# [OPE-L:4222] Profit Rate Determination

john erns (ernst@pipeline.com)
Fri, 14 Feb 1997 17:06:18 -0800 (PST)

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In OPE-4219, Alejandro expressed his curiosity about
my comment concerning my unclarity concerning the
separation of depreciation and profit in carrying out
empirical studies. For me, this problem relates to
my larger concern of determining the rate of profit
given the presence of depreciating fixed capital.
Let me review some of the difficulty.

Given that capitalists choose techniques on what
basis do they do so? We assume that the choice
will be based upon the various anticipated rates of
profit. But how do they figure the rate of profit?
In CAPITAL, Marx tacitly assumes that the rate of
profit is figured on the profit divided by the
total investment. Indeed, he does so as explains how
values come to be seen as prices of production. But
no capitalist would fail to look at the manner in
which the fixed capital turns over or depreciates as
he computes his rate of profit. He would price his
output accordingly. But how?

a. In Marx, again, we find no clue as Chapter 4 of
Vol. III was nothing more than a title when Engels
edited the manuscript.

b. If we consider an investment of 200 in fixed capital
that is expected to yield payments of 150 in each of 4
years, we could find a rate of profit, r, by using the
relation

150/(1+r)+150/(1+r)^2+150/(1+r)^3+150/(1+r)^4=200

and solving for r. Here, r is about 93% .
However, if we use straight line depreciation and look
at the amount invested in each of the 4 periods we arrive
at a different r. Let's take a look.

Total Depreciated Profit Total r
Period Invested Capital Output for
Period

1 200 50 100 150 50%
2 150 50 100 150 66.7%
3 100 50 100 150 100%
4 50 50 100 150 200%

Total 500 200 400 600 80%*

*Now, as we look at the total profit from these investments
which total 500, we obtain a rate of profit of 400/500 or
80%.

So what is the rate of profit here? If we assume that capitals
move about in search of higher profits, does the capitalist
earning an 85% rate of return move into or avoid this situation?

I do not have the "right" answer but would like to
know how others deal with this.

John