivetti's theoretical framework in
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10 explaining negative interest rates and low real wages. The fourth section discusses the assumptions
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12 underlying the various approaches on the subject, in particular the power relations between 'classes'
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14 and 'subclasses' of capitalists. Conclusions follow. Finally, Appendix A proposes an attempt to
15 incorporate the (commercial) banking sector within Pivetti's approach.
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1 The Monetary Theory of Distribution
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23 The approach of Pivetti consists in overturning the causal relationship between interest rate and
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profit rate hypothesised by the classics (Smith, [1776] 1904; Ricardo, [1821] 1951). 2 He takes his
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cue from a passage in chapter five of Production of Commodities by means of Commodities3
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(Sraffa, 1960) which seems to suggest precisely this idea.4

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30 Pivetti's theory (1985, 1987, 1988, 1990, 1991) does not deal directly with bank profitability, but
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32 2
Mention of this hypothesis is also made by Sylos Labini (1971); Garegnani (1978-1979); Vianello (1985); Roncaglia
33 (1988); Schefold (1989).
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Sraffa (1960), p. 39:
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35 The rate of profits, as a ratio, has a significance which is independent of any prices, and can well be 'given'
36 before the prices are fixed. It is accordingly susceptible of being determined from outside the system of
37 production, in particular by the level of the money rates of interest.
38 4
See also some interesting unpublished passages by Sraffa on the interest rate in Arena (2015), taken from the archives
39 of Wren Trinity, Cambridge (Sraffa, Archives, https://archives.trin.cam.ac.uk/index.php/papers-of-piero-sraffa-1898-
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1983-economist ). It should also be noted that in a letter to Garegnani dated 03/13/1962 (quoted by Stirati, 2022, p.
41 257), Sraffa seems to want to play down the importance of this passage (Sraffa, 1960, p. 39) and refrain from
42 elaborating a theory linked to this statement:
43 But for the review it is perhaps best not to venture too far into this terrain: I did not intend to say anything very
44 challenging, and in general I only wanted to put out a few signals to avoid the belief that the system is being
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45 presented as a 'foundation' for a theory of the relative supply of capital and labour! It is the negation that seems
46 important to me: as for the affirmative, I have no intention of putting forward another mechanical theory which,
47 in one form or another, reiterates the idea that distribution is determined by natural, or technical, or perhaps
48 accidental circumstances {the earlier version of the letter adds: 'or in any case extraneous'} but in any case such
49 as to render futile any action, on one side or the other, to modify it {the previous version of the letter adds: (and
50 here, between us, I also have in mind at Cambrid[ge] as Pasinetti christened it the theory that makes the profit
51 rate depend on the growth rate)}. In conclusion I would say that in the review it is better not to insist too much
52 on the obiter dictum of the monetary essay of interest. [my translation; original version: Ma per la recensione è
forse meglio non avventurarsi troppo su questo terreno: io non ho inteso dir niente di molto impegnativo, e in
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generale ho solo voluto metter fuori qualche segnale per evitare che si creda che il sistema viene presentato come
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“fondamenta” per una teoria delle offerte relative di capitale e di lavoro! È la negazione che mi sembra
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importante: quanto alla affermativa non ho nessuna intenzione di mettere avanti un’altra teoria meccanica che, in
56 una forma o nell’altra, ribadisca l’idea che la distribuzione sia determinata da circostanze naturali, o tecniche, o
57 magari accidentali {la precedente versione della lettera aggiunge: “o comunque estranee”} ma comunque tali da
58 rendere futile qualsiasi azione, da una parte o dall’altra, per modificarla {la precedente versione della lettera
59 aggiunge: (e qui, sia detto fra di noi, ho in mente anche alla Cambrid[ge] come l’ha battezzata Pasinetti la teoria
60 che fa dipendere il saggio del profitto dal saggio di crescita)}. In conclusione direi che nella recensione è meglio
non insistere troppo sull’obiter dictum del saggio monetario dell’interesse].
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3 more generally with the relationship between interest rate and profit rate. His approach is however
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5 very similar in its conclusions to Panico's, the latter being based on the analysis of the banking
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7 sector.5
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The first question posed by Pivetti is which variable is to be considered independent between the
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10 profit rate and the wage rate (Pivetti, 1985).6 Since the real wage may contain a part of surplus,
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12 considering it as the independent variable seems arbitrary. The profit rate, on the other hand, seems
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14 to be composed of two parts, the interest rate on long-term loans, which can be regarded as the pure
15 remuneration of capital, and the 'profit of enterprise', which remunerates the risk and trouble of
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17 productive activity. As one of the two components (or both) increases, monetary prices will
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19 also increase.
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The interest rate can be controlled more or less directly by the central bank; if, therefore, the central
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22 bank controls one part of the profit rate, it follows that, if the other part is roughly given, the total
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24 profit rate is determined by the central bank. Necessary conditions for a conception of the profit rate
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26 as the sum of two autonomous components and as an increasing function of the interest rate are thus
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the stability of the normal enterprise profit and its independence of the interest rate. If, in fact, the
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29 enterprise's profit decreased as the interest rate increased, the profit rate could decrease. 7
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31 Given the nominal wage, the interest rate determines the profit rate and prices and, thus, the real
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33 wage and the entire distribution. Pivetti then analyses the relationship between profit of enterprise
34 and interest rate in the classics and in Marx. In his analysis profit of enterprise and interest rate are
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36 the two determinants of the profit rate, whereas for Smith, Ricardo and Marx they are the two
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38 parts into which profit is resolved (Pivetti, 1985).
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In the classics, it is the profit rate that determines the interest rate, in a residual position with
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41 respect to the risk and trouble premium, objective or presumed to be such, of entrepreneurial
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43 activity; in Marx, on the other hand, the interest rate is rather autonomous from the profit rate and
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45 the enterprise's profit is a residual quantity not linked to the idea of a premium. Pivetti
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observes, however, that without the idea of a risk premium business profit could only tend to
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49 Ginzburg and Simonazzi (1999) in addition to what is theorised by Pivetti (which they consider to be a direct
50 mechanism), hypothesise an indirect mechanism, operating in industrialised countries, whereby the interest rate
51 influences production costs through the relationship between the interest rate and commodity prices.
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52 Pivetti (1985), p. 73:
Within the classical-Marxian approach to distribution the real wage rate and the rate of profit are not
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symmetrically and simultaneously determined: on the contrary, after either one of these two variables has been
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explained independently from both the social product and the other distributive variable, then the other one is
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determined as a residue. Once the view is abandoned that real wages consist of the necessary subsistence of the
56 workers, and the possibility of variations in the division of the social surplus is admitted, a theory of distribution
57 on these lines requires a solution to the question of which of the two distributive variables should be regarded as
58 independent or 'given' in the present reality of the capitalist economy, and through which social-institutional
59 channels distribution between profits and wages is actually arrived at.
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In contrast, a direct relationship between interest rate and risk premium would give rise to a direct relationship
between interest rate and profit rate. However, Pivetti's conception has two independent components.
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3 zero, driven by competition. Thus, he embraces a conception closer to the thesis of Smith and
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5 Ricardo, although he keeps in mind the importance of Marx's idea that the determination of the
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7 interest rate is influenced by various economic, social and institutional components and is not
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directly linked to the profit rate (Pivetti, 1987; Pivetti, 1991, pp. 68-69). The consequence is
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10 that in Pivetti's approach the risk premium is considered autonomous as in Smith's and Ricardo's
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12 approach, while the interest rate is autonomous, echoing Marx's analysis: from the sum of these
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14 two quantities, we obtain the profit rate.
15 However, Pivetti believes that his own conception is not at odds with the Marxian idea of
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17 distribution based on class struggle: he does not deny the struggle between classes, rather he
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19 specifies the terrain of conflict.

