RE: OPE-L 5112
Duncan,
Your post gave me quite a bit to think over. Below is my response
to some of the points and questions you raised.
Duncan wrote:
(snip)
I don't want to do away with "moral depreciation", which I take to be the
idea that capitalists take account of the possibility of technical changes
which will alter the valuation of their stocks of assets held for
production. (Usually this type of technical change will lower the value of
existing stocks, but it might be otherwise.) What I want to do is to
separate out two components of the individual capitalist's profit: the
profit on production per se and the profits or losses on stocks of assets
held as part of the production process.
John responds:
Given that you are clearly stating that asset revaluation has to be
taken into account to figure what I'll call the overall rate of profit,
I'd agree that you are not ignoring moral depreciation. What I
question is how you want to include it.
For example, if we were to say that a machine is built to last 10 years,
but due to moral depreciation will only last 5 years, which of the two
lifetimes are to be used in calculating the RRI? the rate of profit?
The way I read what you are saying is that the 10 year period is to be
used and asset revaluation will be taken into account for each of
the 5 years the machine actually lasts. Am I reading you correctly
on this?
Duncan wrote:
I think we agree that the individual capitalist cares about the sum of
these two components: he calculates, ex post at least, the total change in
his capital, that is the sum of profits on production and gains or losses
on stocks of assets, plus whatever he has consumed as his personal profit.
Ex ante, the capitalist presumably tries to anticipate both components of
profitability in deciding whether or not to undertake a given investment
project. Furthermore, it is logically possible that a capitalist might make
a profit on production per se, but an even larger loss on his asset stocks
through the period of production, and thus wind up with a negative total
profit. Am I correct in assuming that what you think of "moral
depreciation" as the anticipation of these possible losses on assets
through the period of production?
John responds:
Yes, you're correct. I think that at least some of the losses are
anticipated since capitalist estimates of the lifetimes of machinery
are not made on the basis of their physical durability but on their
ability to yield returns that provide for the average or an above
average RRI.
Duncan wrote:
In macroeconomic data, I think the total profit, including the losses (or
gains) on stocks of assets, largely follows the profit on production per
se. Dumenil and Levy's attempts to calculate the RRI and the profit rate,
for example, tend to show that the RRI follows the profit rate (on
production) with a lag.
John responds:
On this point, perhaps we read the results of Dumenil and Levy a bit
differently. Let's say at some point the rate of profit is falling.
At that same point, the RRI is rising. Why the lag? Let me suggest
one possibility.
With a rising RRI, investment increases. With the increase in investment,
the rate of profit falls even more as the stratification of fixed capital
changes such that the C/(v+s) increases where C is the total undepreciated
stock of capital invested. Sooner or later, the mass of profits available
for investment is not enough to maintain a "normal" rate of investment.
Demand slackens. With falling prices, the economic lifetimes of fixed
capital decrease, the average RRI falls. With its fall, investment slackens
further so that the stratification of capital again changes increasing the
rate of profit or decreasing C/(v+s). This eventually leads to the
production of enough surplus value for more investment. Increasing demand
leads to an increase in the RRI.
BTW. Do you know of studies other than that of Dumenil and Levy that
attempt to compute and track the RRI? That they do so was extremely
interesting. Why they seemed to emphasize the rate of profit is
unclear to me.
Duncan wrote:
I also read Marx's discussion of the falling rate of profit as focused on
the profitability of production per se. I think Marx was quite well aware
of the devaluation of capital assets caused by technical change, as well,
but that this was not the issue he had in mind in discussing the falling
rate of profit. I think this may be a point of disagreement, and as such
worth pursuing further.
John responds:
I, of course, agree that Marx was aware of the devaluation of capital
assets due to technical change. What I'm unclear about is how well
Marx was able to distinguish between a falling rate of profit due to
enormous increases in fixed capital and one, say, due to what we have
been calling "Marx biased" technical change. In the former case, we
could observe a falling rate of profit simply because of the changing
stratification of fixed capital. In this case, we may find a falling
rate of profit with a rising RRI as capital saving innovations
are introduced. The changing stratification of fixed capital could
appear as "Marx biased" technical change even when the dominant form of
technical change is capital saving.
