# [OPE-L:4209] Sheep -- Nothing Moral

john erns (ernst@pipeline.com)
Thu, 13 Feb 1997 12:08:41 -0800 (PST)

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Here, I attempt a response to Andrew's OPE-L 4204.

Andrew writes:

A reply to John's ope-l 4174.

John had asked: "If we say that there may be differences between your
calculation of the rate of profit and that of the capitalists', then which one
is to be used as we consider the tendency of the rate of profit to fall?"

John responds:

Your reply is a bit off, is it not? That is, should we not be speaking
of profit in relation to capital advanced in dealing with the rate of
profit. Here, I mean nothing pedantic but ask simply that we deal with
"the effect of the turnover on the rate of profit", the title of
Chapter 4 of Volume III of CAPITAL. Perhaps your reading of that chapter
differs from mine. I find it, written entirely by Engels, sadly incomplete.
All we see is an extension of Marx's thoughts on the effects of turnover
on s and v. How fixed capital itself turns over is for no apparent
reason unnoticed.

Beginning with my statement that we look at both rates of profit
the one capitalists calculate and "ours", Andrew continues:

John: "How about both? That is, it seems to me that we have to
explain the phenomena encountered by the actors in the society we are
analyzing. Thus, if 'your' or 'our' rate of profit differs from theirs, we
must explain the relation between the two."

I now say: I agree with your last two sentences. That doesn't mean the first
is correct. "[A]s we consider the tendency of the rate of profit to fall," we
need to be considering s/(c+v), because that is the profit rate that has a
tendency to fall, according to Marx.

John: "c + (v+s) = w

100 + 100 = 200

If v is very,very small, then the rate of profit would be 100%."

If v is very, very small, then the rate of profit would be very, very close to
100%. It will equal 100% when v is exactly zero. No talk about actual
economies can alter the mathematical facts.

John then presents a numerical example and a calculation that makes the annual
rate of profit constant throughout the lifetime of the investment. I do not
accept the calculation.

First, it is based on looking at the change in the value of the firm, i.e.,
the change in what it is worth. This is fine, but I don't accept John's way
of determining the value of the firm. He computes the new value of the firm
as the initial value plus the value added by living labor. This presumes that
there is no capital gain or loss. I addressed this issue in some detail in
ope-l 4160, the very post to which he was replying. Unfortunately, he didn't
comment on this issue.

John now responds:
You are right I did refer to the "new value of the firm." Here, let's call
the value of the commodities being produced prior to the completion of the
production process. Here, using the above figures, I merely assumed that
the production process took 2 years and looked at the value of the partially
completed product after 1 year. I was not ignoring your 4160 but merely
attempting to get clear on the "effect of the turnover on the rate of profit"
prior to considering productivity changes and moral depreciation.

Andrew continues:

Second, the calculation is able to obtain a constant annual rate of profit
only by redistributing value added across periods. In the example, what
presumably gets counted as profit of year 1 is less than value added, and what
presumably gets counted as profit of year 2 is greater than year 2's actual
value added by the same amount. It is an ingenious procedure, but the
theoretical justification for it is not at all clear to me. If one wants to
measure s/(c+v), then one needs to use the actual s and v and count them when
they occur, instead of using a hypothetical s and v by playing with time. One
can always get a constant, or rising, or falling rate of profit by juggling
figures across time periods. That has nothing to do with the tendency of
which Marx speaks. Or, it could be that John is trying to get at how firms
compute their profit rates. But then DO NOT MIX AND MATCH THEIR CATEGORIES
WITH CATEGORIES OF VALUE *DETERMINATION*. I repeat: DO NOT MIX AND MATCH
THEIR CATEGORIES WITH CATEGORIES OF VALUE *DETERMINATION*. It's fine with me
to talk about the determination of s/(c+v) and about the profit rates that
firms compute, but not to talk about them together. Capitalists know nothing
about the determination of value and care about it even less. How they keep
their books cannot alter things that have already taken place.

John responds:
I do not think we are talking about capitalists altering things that have
already taken place. Here, I am trying to square the determination of
prices by value with the effect of turnover. Note that, for me, the values
are key in that total value produced is the total value added and total
surplus value is equal to total profit.

Andrew continues:

Third, the problem seems to be mostly a non-problem. If the \$50 of value
added in the first year is re-invested in the 2nd and obtains the same rate of
return as the original investment, then we would have

year 1:

100 (investment) + 50 (value added) = 150

year 2:

(a) 100 (investment) + 50 (value added) = 150
(b) 50 (new investment) + 25 (interest) = 75

150/100 = (150+75)/(100+50) = 1.5, so in both years the rate of return on
total investment is 50%.

John responds:
What? There is one capital we are considering. That is, the initial
investment is 100. In each year, workers add 50 in value -- period.
That said, your way of looking at things would differ from mine.
What I do not understand is how and why you see the "50" in (b) as
new investment. The same workers in year 1 are going to use it
in year 2 to produce the output of 200 at the end of the year.

Andrew then states:

Fourth, John justifies his calculation by referring to "the production of
surplus value and its conversion into profit." His calculation has nothing to
do with what Marx means by the conversion of surplus-value into profit.

John responds:

Here, I am hopefully clearer. What I thought we needed to look at was, again,
"the effect of the turnover on the rate of profit."

Andrew continues:

It seems to me that the key issue we need to discuss is the *other* one that
John raised, and to which I responded: can there be a capital gain or loss in
the system as a whole, so that the change in the value of capital does not
equal surplus-value but surplus value *plus* the capital gain or *minus* the
capital loss.

John responds:

To be sure, there are two issues here. I am not willing to say which is
key. I thought as we got into the stuff about moral depreciation that
we needed to look at depreciation itself with no changes in productivity
in relation to the rate of profit. That is, we may be able to agree on
the relation between surplus value and profit as well as the depreciation
of fixed capital. But then we have to consider the manner in which
the rate of profit is determined. To assert that it is simply s/(c+v) in
any given period implicitly says that Chapter 4 of Vol. III is complete
and somehow in agreement with Marx's thoughts. In Engel's piece, the
depreciation of fixed capital means little to the rate of profit. An
annual figure is given for the depreciation of fixed capital in its
first year of existence of 10 0f the total fixed capital. The rate
of profit is computed in the usual fashion of s/C where C is defined
as the sum of the fixed and circulating capital. We might ask about
how things look in the 2nd year of this process but instead are
treated to Engel's thoughts on the turnover time of circulating capital
and its effect on the rate of profit. Indeed, Engels gives us
the formula

p' = s' n v/C

where p' is the annual rate of profit, s' the rate of surplus value,
n the number of turnovers in a year, and C the total capital advanced.
The example with which he concludes the chapter seems wrong as it
includes rent as an advance and does not reflect how much circulating
capital needs to advanced for each turnover. But the major problem
with this is simple. We are only considering one year of an investment.
Each year or period then bears no relation to what came before or after.
Consequently, we never know what is the overall rate of return on a given
investment. It is that rate of return we need to determine if we are
to gain clarity on moral depreciation.

John