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The real wage thus becomes the dependent variable in the analysis of the relationship between
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22 profits and wages. With normal enterprise profit taken as given, attention must focus on the interest
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24 rate, and the interrelationship between wage policy and monetary policy, to explain the distribution
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26 between capitalists and workers. This approach takes into account the fact that wage bargaining
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primarily determines the monetary wage; then, the price level is explained along with the
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29 distribution.
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31 For each industry there is a different risk and trouble premium, which, added to an equal interest
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33 rate, equivalent to the opportunity cost, leads to a different total profit rate for each industry. For the
34 same risk (and trouble), however, the rate of profit is the same.
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36 Pivetti's intuition can then be inserted into a system of equations analogous to that of Sraffa, 1960
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38 (e.g. as hypothesised by Mongiovi and Rühl, 1993, pp. 92-93):
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[1] 𝒑 = 𝒑𝑨(1 + 𝑟 ∗ ) + 𝑤𝒍 = 𝑤𝒍[𝑰 – 𝑨(1 + 𝑟 ∗ )]−1
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43 [2] 𝑟 ∗ = 𝑟𝑛 + 𝑖
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45 where A = unit input coefficient matrix, l = vector of labour input per unit output, w =
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47 monetary wage, p = vector of monetary prices, r* = profit rate, rn = normal profit of enterprise, i =
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49 long-term interest rate.
50 When the interest rate changes, so do prices and thus the real wage. If i is assumed to increase, p
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52 will increase and the w/p ratio will decrease. If workers were to achieve an increase in
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54 monetary wages to compensate for the reduction in real wages, an inflationary spiral could be
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created.
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60 2 Criticism to Pivetti’s Approach
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3 First, it seems useful to report the opinion of Garegnani (1984, p. 320, note 49), regarding the idea
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5 that real wages can contain a part of surplus:
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8 The view that the wage can exceed the level of subsistence for long periods of time seems indeed
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10 implied also in the very idea of a rising subsistence level. This rise can result only from wages
11 remaining above the previous subsistence level for a period of time which is long enough to
12 engender those 'habits' which may then become a 'second nature' in Torrens's phrase later adopted by
13 Ricardo […] and by Marx […]).
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16 Therefore, Garegnani (1984, p. 321) continues:
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19 The real wage will then appear in the "core" as the magnitude which has been determined in both
20 level and composition by the circumstances in question: profits will continue to be determined as a
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pure residual, though now they will not constitute the entire surplus.
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It seems, therefore, that Garegnani does not consider the possibility that real wages may contain a
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26 part of surplus to be a problem in order to assume the real wage to be the independent variable of
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30 Wray (1988) argues that the idea of the division of the profit rate into risk premium and interest as
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pure remuneration of capital does not fit with a conflictual view of society, which can be traced
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33 back to Marx, which he agrees with most: the very existence of financial capitalists entails their
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35 group interest in contrast to that of workers and the result that the division between interest rate
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37 and enterprise profit comes to depend on this contrast. An economic analysis without contrast
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reminds Wray of the marginalist approach, where interest is the remuneration of waiting and
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40 enterprise profit of the trouble of organising production.8 Finally, Wray points out that Pivetti
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42 does not clarify how the monetary authority sets the interest rate. Pivetti (1988) responding to the
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44 criticism of Wray (1988)9 reiterates the conformity of his own explanation of the distribution with
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45 the theoretical scaffolding of the surplus approach, considering on the contrary difficult to accept in
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47 a modern capitalist system to assume the real wage as given once the material subsistence level of
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49 the workers is exceeded. The independent variable is thus the rate of interest, the determination of
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which according to Pivetti (1988) is not subject to any general law, but depends on a series of
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52 objectives and constraints with which the authorities are confronted in different ways according to
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Wray (1988, p. 272, note 7):
56 Pivetti's decomposition of the rate of profit into a portion attributed to trouble and risk and a portion due to the
57 interest rate is strikingly similar to that of neoclassical theory. Entrepreneurs earn profit due to the pain of
58 investing, while money capitalists earn interest due to waiting.
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It should also be noted that Pivetti (1988) responds also to the criticism of Nell (1988) who considers the interest rate
60 set by the monetary authorities to be a short-term variable, subject to many variations and difficult to compare with the
rate of profit.
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3 the historical-social context analysed. These factors include the contrast between classes.
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5 Some interesting elements of the analysis by Wray (1988) should be highlighted. Pivetti's
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7 explanation of distribution certainly does not deny the struggle between classes, but a risk-based
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division of the profit rate does not seem immediately compatible and superimposable with a
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10 contrast-based view of the relations between finance and productive sector, as in Marx. The contrast
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12 between subgroups of capitalists might be part of the conditions determining the choices of
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14 monetary authorities, but the link is rather indirect and remains vague. Moreover, a precise
15 specification of the relationships between the Treasury (as issuer of government bonds), the
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17 central bank and the banking sector, as well as the relationships between interest rates on
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19 government bonds, central bank policy rates and bank rates is absent from Pivetti's analysis.
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Mongiovi and Rühl (1993) offer a further critique10 of the monetary theory of distribution,
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22 criticising the idea of considering normal enterprise profit and the monetary wage as exogenous
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24 variables, thus preferring an approach in which it is the real wage that is considered as given11. This
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26 point echoes the Marxian view based on the conflict between classes. If, in fact, enterprise
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profit is not given exogenously, the effects of a change in the interest rate will be discharged
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29 between classes according to power relations and there is no economic rule that can determine the
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31 effects a priori.12
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33 To conclude, we add to these debates13 an observation on the zero tendency of the risk premium
34 when it is determined residually. As mentioned above, this point in Marx's analysis is criticised
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36 by Pivetti (Pivetti, 1987; Pivetti 1991, pp. 68-69), who believes that if the risk premium is
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38 considered a residual, it should tend to zero driven by competition. Considering, however, as Marx
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does, this part of the profit rate as the fraction of the profit rate accruing to the productive
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41 capitalist, it does not seem necessary that it should tend to zero. Indeed, competition would drive
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43 this residual to zero if it were not the remuneration of the productive function of capital (and the
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45 interest of the financial function): in other words, if this residual were zero, no capitalist would
46 have any reason to go into debt in order to produce, since he would earn zero, net of interest
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50 Mongiovi and Rühl (1993, p. 93) state that the central bank often changes interest rates and it is therefore difficult to
51 imagine the interest rate as a sufficiently stable quantity to be compared with the normal profit rate, a theoretical and
52 long-run quantity (this point was also discussed by Nell, 1988).
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The criticism expressed is similar to that of Wray (1988). Similar views are also expressed by Argitis (2001) and Hein
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(2006, 2019). Hein (2006, 2019) considers the theories of monetary determination of distribution (including the work of
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Panico, 1988) incompatible with the Marxian approach because they would ignore the contrast between the subclasses
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of capitalists: changes in the interest rate may have effects on the distribution between wages and profits, but these
