Bank rate, profit of enterprise, risk premium and promoter’s profit in Marx and Hilferding

This paper deals with the contributions of Karl Marx (1864-1875) and Rudolph Hilferding (1810) to corporate finance. Firstly we present Marx's analysis of the division of gross profit of joint-stock companies into management fees, interest on borrowed capital, and profit of enterprise. Among the capital assets, Marx places more emphasis on debt contracts whose yields are fixed and develops a monetary analysis of the determination of these yields. Secondly we present Hilferding's theory of promoter's profit. This author resumes Marx's theory but put the emphasis on the securities (shares) of joint-stock companies whose yields, the dividends, are uncertain, and risky. Hilferding introduces the risk premium in the interest rate used to capitalize the profit of enterprise, which gives rise to the promoter's profit. Promoter's profit arises from the conversion of profit-bearing capital into dividend-bearing capital. Our topic is not a general study of Marx's and Hilferding's writings on value, money, capital, cycle and connections between industrial and banking capital – cf. J. Schumpeter (1954), S. de Brunhoff (1971, 1973), W.A. Darity & B.L. Horn (1985), C.M. Germer (1998), A. Nelson (1999); J. de Boyer (2003), S. Hollander (2008), J.E. King (2010). In particular we do not inquire the continuity or discontinuity between Marx and Hilferding about the determinants of the value of money and of prices of commodities. We restrict our study to the characteristics of joint-stock companies and to the determinants of interest rates, rate of profit on own capital and market valorisation of this capital. On this limited topic, as far as we know, there are relatively few studies in the secondary literature: A.A. Bolbol & M.A. Lovewell (2001), de Boyer, and Hollander already quoted. Following the introduction, section 2 introduces the profit of enterprise and presents the interactions established by Marx between the forces of supply of, and demand for, interest-bearing capital and the distinct motives of the demand for money; i.e. demand for money as a means of purchase, as a means of payment, international and national, or as a means of hoarding. It leads to take into account the functioning of the money market and to conclude that the "bank rate" policy of the central bank is the key determinant of the interest rates established on the market for interest bearing capital. Section 3 is devoted to Marx's criticism of both currency and banking schools concerning this "bank rate" policy. Section 4 introduces the analysis of the leverage effect of borrowed capital on the profitability, and riskiness, on own capital as well as, according to Marx, the separation of ownership from management that results from the creation of joint stock companies. Section 5 focuses the equity risk premium and promoter's profit introduced by Hilferding. Section 6 discusses Hilferding's results (1910) in the light of Modigliani-Miller theorem (1958).