[OPE-L:4176] Re: depreciation and financing

aramos@aramos.b (aramos@aramos.bo)
Sat, 8 Feb 1997 17:03:31 -0800 (PST)

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In ope-l 4159 Jerry wrote:

> Alejandro R has advanced the idea in [4082], [4087], [4092], and
> [4095] that capitalists, even in a "simple depreciation example", finance
> their purchase of constant fixed capital "through a debt (credit)" to
> banks.
> Why must we examine credit and bank capital in the simple case regarding
> depreciation, including moral depreciation? Isnt it possible for us,
> instead, to initially assume that the money capital required for financing
> expenditures on constant fixed capital can be "internal" in origin, i.e.
> these sums of "money-value" can be obtained by the firm with the money
> capital obtained after sales?
> It would also seem to me on logical grounds that it would be more
> appropriate to consider the case where there is "internal financing"
> before we then complicate matters by introducing credit.
> What do you think about the above, Alejandro?
> In solidarity, Jerry

Thanks for your question, Jerry. I am trying to rigorously
SEPARATE two flows:

a) "Real depreciation": This is the amount which Mr Wolf
can effectively charge on account of the fixed capital as
a part of the commodity's price. This amount is "allowed"
by the market and, specifically, depends on some sort of
"average" of the technologies being used.

b) "Forecasted depreciation": This is the amount of
depreciation forseen AT THE TIME THE FIXED CAPITAL WAS
ADVANCED. So, let us suppose that Mr Wolf advanced $1000 in
1995 in purchasing a machine which, at this time, is
considered that will last 10 years, but in 1998 there is a
new and cheaper machine which "morally depreciates" the old
one. This implies that from 1998 on, the amount of "real
depreciation" (less than $100 per year) diverges from
"forecasted depreciation" (which was $100 per year).
Mr Wolf, however, must calculate his profit rate according
to the *forecasted depreciation* because this was the amount
of money he effectively advanced in 1995.

We can imagine that the "forecasted depreciation" is an
"amount of payments" that Mr Wolf owes to banker and, by
doing so, it is clearer that the profit rate is calculated
taking into account the money effectively advanced in 1995.
If, in this example, we imagine the business was done by
borrowing, we have that, from 1998 on, Mr Wolf is "between
two fires": On the one hand, market price is falling and,
on the other, the banker is charging according to the
"forecasted depreciation".

IMO, the matter is not simply to consider a "pattern of
depreciation", but how to calculate the REAL RATE OF PROFIT
given a moral depreciation. I agree that in the "simple
situation" (when there is no moral depreciation) it does
not make a lot of sense to separate both flows because they
are quantitatively equal. However, they are different
conceptually, a difference that is clear when we start to
consider a heterogeneous stock of fixed capital.

So, IMO, what we are discussing is basically how to
calculate the real rate of profit, not merely the
"depreciation". Of course we can consider the matter by
means of "internal capital" but the recourse to "credit"
illustrates better what is the amount that we have to put
in the denominator of the profit rate on account of fixed

Alejandro Ramos M.