56 effects are highly dependent on the market power of firms and the bargaining power of productive capitalists and
57 workers.
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Mongiovi e Rühl (1993, p. 94):
59 It follows that an increase in the interest rate is as likely to squeeze (net) profits as it is to reduce real wages.
60 13
Note also the remarks of Ciccone (1990) taken up by Serrano (1993) and Stirati (2001) on the role of the real interest
rate and monetary theory of distribution.
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3 payments and other costs. The remuneration of the productive function of capital does not
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5 derive from the idea of a risk premium for the risk of production, but from the strength of the
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7 subgroup of productive capitalists relative to financial capitalists: it is residually determined14
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but depends in Marx on the contrast between subclasses of capitalists (productive and interest-
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10 bearing) and on more or less relevant influences of the general conditions of the financial and
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12 monetary sector and of competition on the determination of the interest rate. All these elements,
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14 however, play on the balance of power between the two groups of capitalists, generating a level of
15 the residual that can be considered stable and historically determined.15
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17 Indeed, from Pivetti's point of view, if the risk premium were not objective or considered as such, it
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19 could only tend to zero,16 but it does not seem correct to assume a similar mechanism within the
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Marxian approach, where the enterprise profit is not considered as a 'premium'.
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22 There is therefore no internal contradiction in the Marxian approach, as suggested by Pivetti, but a
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24 difference in starting assumptions and points of view between the two authors, who arrive at
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26 different conclusions.
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34 3 Monetary Theory of Distribution and Negative Interest Rate
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37 In recent years, the rates set by the central bank in many countries have been close to zero or even
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39 negative. Thus, the risk-free remuneration of capital has been close to zero or negative, while real
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wages do not seem to have grown considerably (see for example Stockhammer, 2015; INPS, 2019),
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42 indeed, in Italy they have even decreased (ILO, 2022).17 As a result, almost the entire profit rate
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44 has been absorbed by the risk premium.18 Since within Pivetti’s theoretical framework the risk
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47 To better illustrate the point, consider that taking the real wage as given, the profit rate is also residually determined
48 (together with the price system), but does not tend to zero due to the bargaining power of capitalists. See Marx ([1939-
49 1941] 1997, vol. II, pp. 770 – 771).
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50 In Marx, as noted above, the interest rate is the part of the profit rate that goes to the financial capitalist, with the
51 remainder going to the productive capitalist. The division of the profit rate is functional, how profits are then divided
52 materially between individuals is a purely empirical question, like the division of profits between the shareholders of a
company. In Pivetti's analysis, instead, the division of profits between subgroups of capitalists is not important since the
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interest rate constitutes the opportunity cost of investing capital in real assets and is the pure (i.e. risk-free) remuneration
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of capital.
55 16
One could also elaborate and discuss why in the classics the risk (and trouble) premium is considered 'objective', i.e.
56 exogenous.
57 17
See ILO (2022), in particular Figure 3.5, p. 52.
58 18
Pivetti (2019, p. 172, footnote 10 (p. 182)):
59 The epoch-making policy shift away from full employment that took place at the end of the 1970s reduced the
60 incentive to invest throughout advanced capitalism, lowering the rate of growth of fixed capital formation to less
than half what it had been in the 30-year period following WWII. The point is that a reduction of the incentive to
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3 premium is autonomous from interest rate variations, the only possible explanation for the interest
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5 rate decrease not accompanied by a wage increase lies in assuming two independent movements of
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7 the two variables interest rate and risk premium in opposite directions (Pivetti, 2019). Pivetti
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(2019), addresses this issue, asserting that a (real) interest rate around zero implies a base return on
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10 capital, as well as an opportunity cost of production, of zero. Pivetti (2019) explain the failure to
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12 raise wages by arguing that the role of opportunity cost was taken over by some positive
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14 speculative financial rate, perhaps share19 (and thus riskier). He then summarises his thinking, on
15 the paradoxical effects of negative rates, seen as a brief economic parenthesis of no importance
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17 (Pivetti, 2019, p. 178):
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The relevant point here is, in my view, that under capitalism private ownership of wealth, as
21 distinct from ownership of productive capital, cannot permanently cease to yield an income,
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22 independently of the forms of its employment. Nor can the bulk of that income be permanently
23 ensured by speculation and capital gains. In the context of a permanent zero interest-rate policy,
24 mere private ownership of wealth would cease to be a sinecure, the credit system would collapse
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26 and capital income could continue to exist only as profits of enterprise. The net output or surplus of
27 the economy would thus accrue to labour, but for the remuneration of the risks incurred in the
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various productive employment of wealth. A state of "euthanasia of the rentier" - that is, practically
29 our having got out of capitalism - would thus have been achieved simply though monetary policy,
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without any social revolution.
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33 We note in this passage that Pivetti (2019) makes the pure remuneration of capital, based on
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differences in the degree of risk, coincide with the remuneration of the financial function of capital
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36 of the Marxian type,20 based on the contrast between subclasses of capitalists. As we have seen
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39 invest is one and the same thing as an increase of the risk of productively employing capital, that must perforce
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result in a rise of the normal component of profit necessary to remunerate it. As to the increased weight of the
41 financial sector, it is widely acknowledged to have increased the share of business profit in total value added, as
42 well as the ratio of total value added to money wages.
43 19
As mentioned above, it should be noted that the banking sector is not included in Pivetti's analysis. The base rate thus
44 coincides with the rate on long-dated government bonds (Pivetti, 1991, p. 21; 2019). In any case, this confusion between
ly
45 the role of equity and debt capital is rather strange (Pivetti, 2019, pp. 177-178):
46 In the light of the recent experience of advanced capitalism, one might be led to believe that the ‘void’ left in
47 normal profit margins by the longterm rate of interest could perhaps be filled by some rate of return on
48 speculative financial investment, i.e. by persistently higher stock prices/ earnings ratios [italics added] which
49 would thus become the new opportunity cost of capital employed in production.
20
50 See footnote 21, p. 184, at the end of the above-mentioned passage from Pivetti (2019, p. 178):
51 In Marxian terms, permanent zero real interest would imply that in the first phase of the circuit M – C – M’, M
52 could never be anticipated by someone who was not himself the operating capitalist. For all those who did not
intend to transform their money into productive capital, themselves, hoarding would obviously be the best
53
choice: “[t]he miser’s plan would be far simpler and surer; he sticks to his 100 pound sterling instead of exposing
54
it to the dangers of circulation” (Marx 1887, p. 147). After having observed that a large part of social capital is
55
not employed by its actual owners, Marx points out that with the development of loan capital “[t]he last illusion
56 of the capitalist system, that capital is the fruit of one’s own labour and savings, is destroyed. Not only does
57 profit consist in the appropriation of other people’s labour, but the capital with which the labour of others is set
58 in motion and exploited consists of other people’s property, which the money capitalist places at the disposal of
59 the industrial capitalists, and for which he in turn exploits the latter” (Marx, [1894] 1959, p. 496). He finally
60 emphasizes that “as long as the capitalist mode of production continues to exist, interest-bearing capital, as one
of its forms, also continues to exist and constitutes in fact the basis of its credit system. Only that sensational
9
1
2
3 before, however, for Marx there is no reason why the part of the profit rate that goes to the
4
5 financial capitalist should be risk-free or coincident with opportunity cost, so that the productive
6
7 capitalist is left with something definable as a risk premium. On the contrary, this part is the
8
9
subject of clashes between subclasses of capitalists, and is influenced by various factors, among
10 which riskiness does not enter directly: i.e. given a certain opportunity cost for investment in the
11
12 economy, the financial function of capital in Marx's terms could without any theoretical problem
13
14 obtain a remuneration far higher than the risk-free one.
15
From an empirical point of view, one can then observe that the deposit facility rate was in negative
16
17 territory in the EU from 2014 to 2022 and the main refinancing rate at zero from 2016 to 2022 (not
18
Fo
19 to mention that both rates had already been very close to zero for some years). In a nutshell,
20
21 a not exactly short period of time (about 10 years) in which nominal policy rates have been
rP
22 around zero or negative.

