 In the previous segments, we looked at two types of profit which are forms of surplus value industrial profit and commercial profit. Then, we took a small detour and understood the key distinction between productive and unproductive labour. Now, let us come back and look at the other two forms that surplus value takes in capitalism interest and rent. So, let us start with the notion of interest. Interest is a fragment, a portion of the surplus value that is appropriated a group of capitalists that Marx calls money capitalists. These are capitalists who specialize in the function of making loans of money to either industrial capitalists or commercial capitalists. Both those kinds of capitalists make profit. Remember, we have already seen industrial capitalists make industrial profit, commercial capitalists make commercial profit. So, now, when there is a transaction between money capitalists and either of these two, the money capitalist gives the stock of money that she has to either of these capitalists to be used in the circuit of capital either to generate surplus value or to help in realizing the surplus value. Both of these then have to hand over a part of that surplus value back along with the original amount of money that they borrowed to the money capitalist and this extra amount that the money capitalist gets is known as interest. So, let us use the circuit of capital to understand what is going on. So, here is the circuit of capital by which we are familiar with by now. So, this is the sum of money M used to purchase a bundle of commodities, which are of two types, means of production and labor power. Then, they are brought into the production process. The finished commodity emerges. It is then sold in the market to give a sum of money M prime. M prime is bigger than M. The difference between the two is the total surplus value generated. Now, where does the money capitalist come in? Suppose, all of this money that was used for the production process was not available to the industrial capitalist and so, the industrial capitalist had to borrow of sum of money M0, which becomes part of this M to be used in the circuit of capital to produce value and surplus value. Then, what happens is that the capitalist borrows M0 along with the money that he or she already has, uses it in the circuit of capital to produce the commodity to sell it and then make some surplus value and then he returns M0 prime to the money capitalist, where M0 prime is M0 plus delta M0. So, delta M0 which is the excess that this capitalist money capitalist gets is known as the interest income. If we want to be specific, let us say the money capitalist had lent 110 million to this capitalist and let us say that the interest rate is 10 percent, then what the money capitalist will get back at the end of one year will be 110 million, which will be the 100 million that she had lent plus 10 million that is her interest. So, this difference M0 prime minus M M0 is known as the interest. Now, in the way we have written it here, it is immediately transparent where this source of this interest income is. The capitalist uses the sum of money that he borrows along with the money that he already has in the production process to create value and surplus value. Part of that surplus value is then handed over to the capitalist the money capitalist as income. Therefore, the source of the interest can be nothing other than the surplus value generated and realized in the circuit of capital. The sum of money that was lent to the industrial capitalist has been used for generating surplus value and the industrial capitalist who has used that sum of money now returns that original sum of money plus a price for using that sum of money for a given period of time. That price of using money is the interest income. The interest income divided by the original sum of money that was lent out is known as the interest rate. So, in this example the interest income itself was 10 million and the interest rate was 10 percent because 10 million counted over the 100 million that was used to make the loan is a 10 percent amount. So, let us go back to the example that we have been working with to understand how interest income is part of the surplus value generated. The example we have seen earlier has an industrial capital and the industrial capital has a constant capital of 390 variable capital of 110 and surplus value of 110 because the rate of surplus value is 100 percent. And therefore, the total value of the commodity is 610. Now, let us say instead of industrial capital having access to all of this 500 which is the initial cost of production the industrial capitalist borrows 100 dollars from the money capitalist. So, the money capitalist makes 100 dollars available. So, out of this 500 100 dollars is given by the money capitalist. So, the industrial capitalist has to borrow 100 dollars from the money capitalist. What happens? The contract is that the money capitalist is lending out 100 dollars to the industrial capitalist at a 10 percent rate of interest for a period of one year. Let us say at the end of one year the commodity has been produced and sold and the industrial capitalist gets back 610 dollars as revenue from selling the commodity. Now, what he has to do? He has to return to the money capitalist a sum of 100 which is the original sum that he borrowed plus 10 dollars that is the interest income that goes to the money capitalist. So, the money capitalist will get back 110 dollars which includes the original sum that he lent out which is M 0 M 0 and plus 10 dollars which is the difference between the two. So, the M 0 prime in our previous representation is now 110. So, therefore, what is left with the industrial capitalist is 610 minus 110 which is 500. Now, the industrial capitalist has earned this 500 using a sum