John had written:
>In OPE-L 4968, you expressed unclarity about much of what
>I wrote in OPE-L 4964. I think this may be due to my
>attempt to do three things at once.
>
>(1) make use of the RRI,
>(2) account for moral depreciation.
>(3) show how Marx's notion of a falling rate of profit becomes
>less problematic if the rate profit is not used as the main
>criterion for investment decisions in models that attempt to
>deal with fixed capital.
>
>Let me see if I can be a bit more clear.
>
>(1) The RRI.
>
>For Marx, this concept did not exist. Indeed, only after his death did
>accountants begin using it. As we know, Marx simply calculated the rate
>of profit with the formula, s/(C+v).
Well, I'm not comfortable with this formulation, since I read Volume II of
_Capital_ as largely concerned with the stock-flow issue. s/(c+v) is,
properly speaking, the markup on costs. The gross profit rate is s/K, where
K is the stock of capital tied up in production, and is equal to
(s/(c+v))((c+v)/K), where (c+v)/K is the average rate of turnover of
capital. As I read it, these formulas concern the profit on production per
se. To get the individual capitalist's "bottom line", we would have to add
or deduct from s here the gains of losses on stocks of assets held during
the production period. When Marx writes the rate of profit as s/(c+v), he
is at pains to make the explicit assumption that the rate of turnover is 1,
which he acknowledges to be an unrealistic assumption adopted for the sake
of pedagogical simplicity.
John responds:
1. I'm not sure about that "pedagogical simplicity." I would agree that
Marx knew that the assumption that the rate of turnover is 1 was
unrealistic. But could he have made a different assumption? What tools
did he have to do so? After writing V1 and having previously finished
what we read in Part III of V3, we find that he was still asking Engels how
capitalists depreciate their capitals. Capitalist accountants knew
nothing of how depreciation charges and profits could be separated using
present values until after Marx died.
2. What we find in V2 is Marx's recognition that the turnover of fixed
capital may be the "material basis" for a theory of crisis. We also
see that he could and did develop the idea of an annual rate of surplus
value. In V3, we know he wrote nothing concerning "The Effect of Turnover
on the Rate of Profit."(Ch 4) The entire chapter, written by
Engels, does little more than consider the manner in which the turnover
of circulating capital effects the annual rate of profit. How the
turnover of fixed capital influences the rate of profit is not discussed.
John had written:
>Given that capitalists do use
>the RRI in making investment decisions, sole use of the rate of profit
>in examining the capitalist process of accumulation is problematic even
>in the absence of technical change. That is, Marx's overall rate
>of profit would vary as the stratification of fixed capital changes
>since the rate of profit on any given capital would increase as capital
>depreciates. Thus, the rate of profit would fall even with a constant
>RRI in the case where the average age of the fixed capital is decreasing
>and increase when the average age is increasing.
Duncan wrote:
In my view this has to do with the calculation of K, the capital tied up in
production. I've always read Marx as calculating K as the average capital
tied up over the production process, and thus not changing as depreciation
changes, but I might be missing something there.
John responds:
Let me suggest one possibility.
In Ch 25 of Vol 1, Marx uses the expression "accelerated accumulation."
For me, this would mean that K in the above is growing quite rapidly at
times. The average age of machinery is decreasing as the rate of profit
computed in the usual fashion is falling even as the RRI may be increasing.
One problem I see in stressing the rate of profit is the tendency to
ignore the stratification of fixed capital which might change rather
dramatically in periods where there is "accelerated accumulation."
My point is that one can generate a falling rate of profit even
without technical change given "accelerated accumulation."
John had written:
>(2) Moral Depreciation.
>
>On this list in discussions primarily with Andrew, I tried to incorporate
>the idea of moral depreciation within the Marxian framework using the
>rate of profit. Andrew showed that this was generally wrong.