23
24 Furthermore, by including the banking sector in the picture and thus making the base rate coincide
ee
25
26 with the deposit rate (see Appendix A), it is evident that bank lending rates are higher than the
27
28
risk-free base rate, clearly distinguishing the remuneration of the function of the financial capitalist
rR
29 from the idea of a division according to the degree of risk.

30
31 The analysis conducted in other approaches, as Shaikh (2016) and Zolea (2022a), outside the
ev
32
33 theoretical apparatus of Pivetti, allows a better explanation of the compatibility of such low interest
34 rates with the capitalist system. First of all, considering the real wage as given, the decrease in the
iew
35
36 interest rate corresponds to an increase in the residual enterprise profit, without having to resort to
37
38 independent movements of the two magnitudes that compensate each other while keeping the
39
40 total profit rate unchanged. Moreover, the introduction of the banking sector modifies the
On
41 framework of analysis, making the role of the Marxian financial capitalist substantially coincide
42
43 with that of the banker, whereas in Pivetti's analysis, the latter seems more akin to a figure of the
44
ly
45 bondholder. Indeed, it is possible to identify the figure of the Marxian financial capitalist with both
46
the banker and the bondholder, but the banker seems to suit better this role,21 as Marx himself
47
48 believes (see also Bellofiore, 2020, p. 240).
49
50 Indeed, the rate on bank loans, as rightly noted by Pivetti (2019) cannot be zero, or negative, for
51
52 extended periods of time. If this were to happen, credit activity would no longer be profitable, i.e.
53 advancing the monetary capital (interest-bearing capital, Marx, [1894] 1959) that the entrepreneur
54
55
56 writer, Proudhon […] was capable of dreaming of a crédit gratuit, this monster which was supposed to realise
57 the pious wish of small capitalist production” (ibid., p. 594).
58 21
Pivetti (2019) believes that a negative (or zero) remuneration of the financial capitalist is impossible in capitalism.
59 Since, however, it is bond rates that are negative and not bank rates, it can be assumed that he identifies the financial
60 capitalist in the bondholder. Pivetti (1991, p. 21), identifies the base rate in the rate on long-term government bonds and
secondarily in the rate on the safest bonds.
10
1
2
3 transforms into productive capital by using it in production (Marx, [1894] 1959). With the
4
5 disappearance of the credit system there would remain for the productive capitalist only the use of
6
7 his own capital, essentially the end of contemporary capitalism.
8
However, the bank interest rate was by no means zero or negative. Some central bank policy rates
9
10 went below zero (in Europe and Japan), as did those of some government bonds issued by states
11
12 (as well as some rates on deposits with banks). Bank lending rates remained positive. It is
13
14 important to clarify what the interest rate is at each level of abstraction: at a very abstract level,
15 where a single interest rate is assumed, this can only be positive; however, this rate must be
16
17 identified with the bank lending rate. In an analysis at this level, policy rates or bond rates have no
18
Fo
19 place. By going down to a lower level of abstraction and considering a complex and articulated rate
20
21
structure, the role, effects and significance of particular negative or zero rates can be studied.
rP
22 Since, therefore, the bank lending rate was and is positive, considering only the remuneration aspect
23
24 of financial capitalists, it can be assumed that a situation of near-zero or slightly negative policy
ee
25
26 rates could continue indefinitely. The banker, in fact, earns on the difference between lending and
27
borrowing rates: provided this delta remains unchanged, the profitability of capital is guaranteed
28
rR
29 even in the event of a fall in interest rates in the financial system.22 On the contrary, a bond with
30
31 a very low rate (zero or negative rate) would give a very low remuneration to the investor (equal to
ev
32
33 zero or even negative), thus becoming unattractive for the investor, except for rather risky
34 speculative reasons.23
iew
35
36 Furthermore, if one assumes a higher than normal bank profit rate, within a certain limit even a
37
38 reduction in the difference between bank lending and borrowing rates and thus in the profit rate
39
40
would not drive financial capitalists out of the banking sector.
On
41 Negative nominal rates have been a reality for about 8 years in the EU and for about 10 in Japan
42
43 (not counting real rates). This phenomenon is apparently at odds with the conception of the interest
44
ly
45 rate as remuneration for financial capitalists, but a careful reconstruction of the reference rate for
46
financial capitalists explains and resolves what at first glance might seem an aporia. Moreover, the
47
48 analysis of banking operation illustrates why the bank can remain a profitable industry even in
49
50 the presence of negative rates.
51
52
53 22
Using such low policy rates, indeed, beyond a certain level could also put bank profitability at risk. See the discussion
54
on the Zero Lower Bound (ZLB): Brunnermeier and Koby (2017); Palley (2018); Bertocco and Kaljzic (2018).
55
European banks seem to have reacted effectively to the challenge, also with the help of the ECB (ECB, 2020). Nor do
56 there seem to have been any particular bank failures linked to these low interest rates so far. Instead, the rise in interest
57 rates also had the effect of decreasing the value of the stock held by banks of previously issued securities (as
58 hypothesized by Palley, 2018). This is one of the central elements of the recent failure of Silicon Valley Bank and
59 Signature Bank and the collapse of Credit Suisse.
60 23
There is the possibility of capital gains by selling at a higher price than buying, a rather risky operation in the context
of negative-rate securities.
11
1
2
3
4
5 4 A More General Approach to Distribution
6
7
8
As seen above, Pivetti's approach has some difficulties explaining the co-existence of negative
9 interest rates and low real wages. On the contrary, following Marx ([1894] 1959) and the idea of the
10
11 contrast between classes and between subclasses of capitalists, one can explain this situation more
12
13 easily -see also Shaik (2016) and Zolea (2022a), who reprise and deepen Marx's analysis. For
14
Shaikh (2016) in fact the real wage is given and the interest rate can be determined as the price of
15
16 the commodity 'loan' - the output of the banking sector - just as the prices of other commodities are
17
18 determined. Thus, the profit rate determines the interest rate and their difference makes it possible
Fo
19
20 to derive the enterprise's profit. As Zolea (2022a, 2022b) points out, the loan must be considered a
21 non-basic commodity24 in order to consider the profit rate a determinant of the interest rate.
rP
22
23 Otherwise profit rate and prices, including the interest rate, would have to be determined
24
ee
25 simultaneously, making it impossible to identify any causal relationship.

26
27
Thus, in the case of low interest rates and low real wages, the puzzle can be explained by assuming
28
rR
a high total profit rate to which low real wages correspond. Moreover, in spite of low interest rates,
29
30 banks still achieve at least the normal profit rate by deriving their profit from the difference between
31
ev
32 lending and borrowing rates.