of 400 because in his cost of 500 he only put in 400 and he had borrowed the rest which is 100 from the money capitalist. So, for the industrial capitalist the amount of return that he gets is 100 on a investment of 400 which is 25 percent. But what we see here is that the total amount of surplus value which in this case was 110 has got split into two parts. One part remains with the industrial capitalist which is a amount of 100 and another part which is 10 goes to the money capitalist. So, this example therefore, makes clear that the interest income that is earned by the money capitalist is merely a form of the surplus value that is created in production and realized through exchange. It is handed over by industrial capitalist to the money capitalist for the price of using the money that the industrial capitalist borrows from the money capitalist. With that we can summarize the relationship between the industrial capitalist and money capitalist in the following diagram. So, we have the money capitalist who lends out a sum of money to the industrial or commercial capitalist. The commercial capitalist or the industrial capitalist uses that sum of money in addition to the sum of money that he or she might have to generate surplus value. So, the industrial capitalist generates surplus value and the commercial capitalist helps in realizing that surplus value and they divide the total surplus value amongst themselves in the form of industrial profit and commercial profit. Now that total surplus value in effect then gets divided into two parts. One part is the interest income which flows back to the money capitalist. Whatever is left of the surplus value after interest has been paid back is known as the profit of enterprise. So, if we consider the relationship between money capitalist and industrial capitalist we can see that the total surplus value generated and realized by industrial capitalist gets broken up into two parts. One part flows back to the money capitalist as a return for the money that she lent to the industrial capitalist and the part that remains is known as the profit of enterprise. With the emergence of interest and the interest rate some new phenomena come to the fore and these new phenomena can be captured under the title of fictitious capital. So, let us quickly see what fictitious capital is. To understand fictitious capital the first concept we must understand is the concept of capitalization. Capitalization refers to the way in which streams of revenue which are spread over long periods of time can be valued and a price can be put to it. So, let us look at a stream of revenue say we are right now in period 0 and then we are looking ahead into the future. In period 1 let us say I will get a stream a revenue of 100 dollars. In period 2 I will get a revenue again of 100 dollars. In period 3 I will get a revenue of 100 dollars and so on indefinitely. So, what we have here is a stream of revenue each period or each year that revenue gives me 100 dollars and this process goes on indefinitely. Can I put a value? Can I put a price a monetary price to this stream of value? The way to do that is known as capitalization. How do we do that? What capitalization entails is to say if the interest rate is 10 percent then what I want to calculate when I am capitalizing this stream of revenue is to arrive at a sum of money which will give me a interest like income of 100 dollars every month every period every year for the indefinite future. Now, if the interest rate is 10 percent what is this sum of money which will give me 100 dollars as interest income every year into the indefinite future? Well, the answer is 1000. If the interest rate is 10 percent, a 10 percent interest income on a principle of 1000 is precisely 100. So, when I am capitalizing this stream of money I am basically calculating this sum of money which gives me the stream of revenue as the interest income of this amount that I am trying to calculate. In this particular case the capitalized value of this stream of revenue is 1000 dollars. So, notice what I need to calculate the capitalized value of a stream of revenue is the interest rate. So, whenever the capitalist economy stabilizes the financial system stabilizes and the phenomenon of interest becomes widely accepted widely known and a market interest rate emerges the capitalist system is immediately able to put a market price that is capitalized streams of revenue which go into the future. Now, that is the genesis of the notion of fictitious capital. Fictitious capital is an asset which has the property that for the person who buys that asset it provides a interest like income. But it is fictitious in the sense that the amount of money that was used to purchase that asset never goes into the circuit of capital and therefore, it is not directly used to generate surplus value and therefore, the stream of revenue that comes out of the ownership of this fictitious capital behaves as if it is drawing on and generating surplus value like income for a interest bearing capital. But it is fictitious because it does not the money that has been spent to purchase the fictitious capital never directly gets involved in the generation of surplus value. Let us look at some examples of fictitious capital. The first example is government bonds. When there is a government bond what does it entail? Well, a government bond is a piece of paper which is used by the government to borrow from the public. Whoever purchases that bond is then entitled to an interest payment as long as the bond does not mature for every quarter or every year till the period of maturity of the bond. So, the government bond the ownership of the government bond entails a revenue stream that will come to the person who owns the government bond. So, let us call these revenue streams x. So, in