>Yet, within CAPITAL it is clear Marx recognized that capitalists do
>consider moral depreciation as they adopt new techniques.
Duncan wrote:
I think we need to be very careful with this argument. The individual
capitalist does not consider the impact of his innovation on the value of
other capitalists' stocks of assets, and there is no reason in a
competitive capitalist system why the individual capitalist should. It is
true, however, that capitalists in judging investment projects consider the
capital losses they may sustain through other capitalists' innovations over
the life of the investment. For example, Phillips would not release CD
technology until it could make sure that it would not suffer these kinds of
losses due to the introduction of other technologies or to a rapid fall in
the sales price of CDs over the life of the initial investment.
John comments:
We are in agreement that capitalists do see the possibility of this type
of loss. Let's assume the investment does take place even though
some of the losses are anticipated and do occur. Given that the
losses are anticipated would not the losses in assets also be
anticipated? If so, why would there be a need to revalue the
assets as well as a need to deduct the losses from the surplus
value produced?
John had written:
>Marx saw that a portion of their returns on investment represented not
>only depreciation due to the use of fixed capital but also due to its
>moral depreciation. By using the RRI, we can incorporate changes in
>asset valuation, generally moral depreciation, within our view of the
>accumulation process. What does this mean?
>
>I am willing to assume that in making investments capitalists and their
>accountants know that, say, machinery will get cheaper in the future
>and that the unit price of the commodity they produce will fall due
>to new and better machinery. Using the RRI, this means that much of
>revaluation of constant capital need not be made after each change of
>technique and/or decrease in prices.(Note 1) The revaluation has
>already been taken into account. Moral depreciation is built into
>capitalist accounting.
Duncan wrote:
At this point I think you're shifting from accounting to pricing theory.
Competitive capitalists in a system with a given average rate of profit
will not compete the price of a product below the point where the
investment to produce it yields the average rate of profit including the
losses on stocks of capital assets due to anticipated price changes. I
would rewrite your last sentence to say "moral depreciation should be built
into competitive capitalist pricing".
John comments:
I like your suggestion. However, I'm not sure that capitalists are
unwilling to make investments that lower their rates of profit below
the average. Again, I think the anticipated RRI and not the rate of
profit is the basis on which capitalists make investments.
Let me add that if we build moral depreciation into competitive
capitalist pricing, then using the rate of profit to carry out the
transformation of values into prices becomes problematic. That is,
if the rate of profit is not seen as the basis for investment decisions
by capitalists, why would there be any tendency for the rate of
profit to equalize among the competitive capitalists? The prices of
production computed by Marx are without meaning except in models where
all constant capital is circulating.
John had written:
>Should capitalists not consider possible decreases or increases in
>the prices of their inputs and outputs, they would, of course, compute
>RRI's much higher than the ones they actually experience since they
>would be assuming the returns each year would be higher and that the
>machines would last longer. Losses in asset values would have to
>be seen as deductions from profits and the continual revaluation
>of constant capital would appear justified. The RRI on a given
>capital would be continually adjusted downward. Yet, Marx himself
>recognized that this does not happen by including "moral depreciation"
>within the concept of depreciation itself.
Duncan wrote:
I don't think we have any disagreement on this point.
John asks:
I always like no disagreement. But what I now do not understand is
why you want to separate asset revaluation from the production of
surplus value? Here, you seem to agree that Marx made no such
effort.
John had written:
>As capitalists compute the RRI while anticipating technical change and
>falling prices of inputs and outputs, they may still invest in
>such a way that the rate of profit falls.
Duncan wrote:
Yes, because of competition, but also, as we know from Okishio, because of
the tendency for the wage share rather than the level of real wages to
remain constant.
John comments:
Clearly, you have given us one possibility. But, again, we could have
massive investments with an increasing or a constant RRI and a falling
rate of profit. In this case the level of real wages could remain
constant as the rate of profit falls. Here, we would be considering
something not dealt with by Okishio -- fixed capital and its
stratification.
That's it for now.
Be well,
John