33
Zolea (2022a) develops this approach by bringing it even closer to Marx's thinking. Marx ([1894]
34
iew
35 1959), in fact, considers the interest rate an independent variable but does not clarify why it is
36
37 independent.25 By explicitly incorporating the assumption of a higher than normal banking profit
38
39 rate (Zolea, 2022a, 2022b) due to monopolistic behaviour (Hilferding, [1910] 1981), as barriers to
40
On
entry due to the 'class' power of bankers against productive capitalists, Marx's idea takes on more
41
42 substance.
43
44 In this framework, one can imagine numerous scenarios determined by the possible power relations
ly
45
46 between workers and capitalists on the one hand and productive and financial capitalists on the
47 other, summarised in Table 1,26 which discusses the possible economic-social contexts that
48
49 determine the intermediate data within the core of the classical theory (Garegnani, 1978-1979;
50
51
52 24
The issue is much more complex, since the 'loan' commodity does not enter into any price equation of the production
53
sector, and the interest only appears as part of the profit (Zolea, 2022a, 2022b).
54 25
In Marx's thinking, however, the interest rate does not determine the profit rate or the real wage. The real wage is the
55
independent variable of distributive conflict. Once the profit rate is determined, the interest rate is the remuneration of
56 the financial capitalist, while the remaining residual is the remuneration of the productive capitalist. This concept can be
57 summarised with this formula: [A] r - i = π. Where r = profit rate, i = interest rate, π = remuneration of the productive
58 capitalist, residually determined.
59 26
Note also that in this analysis it is assumed as a first approximation that the independent distributional variable is the
60 real wage, following Marx and the classics. In some cases (rows 1 and 2) this assumption is partly modified, with
appropriate explanations.
12
1
2
3 1984).
4
5 We have to note that the contrast between productive and financial capitalists is most pronounced if
6
7 one assumes a higher than normal bank profit rate. If this is not the case, the issue seems to be one
8
of competition between productive sectors, since bankers would obtain the same profit rate as
9
10 productive capitalists and it would therefore be more difficult to assess their greater or lesser
11
12 bargaining power. However, even with a normal rate of profit in the banking sector, one can detect a
13
14 conflict between capitalists, as productive capitalists would like to pay as little interest as possible
15 on borrowed capital and do not care about the profitability of bank capital.
16
17 Furthermore, banks' profit is derived from the spread between lending and borrowing rates.
18
Fo
19 Therefore, a change in the interest rate may not affect the bank profit rate. Hence, it is important to
20
21
consider also a hypothetical bondholder as a financial capitalist: in this case, the bondholder would
rP
22 not obtain the same profit rate as the productive capitalist, since the interest rate would be directly
23
24 related to the capital invested by the bondholder. In other words, the bond buyer does not engage in
ee
25
26 entrepreneurial activity and therefore accepts an interest rate lower than the profit rate (otherwise it
27
would not be possible for a company to issue bonds at an interest rate equal to the profit rate).27
28
rR
29 In general, it seems to be acceptable to consider the profit rate of the financial sector as also
30
31 depending on the strength of the subclass of financial capitalists, bankers and bondholders. In order
ev
32
33 to simplify the analysis, a simple direct relationship between financial profits and interest rates is
34 considered, although, as mentioned above, the banking market is far more complex than the bond
iew
35
36 market.28 Thus, banks are considered the main financial capitalist, but the existence of other types of
37
38 financial capitalists is also taken into account. However, some early empirical evidence seems to
39
40
show a direct relationship between interest rates and bank profitability in some countries (probably
On
41 due to the particular market power of banks (Messer and Niepman, 2023).29
42
43 Finally, it must be taken into account that the financial and productive capitalists tend to present a
44
ly
45 common front against the workers, with the result that the contrast within the capitalists is usually
46 attenuated in comparison to that towards the workers. In this regard Brancaccio’s analysis30 should
47
48 be noted, whereby small and large capitalists -and capitalists in a positive financial position as
49
50 opposed to capitalists in a negative financial position- are essentially pitted against each other, while
51
52
workers' organisations are quite weak and essentially irrelevant to society.
53 Before explaining Table 1, it is necessary to make a few clarifications. The words ‘weak’ and
54
55 27
However, considering only bondholders as financial capitalists, similar to Pivetti's (1991) approach, has other
56 disadvantages, as we have seen above.
57 28
In the case of market power in the banking sector, it is easier to imagine an increase in the bank profit rate in the event
58 of a rise in the central bank interest rate, as banks can better exploit the situation to increase the interest rate differential.
59 29
See also: https://www.esm.europa.eu/blog/are-banks-profits-here-stay .
60 30
Brancaccio and Fontana (2016); Brancaccio, Giammetti, Lopreite and Puliga (2018), (2019); Brancaccio, Califano,
Lopreite and Moneta (2020).
13
1
2
3 ‘strong’ are not precise, but at this stage of the analysis are useful to understand in a heuristic way
4
5 the terms in which the issue arises.31
6
7 Table 1. Overview of class and inter-class conflicts
8
Workers Financial capitalists Productive capitalists Outcome
9
10
11 1 Weak workers Strong financial Strong productive Low real wage, high
12 capitalists capitalists interest rate, stable
13 enterprise profit, high
14
total profit rate
15
16 2 Strong workers Weak financial Strong productive High real wage, low
18
Fo
19
enterprise profit, low
20 total profit rate
21
rP
3 Strong workers Strong financial Weak productive High real wage, high
22
23
capitalists capitalists interest rate, low
24 enterprise profit, low
ee

26
4 Weak workers Strong financial Weak productive Low real wage, high
27
28 capitalists capitalists interest rate, low
rR

31
ev
5 Strong workers Weak financial Weak productive High real wage, low
32
33 capitalists capitalists interest rate, high
iew

36
37
6 Weak workers Weak financial Strong productive Low real wage, low
On
41
42
43
44
ly
45
46
47 Pivetti's approach can be associated with the first row of the table. Assuming a given real wage, a
48
49
rise in the interest rate reduces the enterprise profit. The productive capitalists can try to pass the
50 financial cost onto wages and will succeed if the workers are 'weak'. If this pattern is repeated
51
52 several times over time, it is possible to take the enterprise's profit as given and the interest rate as
53
54 the variable that determines the distribution, as in Pivetti’s analysis. The gross profit rate increases
55
when the interest rate increases. In the second row there is a similar situation, as productive
56
57 capitalists are able to defend the profit of enterprise. In a Marxian view, workers could earn higher
58
59 wages and the rate of profit would fall. However, in this case, since finance capital is weak,
60
31
For a more in-depth study of the capital-labour distributional contrast and inflationary effects, see Stirati (2001).
14
1
2
3 productive capitalists manage to maintain the same enterprise profit by passing the higher cost of
4
5 workers onto the interest paid to finance. Even if it is not obvious to imagine this scenario, one
6
7 might think that an increase in workers' strength could lead to greater competitiveness among
8
capitalists and, in the case of, for example, higher-than-normal financial profits, could lead to a
9
10 reduction in the market power of banks and a reduction in lending rates. Besides, in Pivetti's
11
12 approach, workers can only obtain higher real wages if the central bank lowers the interest rate (or
13
14 accepts a lower interest rate in an inflationary spiral). The pressure of workers and productive
15 capitalists on the central bank can be an important way of class struggle. The key point of these
16
17 rows is the ‘strength’ of productive capitalists who defend their profit of enterprise (or risk and
18
Fo
19 trouble premium) in any cases.