period 1 he will get x in period 2 x and so on. So, just like the revenue stream we looked here once we know the interest rate let us call the interest rate i. Once we know the interest rate we can put we can capitalize this revenue stream that gives us a market price of the value of the revenue stream that is entailed by ownership of the government bond. So, for the person who is purchasing that government bond the amount of money that she uses to purchase the government bond operates like a loan because every period that person is getting a interest interest like income. But it is fictitious because the amount that has been used to purchase the government bond does not participate in the capitalist economy to generate revenue. The government uses the the bonds the the amount of money that it borrows using the bonds to finance some activities like building roads or maintaining hospitals, but none of it is used in a capitalist enterprise to hire workers and to generate surplus value. And therefore, the asset the government bond gives to its owner a stream of interest like income in that sense it it performs the function like a capital like interest bearing capital. But it is fictitious because the money used to purchase that bond is not part of the capital the circuit of capital. So, where does this money come from which is given to the owner of the government bond well ultimately it derives from the tax revenues that the government collects. So, in some indirect way some of that tax revenue might come from surplus value, but that is not the point the point is that the amount of money that was used to purchase the bond is not directly involved in the circuit of capital either as industrial capital or as commercial capital. So, that is one example of fictitious capital. Let us look at another example another prominent example of fictitious capital is shares of stocks of capitalist enterprises. So, those who own the shares of the stocks of the capitalist enterprise is again entitled to a stream of revenue payments in this case dividend payments. So, let us call those dividend payments D. So, in period 1 the person will get D in period 2 D in period 3 D. Now these amounts of dividends might vary depending on management policy and other things, but nonetheless ownership of stocks of the shares give the person who is owning that a right to a stream of revenue. Therefore, the stream of revenue can be capitalized and that gives rise to a value a kind of market value of the firm which has issued those stocks. Now, once we put a value to these streams of revenue that is entitled by ownership of those stocks we get a sum of value. On the other hand the capitalist enterprise does own capital stock it has fixed assets it has machinery it has buildings it has production equipment all of those do have a certain real value. So, the discrepancy between the value that is arrived by capitalizing the stream of dividend payment and the real value of the capitalist enterprise is an example of fictitious capital because the real value and this value of the stream of revenue that comes from the dividend payments of the stocks can be different. And as long as there is a discrepancy between the two the discrepancy itself operates like a fictitious capital. The third example of fictitious capital is the example that will allow us to transition into the next topic and that example is land. So, land is also a type of fictitious capital why well ownership of land gives rise to a payment stream of payments called rent. So, let us say a person who owns the land will therefore have a payment of rent in period one in period two period three and so on. So, ownership of the plot of land gives ownership or entails this stream of revenue payment that will come to the person who is owning the plot of land. So, if the interest rate the market interest rate is given to be I then we can capitalize this stream of revenue payments and that capitalized value of the stream of revenue payment of this rent becomes the price of land. So, the price of land is the capitalized value of the rent payment entailed by ownership of the plot of land. Now, let us think of a person who is buying that land a person who is buying that land let us say the price of the land is one million. The person who is putting one million to buy that piece of land for that person that one million dollar operates like interest bearing capital because on the basis of that one million that he has or she has put to buy the land she will get a revenue stream in period one two three and so on. So, it is like receiving a stream of interest like payments. On the other hand the money that was used to purchase the land does not get involved in the production process either in the generation of surplus value or in the realization of surplus value. Therefore, that amount of money even though it provides an interest like income to the person who has used this to purchase the land is not real capital it is not even interest bearing capital because in interest bearing capital the money that was lent by the money capitalist to the industrial capitalist is actually used in the production process. But here the amount of money that was used to purchase the land is not even used in the production process and therefore, land occupies a category or is an example of fictitious capital. So, we have now just looked at land and we have talked about this category of rent and it is the rent which when capitalized give rise to the price of the land. So, that is the nice transition for now understanding what we mean by rent. So, next we are going to understand the category of rent and we will see that rent just like interest is a part of the surplus value, but the part that goes to the owner of the land not the owner of money capital that is what we will study next.