[OPE-L:4155] Depreciation (& thanks)

andrew klima (Andrew_Kliman@msn.com)
Wed, 5 Feb 1997 16:43:47 -0800 (PST)

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First, many thanks to Jerry and Alejandro Ramos, who graciously sent the posts
I hadn't received. Second, the following thing I had posted wasn't among
them, so I'm re-posting it.

Andrew Kliman

Sent: Sunday, February 02, 1997 2:37 AM
To: Multiple recipients of list
Subject: RE: [OPE-L:4059] Depreciation

A comment on Duncan's ope-l 4059"

He wrote in part: "3. This discussion is a good illustration of the
slipperiness and ambiguity of the concepts of the 'total price' and 'total
value' produced in an economy in a period, as opposed to the value added,
which can be defined unambiguously and associated unambiguously with the
living labor expended in the period. The problem is that 'total price' and
'total value', under realistic conditions of changing technology and prices
inherently have an expectational or subjective element in them. Of course,
once an investment has completely run its course, it is possible ex post to
calculate its rate of return, but there's no reason to think that capitalist
competition can equalize these ex post profit rates in the face of the
inevitable uncertainty of human life. This is one strong argument for defining
the "monetary expression of labor" as the ratio of value added to living
labor, which is unambiguous and operational no matter what is happening to
prices and technology, and gives a transparent system of accounts in which one
can discuss the windfall gains and losses from price changes."

A question to Duncan: when you speak of "value added," to WHAT is this value
being added?

I do not agree that "value added" is an unambiguous concept, whereas "total
price" and "total value" are slippery and ambiguous. First, in Duncan's
interpretation, there are two *distinct* things that are equated to (the
monetary expression of) living labor. One is "value added"; the other is the
price of the "net product." These two sets of equalities are consistent,
obviously, only if one identifies "value added" and the price of the "net
product." That's what he does, but that the meaning of "value added" is
*unambiguously* translatable as "price of the 'net product'" is not clear. In
fact, doesn't this make "value added" something subtracted --- a residual ---
rather than something added? And "value added" is made "unambiguous" in
meaning only by willy-nilly excluding another possible meaning: new value
added to a quantum of pre-existing value.

Second, I do not think the concepts of total price and value are slippery or
ambiguous. Let us imagine for the sake of analogy that Kathy goes into a game
of marbles with 7 (yellow) marbles. During play, she keeps 3 in her marble
bag, and uses the other 4. During play, she happens to lose all 4 to Darryl,
but by the end of play she wins 6 of the (blue) marbles that Darryl had put
into play and ends up walking away from the game with 9 marbles (6 blue, 3
yellow). By how much has she increased her holding of marbles, i.e., what is
the sum of marbles added? I would say 2; she ended up with 9, began with 7,
and 9 - 7 = 2. In addition to this, let us ask how many marbles Kathy has at
the end of the game, over and above the number of marbles which she had *and
still has* from the beginning of the game. The answer, unambiguously enough,
is 6, the 6 blue marbles which she won. And, unambiguously enough, this
equals the 9 marbles she has at the end minus the 3 which never left her
marble bag.

Now, let's imagine that the sum of value existing at time t is Zt, and the sum
of value existing at time t is Zt+1. Let's ignore all processes besides the
generation of value and the using-up of value to generate value. Then we can
define value added during this expanse of time, call it VA[t,t+1], as the
difference between these two sums:

Zt+1 - Zt = VA[t,t+1].

Now, a certain fraction of the value existing at time t, call it k, and so a
certain amount of value, kZt, no longer exists at time t+1 because it has been
used up in activities or processes that led to the expansion of value. We can
re-write the above as

Zt+1 - kZt + kZt - Zt = VA[t,t+1]

or as

[Zt+1 - Zt(1-k)] - kZt = VA[t,t+1].

What is [Zt+1 - Zt(1-k)]? The difference between the sum of value existing at
time t+1 and that *part* of the sum of value that existed at time t which
*still remains in existence* at time t+1. From the above, we see that

[Zt+1 - Zt(1-k)] = kZt + VA[t,t+1].

The right hand side is nothing other than the much-maligned "total value."
What is slippery or ambiguous about this? It seems crystal clear to me. It
also seems quite clear that the concepts of value added and total value are
inextricably and transparently linked to one another, *once* one has a concept
of value existing at time t that is used up in value-expanding processes and
activities, i.e., kZt.

The terms of the value accounting and the marble accounting correspond in a
one-to-one fashion. To see this, simply imagine that marbles are the
substance of value. Zt = 7, Zt+1 = 9, kZt (the number of marbles used up or
sacrificed in the marble-winning activity) = 4, Zt(1-k) (the marbles Kathy
had at the start of the game that she still has at the end of the game) = 3,
and VA[t,t+1] = 2.

Zt+1 - Zt = VA[t,t+1]. (9 - 7 = 2)

[Zt+1 - Zt(1-k)] - kZt = VA[t,t+1]. ([9 - 3] - 4 = 2)

[Zt+1 - Zt(1-k)] = kZt + VA[t,t+1]. ([9 - 3] = 4 + 2)

The 4 + 2, total value, is identifiable as the 6 blue marbles won from Darryl.

Duncan has not yet convinced me that the national income and product accounts
use concepts that contradict this. But if he's right, then so much the worse
for the NIPA. If they contradict this, they contradict the concept of value
and cannot be used in a transparent fashion.

(Of course, things are not as simple as in the above story. A bully may come
along and steal some of Kathy's marbles, or she may swallow one, etc., so that
the number of marbles she ends up with is not fully accounted for by referring
to the number she started with, the number she sacrificed in marble-winning,
and the number she won (starting sum of value, used up constant capital, and
total value of output). That simply means that other value-altering processes
must be identified (moral depreciation, personal consumption). But as long as
the other processes are clearly distinguished from marble-winning, I don't see
any ambiguity.)

Duncan's concept of value added, like any simultaneist concept thereof,
contradicts the one adumbrated above, because it in effect allows the number
of marbles Kathy sacrificed to Darryl in her marble-winning activity to equal
something different from 4. But Darryl walked off with 4 yellow marbles he
didn't have at the start of the game.

Andrew Kliman