20
21
Rows 3 and 4 show the situation where bank profits are higher than normal, i.e. rb > r (where rb =
rP
22 rate of profit in the banking sector, r = general rate of profit; see also Zolea, 2022a, 2022b), or in
23
24 any case with ‘strong’ financial capital. In the case where workers are ‘strong’ and productive
ee
25
26 capitalists ‘weak’, row 3, an increase in the real wages will lead to a decrease in the overall profit
27
rate and a decrease in the enterprise profit, while the interest rate remains high (the bank profit rate
28
rR
29 may remain above the normal one, which has decreased). Moreover, an increase in the interest rate
30
31 in this context results in a decrease in the enterprise's profit, the overall profit rate and real wage
ev
32
33 being equal. One can imagine that the productive capitalists find it difficult to raise product prices
34 due to strong competition among themselves or from abroad or perhaps state price controls.
iew
35
36 Otherwise, one can imagine that workers are able to obtain wage increases greater than price
37
38 increases. In any case, the financial sector, with barriers to entry and a stable political force
39
40
maintaining this market power, manages to keep its share of profits higher than normal.
On
41 If, on the other hand, both the workers and the productive capitalists are weak (row 4), the result
42
43 will be that an increase in the interest rate will spill over into both the enterprise profit and the real
44
ly
45 wage, to the extent that the productive capitalists are able to recoup by raising prices. The end result
46 will be a situation with a high overall profit rate and a high interest rate, corresponding to low real
47
48 wages and low enterprise profit.
49
50 Another possibility is that financial capitalists are weak (rows 5 and 6). Bankers in this case would
51
52
get the normal profit rate (no less, otherwise banking would be unprofitable, and no one would
53 invest in this sector), and thus the condition rb = r applies (as hypothesised by Shaikh, 2016). If
54
55 workers are ‘strong’ and productive capitalists are ‘weak’ (row 5), an increase in real wages will
56
57 result in a reduction of the general profit rate and thus in a reduction of the enterprise profit and
58
interest rate to the extent that it guarantees a lower bank profit rate. Under these conditions a higher
59
60 than normal bank profit rate would fall towards the normal level. The reduction in the overall profit
15
1
2
3 rate will affect both financial and productive capitalists, depending on the internal power relations
4
5 within the capitalist class.
6
7 On the other hand, if the workers were ‘weak’ and the productive capitalists ‘strong’ (row 6), the
8
interest rate would be at the level that would only guarantee the normal profit rate in the banking
9
10 sector, and increases in the profit rate (e.g. through price increases or wage reductions) would lead
11
12 to increases in the enterprise profit and decreases in the real wage. Alternatively, a reduction in the
13
14 interest rate would enable an increase in enterprise profit, while the real wage remains stuck at a low
15 level, as seems to have happened in recent years (Pivetti, 2019).32 This is the actual case from which
16
17 the discussion about the best theoretical approach to explain these data started. It should be pointed
18
Fo
19 out, however, that the inflationary crisis and the rise in interest rates in 2022 seem to have returned
20
21
the socio-political environment to a condition of 'strength' for the financial and productive
rP
22 capitalists, while the workers remained in a condition of 'weakness'. This scenario is discussed in
23
24 row 1.
ee
25
26 It must be made clear that in cases where the general rate of profit is 'high', the banking sector still
27
enjoys high profits even though its bargaining power with respect to productive capitalists is 'low'.
28
rR
29 Vice versa in the opposite case. In fact, financial and productive capitalists still have interests in
30
31 common as capitalists and opposed to those of the workers.
ev
32
33 Finally, there are two further possibilities, not shown in Table 1. The first, more academic than
34 concrete, is that workers, financial capitalists and productive capitalists are all ‘strong’. In this case
iew
35
36 there would be a particularly heated distributional contrast, the outcome of which would be one of
37
38 the six scenarios identified above. The second is that all classes and subclasses are weak. Although,
39
40
it does not seem this possibility has economic meaning, since the rate of profit and the real wage has
On
41 an inverse relationship (Sraffa, 1960).33

