[OPE-L:4146] RE: Sheep

andrew klima (Andrew_Kliman@msn.com)
Tue, 4 Feb 1997 22:48:51 -0800 (PST)

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A reply to John's ope-l 4139.

John: "How do we figure the rate of profit on a particular capital which uses
fixed capital?"

I don't think this is a very important question --- in the form in which it is
stated. There are various ways to measure the rate of profit, some more
appropriate of one purpose, others to another, IMO. What is more important, I
think, is how are the "arguments" in the rate of profit themselves determined.

John: "With unchanging techniques, I agree that we need to assume a 'natural'
life span of fixed capital."

Why? It isn't clear to me why that *needs* to be assumed. I think you're
suggesting that there's no moral depreciation with unchanged techniques. But
why can't you still just work with the economic life of the stuff? I don't
think moral depreciation is excluded in the unchanging techniques case, BTW.
Prices can still fall.

John: "We could, of course, differentiate 'our' view of the separation of
surplus value and depreciation from that of the owners of the fixed capital.
Given that we have assumed no change in techniques as depreciation occurs, our
sums of profit and our sums of depreciation charges will not differ from
theirs. However, in any given period the depreciation charges as well as the
profit observed will differ."

This stuff likewise is not obvious to me. I think it is important, first, to
verify or falsify these notions, upon which further thoughts are developed,
before moving forward.

John: "We then move to the difficulty of introducing technical change as we
consider the depreciation of fixed capital. For me and, I think, for Marx,
the "moral depreciation" of fixed capital that occurs as technical change
takes place shortens the life span of fixed capital."

Is this always the case? Or is it only the introduction of better machines
that shortens the life span? If the latter, then technical change per se does
not shorten the life span.

John: "Given capitalists allow for moral depreciation as they decide whether
or not to introduce a particular technique,
the life span used in calculating the anticipated rate of profit would be its
economic life span and not its "natural" one."

I agree.

John: "To be sure, neither the economic nor the natural life span can be
known *a priori*. Both are estimates. You use the latter and I, the former."

This is wrong or at least misleading. I don't estimate anything. I do only
hypothetical or ex post calculations. I am happy, however, to consider, the
implications of decisions that economic actors make on the basis of *their*
estimates of things past, present, and future. I'm not quibbling here. The
point is an important one. The calculation of value magnitudes and the
calculations that firms make when deciding on courses of action are wholly
different things. The former is merely a theoretical tool; specifically, a
way of representing a process and relations of determination. The latter is a
practical, decisionmaking tool. The two sets of calculations do not
necessarily have to have *anything* in common.

John: "I would argue that if machines generally prove to be profitable for a
period of 5 years even though they can used for 10 years, both we and the
capitalists that own the machines should use the shorter time frame for rate
of profit and depreciation calculations."

Ah! I hadn't read this when I wrote the above. I was right to stress that
I'm not going to let capitalists' ways of thinking determine how I think
things actually are. Capitalists think they get profits by selling dear and
buying cheap. Am I therefore to let value be represented as expanding through

John: "if I were to give you an example of a machine that is used for 5
periods with a given work force and tell you that the machine has no value at
the end of the 5th period, you could easily tell me how much value was created
and transferred in each period."

No. I'd need to know the technological life of the machine. That it has no
value after 5 periods doesn't tell me that. It could be because it is worn
out, or it could be that the price of a new machine of the same type is also
zero (as might happen if it were replaced by a better machine).

John: "Further, given the initial value or price of the machine, you could
easily find the rate of return for the investment. I could then "surprise"
and say that the reason the machine became unavailable for use in the 6th
period was that while the machine was technically useful, its use would have
yielded a lower rate of return than an investment in a new machine. With
this, I would have "tricked" you into including "moral depreciation" charges
as part of the overall depreciation charge."

I don't see this. Please explain. Note, BTW, that I do think that firms
include moral depreciation in their overall depreciation charge (capitalist
calculation). I've said this before. What I deny is that the loss of value
due to moral depreciation is part of the value transferred to the product
(value calculation).

John: "Your solution to the "moral depreciation" problem reminds me of what
we encounter and argue against when it comes to technical change in
circulating capital models. You recalculate the value of the investment after
it is made based upon the changes in techniques that occur as the fixed
capital is in use."

More precisely, I recalculate based on the changes in the asset's price,
irrespective of whether technical change is the cause of the price change. A
company has a mess of cloth typewriter ribbons in inventory. Demand for them
drops to zero. Their price drops to zero. Of course I'm going to recalculate
the value of the investment. Note that typewriter ribbons might be
circulating capital, so I don't argue against the idea that assets are
revalued even when they are circulating capital. I only argue against
retroactive revaluation.

John: "Yet, when you compute the IRR or the rate of profit, you use the
amount originally invested without these adjustments. Why make the
adjustments? I assume that they are made in order to compute total value of
the output of each period."

Yes. Specifically, one part of the total value, the value transferred.

John: "Here let me attempt to put problem in your terms. Given that
techniques are changing as the machine is in use, the abstract labor hours
spent in the production process using the machine will remain constant in each
period for life of the machine but the socially necessary labor hours will
decrease as more productive machines are introduced."

By George, I think you've got it. Seriously, I wish I understood you as well
as you understand me. This was clear as a bell.

John: "To actually know how much this decrease is you would want to know
something of the socially necessary hours for all processes used in a given
period. I do not intend to put words in your mouth but I have simply surmised
this as you have mentioned the need to consider the entire economy in dealing
with our simple examples."

Right again! Right on! All power to the people! It's late at night and I'm

John: "For now, I'm willing to assume a set prices for each period and a
constant MEL as we move from period to period. Maybe we need a "simple"
example of the entire economy so that we can see what our differences are
concerning "moral

I'm happy with a constant MEL and a MEV [Note to Alejandro Ramos: do you and
Adolfo reject the concept of the MEV as imprecise, or do you only reject the
use of MEV in connection with the coefficient that converts between labor-time
and money?]. I'm not at all happy with assuming a set of prices, for reasons
I've noted before. Basically, what happens during production, including value
transfer, constrain prices after production. If you assume what happens
during production, but also the prices afterward, you'll wind up with

The simplest example I can think of is a single state-capitalist economy that
produces machines by means of machines, or sheep by means of sheep, which is
economically equivalent. But forget both mutton and wool. The only product
is the sheep themselves, which are used to produce more sheep, etc. If you
want 2 sectors, because you want a second, better machine, or whatever, cool.
If you want two producers with differential productivities, cool. Or a 2 x 2
example, with 2 sectors and 2 sets of productivities in each one is cool too.
It would help if we could make average sectoral capital compositions equal, in
order to avoid differences between production prices and values, but it may
not be possible. I'm happy with exchange at values, however. And of course,
we'll have no circulating capital. No money producing sector, just money of

It would also make things easier if we had the maximum life of the sheep equal
to 2 periods. So they might be used for 1 period, or for 2.

So, if you're happy with any of the above possibilities, then specify some
physical scenario for the *simplest* of the possibilities you'll accept, plus
some initial prices. We each take this info and determine how the valuation
process worked. OK?