42
43 As noted, all possible combinations with an economic sense have been explored and discussed in
44
ly
45 the literature: Pivetti, 1991; Shaikh, 2016; Zolea, 2022a. Depending on the relevant social, political,
46
historical, and economic context, one of the three approaches may be more appropriate for
47
48 explaining distributional trends. Anyway, in this analysis the real wage was considered as given,
49
50 following the ideas of the classics and Marx, although in some cases, thanks to specific
51
52 assumptions, we arrived at the same effects hypothesized by Pivetti (rows 1 and 2). This analysis
53
54
55 32
In recent years, real wages in European countries and the U.S. have remained stagnant and in some cases, such as
56 Italy, have even declined, despite the fact that policy rates were negative. From 2022, the inflation crisis led to
57 reductions in real wages and increases in profits in several countries, while the central banks of the world's largest
58 economies (such as the Fed or the ECB) raised policy rates. As a result of this monetary policy, the costs of inflation
59 were paid by the workers and profits were defended. The financial (and energy) sector saw an increase in profits in
60 many countries. See also Rochon (2022); Setterfield (2023).
33
Apart from the theoretical issue, this hypothesis is also not realistic or easily imaginable from a social point of view.
16
1
2
3 confirms the idea of Garegnani (1978-1979; 1984)34 that the choice of the independent variable in
4
5 the distribution depends on the socioeconomic context studied.
6
7
8
9
10 Conclusions
11
12
13 This paper discussed the monetary theory of distribution in Pivetti's (1991) formulation. One of the
14
15 main criticisms of this approach is the difficulty in accepting the automatism of an inverse
16
17 correspondence between a change in the interest rate and an inverse change in real wages.
18
Fo
Moreover, the monetary theory of distribution does not consider the contrast and rivalry between
19
20 productive capital and financial capital.
21
rP
22 Furthermore, the relationship between the central bank, banks and the state remains unclear in this
23
24 theory. In fact, going down to a lower level of abstraction, one has to consider that the government
ee
25
26 bond rate can hardly be considered as a base rate. In an economic-financial system in which the
27
28 central bank and the Treasury are separated, the two play quite different roles. The central bank
rR
29
30
through policy rates influences and changes the interest rate structure, while governments finance
31 themselves at market rates. An example of this is the European Union with a central bank setting
ev
32
33 interest rates and the various states financing themselves on the market at different rates. Thus, the
34
iew
35 importance of the banking sector emerges, which transmits the central bank's policy rates to the
36
37 entire economy. And it is precisely these bank rates that are at the heart of the conflict between
38
39 capital and labour and between subgroups of capitalists.
40
On
41 A further question opens up concerning the ability of this theory to explain distributional trends in
42
the presence of very low and negative interest rates. First, the role of the bank is particularly
43
44
ly
relevant here: while a bondholder earns directly the interest rate on the bond, the banker earns on
45
46 the invested capital at least a normal profit rate, which depends (more indirectly) on the difference
47
48 between bank lending rates on loans and borrowing rates on deposits. It follows that even in the
49
50 presence of low or even negative rates - albeit within certain limits that were not reached during
51
52 the decade or so of negative policy rates - bank profitability is not seriously threatened, unlike that
53
of the bondholder. Pivetti's approach seems to assign to an abstract bondholder figure a role similar
54
55 to that of the financial capitalist in Marx's analysis, making him the pivot of the financial structure.
56
57
58 34
In this paper we follow the interpretation of Stirati (2022). In particular Stirati (2022, p. 256) states:
59 My interpretation of Garegnani's position in this respect [the monetary determination of distribution] is that it
60 was rather cautious, and open to recognise that the influence on the distribution from the wage side or from the
interest rate side could from time to time be prevalent depending on the circumstances. [my translation].
17
1
2
3 However, it seems more correct to identify this role in the banker, as Marx also believed. Pivetti
4
5 (2019), considering only the securities market and not taking the banking sector into account,
6
7 seems to see negative rates as a sort of self-destructive 'euthanasia of rentiers' for the capitalist
8
9 system. Instead, the inclusion of the banking sector in the theoretical framework may help to
10
11 explain this issue.
12
Secondly, some critical remarks addressed to the monetary theory of distribution are interesting in
13
14 light of Pivetti's (2019) explanation of a stagnating real wage accompanied by extremely low
15
16 interest rates. These criticisms revolve around the lack of a contrast between subclasses of
17
18
Fo
capitalists and the idea to consider the risk premium as given. Reconsidering these elements, one
19
20 can wonder whether it is more appropriate to take the risk premium or the real wage of workers as
21
rP
22 given within the so-called core of classical theory. Depending on the power relations between
23
24
workers and capitalists and between financial and productive capitalists, as many as six scenarios
ee
25 seem abstractly possible, of which only two seem to be easily compatible with the monetary theory
26
27 of distribution. As for the other four, two seem to be explainable by the approach of Shaikh (2016)
28
rR
29 and two by permanently higher than normal bank profit (Zolea, 2022a). Finally, two further
30
31 combinations are possible, but one does not make economic sense and the other can only be short-
ev
32
33 lived, quickly falling into one of the six cases identified above.
34
This analysis confirms and enriches the ideas of Garegnani (1978-1979; 1984), according to which
iew
35
36
the choice of the independent variable of the distributional conflict between interest rate and real
37
38 wage is not absolute but depends on the political, historical, economic and social context analysed.
39
40
On
41
42
43
44
ly
45
46 Appendix A: The Introduction of the Banking Sector in Pivetti’s Approach
47
48
49 Pivetti's approach does not deal specifically with the banking sector, as also pointed out by
50 Dvoskin and Feldman (2021). Is it however possible to introduce this sector within this analysis?
51
52 Some attempts to model the banking system in a monetary distribution theory context were made by
53
54 Panico (1988). However, although Panico (1988) arrives at similar conclusions to those of Pivetti
55
56 (1991), his analysis is rather different. Panico (1988) in fact introduces the bank interest rate on
57 short-term loans as a cost of production in the price equations of productive industries. Pivetti, on
58
59 the contrary, considers the (long-run) interest rate as a part of the profit rate, as in the classics. The
60
two authors therefore deal with a different interest rate and have a different understanding of the
18
1
2
3 relationship between the real and financial economy.35 In addition, Panico's (1988) approach
4
5 presents some doubts, since in order to include financial coefficients within the price equations of
6
7 the real productive sector, it is necessary for these coefficients to have the feature of necessity and
8
normality, which is hardly conceivable.36
9
10 Let us therefore try to elaborate a representation of the banking sector in line with Pivetti's (1991)
11
12 monetary theory of distribution, thus considering the interest rate as a part of the profit rate of the
13
14 productive sectors.
15 Pivetti (1991, p. 21), identifies the (base) interest rate with the rate on long-term public bonds and
16
17 secondarily with the safest bond rates. Leaving aside the question of the risk that markets nowadays
18
Fo
19 attribute to public bonds, as well as the fact that in the European Monetary Union (EMU) each
20
21
country issues bonds at a certain interest rate, while central bank policy rates are the same, a further
rP
22 complication arises. By introducing the banking sector, the base rate can only be the one set by the
23
24 central bank: the central bank controls the financial market through policy rates, regulation of the
ee
25
26 sector, governor's pronouncements and other instruments; states, on the other hand, issue securities
27
28
at the market rate.37 The central bank directly intervenes in the rates at which it lends or with
rR
29 which it remunerates the deposit of bank reserves; the central bank's manoeuvres are transmitted
30
31 from the banking sector to the entire financial structure and all other market rates. It would
ev
32
33 therefore seem more logical to attribute the role of base rate to one of the central bank's policy rates
34 and to consider market rates as dependent on central bank policy rates through the intermediation of
iew
35
36 bank rates.38
37
38 We therefore proceed by using as base rate the main refinancing rate set by the central bank, set
39
40 equal to the rate on deposits: since banks obtain resources from both the central bank and deposits,39
On
41 it seems quite reasonable to consider, for simplicity's sake, the two rates equal, assuming an
42
43
44
ly
45 35
It should be noted that Panico (1988) does not cite any work by Pivetti, nor does Pivetti (1991) cite Panico. It is
46 therefore not appropriate to state that Panico includes the banking sector in Pivetti's approach. On the contrary, the two
47 authors arrive at similar conclusions through different analyses.
36
48 Dvoskin and Feldman (2021) also develop a price equation for the banking sector, but their approach is very different
49 from that of Pivetti (1991). For Dvoskin and Feldman (2021), the rate of profit within the price equation differs
50 depending on whether the capital is equity or debt and on the financing conditions. Thus, an important concept such as
51 the uniformity of the normal profit rate is missing in this analysis and the cause is the introduction of the financial
52 decomposition of capital within the price equation. This problem is already present Pegoretti (1983) and is criticised by
Gattei (1983). See also Marx, [1894] 1959, p. 357:
53
How the two parties who have claim to it divide the profit is in itself just as purely empirical a matter belonging to
54
the realm of accident as the distribution of percentage shares of a common profit in a business partnership.
55 37
See Deleidi and Levrero (2021) on the influence of short-term rates set by the central bank on long-term rates, in
56 particular government bonds.
57 38
The rate on deposits with banks is lower than the rate on government bonds. Although both can be considered risk-
58 free, deposits are more liquid.
59 39
Of course, the central bank provides reserves or central bank money, whereas a deposit at a bank is bank money.
60 However, beyond clearing houses, a transfer of deposits in the real sector corresponds sooner or later to a transfer of
reserves between banks. For more details, see Zolea (2023a).
19
1
2
3 immediate adjustment of bank rates to policy rates.40 By manoeuvring the rate on deposits the
4
5 central bank can determine the profit rate and the distribution. The focus here is also on the
6
7 conception of the interest rate as pure remuneration of capital, i.e. risk-free, the risk of the various
8
sectors being remunerated by the risk and trouble premium (constant) of each sector.
9
10
11 Let us rewrite [2] in a way that is more useful for the following passages:
12
13
14 [3] 𝑟𝑎 = 𝑖 + 𝜋𝑎
15
16
17
ra = normal rate of profit in any particular sphere of production (a),
18
Fo
i = long-term interest rate or 'pure' return on capital,

19
20 πa = normal enterprise profit or remuneration for risk and trouble (Pivetti, 1990, pp. 439 - 440).
21
rP
22 Inserting the assumption that the base rate is the deposit rate, set by the central bank, [3] becomes:
23
24
[4] 𝑟𝑎 = 𝜏 + 𝜋𝑎
ee
25
26
27 And in particular for the banking sector:
28
rR
29
30 [5] 𝑟𝑏 = 𝜏 + 𝜋𝑏
31
ev
32 πb = risk premium for the banking sector,

33
34 τ = risk-free base rate determining the profit rate, identified in the main refinancing rate and
iew
35
36 equivalent to the deposit rate.
37
38
Let [5] then be inserted into a price equation of the banking sector where Λ = loans, Kb = bank
39 capital, D = deposits: 41
40
On
41
42 [6] 𝑖𝛬 = 𝑲𝑏 [1 + (τ + 𝜋𝑏 )] + τ𝐷 + 𝑤𝑙𝑏
43
44
ly
after some algebraic steps, taking nominal wage w as given [8]:

45
46
47 [7] 𝑖𝛬 = 𝜏(𝒑𝑲𝑏 + 𝐷) + 𝒑𝑲𝑏 (1 + 𝜋𝑏 ) + 𝑤𝑙𝑏
48
49
50 [8] 𝑤 = 𝑤 ∗
51
52
53 The [7] is the price equation of the banking sector within Pivetti's general framework. 42 In [6]
54
55
56 40
The central bank controls the refinancing rate and the rate on overnight deposits, as well as the remuneration of
57 excess reserves. All these rates influence the bank deposit rate (at the moment, a floor system seems to be in force in
58 Europe: Tropeano, 2019). Imagining a single central bank interest rate simplifies the analysis.
59 41
For a more in-depth analysis of the use of price equations in the banking sector, see Panico (1988); Franke (1988);
60 Shaikh (2016); Zolea (2022a), (2023a).
42
Note that Dvoskin and Feldman (2021, p. 5) state with regard to Pivetti's theory:
20
1
2
3 and [7], capital Kb is the equity capital required for banking. Since the banking sector enjoys
4
5 economies of scale, we consider the required capital to be that required by the Basel Accords
6
7 (required capital is a percentage of risk-weighted assets). Required capital is thus in a fixed ratio to
8
credit. Deposits are also treated as an input. Although it may seem strange, this assumption is in full
9
10 agreement with the theory of endogenous money. For the individual bank, in fact, receiving a
11
12 deposit also means receiving reserves in the account with the central bank, net of what can then
13
14 actually happen at the clearing house set up by the central bank. When, on the other hand, a bank
15 creates a loan and with it a deposit, as soon as the loan is used, it is the bank that created the loan
16
17 that will transfer reserves to other banks when the deposit is transferred. For the individual bank, the
18
Fo
19 deposit can thus be regarded as an input and in fact the banks usually pay interest on deposits43 (to
20
21
explore this topic in more detail, please refer to Zolea, 2023a, 2023b, which carefully examines and
rP
22 discusses precisely these issues; a full analysis is, however, beyond the scope of this paper).
23
24 The relationships between prices, nominal wages, real wages, base interest and the risk and trouble
ee
25
26 premium of the various sectors are the same as in Pivetti's framework. A change in τ will lead to
27
28
a change in i, but only to the extent that it secures the risk premium πb for the bank, given the
rR
29 change in the risk-free remuneration of deposits and bank capital. Thus, the difference iΛ - τD, must
30
31 give a value such that it repays costs and wages, covers the opportunity cost of capital pKb and
ev
32
33 ensures an adequate risk premium for the banking sector.
34
The risk premium of the banking sector is likely to be different from that of the other sectors;
iew
35
36 however, for the same risk, the same rate of profit on invested capital is obtained in each sector.
37
38 Furthermore, the lending rate on bank loans (as well as a bond rate) being higher than the risk-free
39
40 base rate τ, contains a part of the risk of the borrower;44 for the bank this risk is the credit risk.
On
41
The bank's credit risk in turn constitutes a major component of the bank's business risk, which is
42
43 remunerated by πb.
44
ly
45 The inclusion of the banking sector within the framework of the monetary determination of
46
47 distribution does not seem to have led to compatibility problems, although the most valid rate to be
48
considered 'base' in the presence of the banking sector is the one set by the central bank, here equal
49
50 to the deposit rate.
51
52
53
Since the structure of interest rates is not explicitly formalized, the riskless rate of return on financial assets and
54
the loan interest rate are assumed to be equal.
55
Equation [7] is precisely an attempt to explicitly formalize this structure of interest rates, emphasizing the difference
56 between the riskless rate and the loan rate.
57 43
Note that all attempts to develop a pricing equation for the banking sector consider deposits as an input: e.g. Panico
58 (1988); Franke (1988); Shaikh (2016); Dvoskin and Feldman (2021).
59 44
However, one must consider that since the bank incurs costs, the bank rate would be higher than the base rate even if
60 the loans were risk-free, although this assumption does not seem realistic. Banking, like any entrepreneurial activity, is
risky in itself precisely because of the certain anticipation of costs against uncertain revenues.
21
1
2
3
4
5
6
7
8
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54 Zolea, R. 2022a. 'A Model of the Relationship Between the Interest Rate and the Profit Rate.'
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58
59 Approaches.' International Journal of Political Economy 51 (2): 121-136.
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25
1
2
3 Zolea, R. 2023a. 'A Functional Analysis of the Role of Deposits in the Traditional Banking
4
5 Industry.' Review of Political Economy. 35 (4): 933-952.
6 https://doi.org/10.1080/09538259.2023.2233870 .
7
8 Zolea, R. 2023b. ‘A Note on Capital in a Functional Analysis of the Traditional Banking Industry.’
9
10
Review of Political Economy. latest articles. https://doi.org/10.1080/09538259.2023.2272472 .
11
12
13
14
15
16
17
18
Fo
19
20
21
rP
22
23
24
ee
25
26
27
28
rR
29
30
31
ev
32
33
34
iew
35
36
37
38
39
40
On
41
42
43
44
ly
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
26
1
2
3 Table 1. Overview of class and inter-class conflicts
4
5 Workers Financial capitalists Productive capitalists Outcome
6
7
8 1 Weak workers Strong financial Strong productive Low real wage, high
12
13 2 Strong workers Weak financial Strong productive High real wage, low
17
18 3 Strong workers Strong financial Weak productive High real wage, high
Fo

rP
22
23 4 Weak workers Strong financial Weak productive Low real wage, high
ee

26
total profit rate
27
28 5 Strong workers Weak financial Weak productive High real wage, low
rR

31
total profit rate
ev
32
33 6 Weak workers Weak financial Strong productive Low real wage, low
iew
35
enterprise profit, high
36
37
total profit rate
38
39
40
On
41
42
43
44
ly
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60

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Journal of Post Keynesian Economics

Banking sector, distributive conflict and monetary theory of

Journal: Journal of Post Keynesian Economics

Manuscript Type: Original Article

interest rate, profit rate, monetary theory of distribution, distributive

This paper analyses the implications of distributive conflict for the

distributional configurations are possible, of which only 2 can be

URL: https://mc.manuscriptcentral.com/jpke E-mail: jankregel@yahoo.com, wray@bard.edu

enrich and develop Marx's ideas.

(Sraffa, 1960) which seems to suggest precisely this idea.4

19 specifies the terrain of conflict.

22 around zero or negative.

29 from the idea of a division according to the degree of risk.

25 simultaneously, making it impossible to identify any causal relationship.

32 lending and borrowing rates.

25 total profit rate

29 enterprise profit, high

35 total profit rate

19 trouble premium) in any cases.

41 an inverse relationship (Sraffa, 1960).33

i = long-term interest rate or 'pure' return on capital,

32 πb = risk premium for the banking sector,

after some algebraic steps, taking nominal wage w as given [8]:

32 dynamics 45: 94-104. https://doi.org/10.1016/j.strueco.2018.03.001 .

22 (2): 183 -191.

32 History of Economic Thought 13 (1): 113-140. https://doi.org/10.1080/09672560500522868 .

41 London: Routledge & Kegan Paul.

purchasing power.' Geneva: International Labour Office.

22 7 (2): 151-170. https://doi.org/10.4337/roke.2019.02.03 .

41 Essays on Piero Sraffa: 432 – 454. London: Routledge.

29 Political Economy 13 (4): 427-451. https://doi.org/10.1080/09538250120099944 .

19 capitalists capitalists interest rate, low

25 enterprise profit, high

29 capitalists capitalists interest rate, high

URL: https://mc.manuscriptcentral.com/jpke E-mail: jankregel@yahoo.com, wray@bard.edu

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