Responding to Duncan's Post of 11/26 on the RRI and the Rate of Profit
>John noted:
>
>As I recall, the IRS of the US began to allow forms of depreciation
>other than the straight line method after WWII. What "accelerated
>depreciation" does is shift what we would call profit into
>depreciation in the early part of the lifetime of fixed capital as
>measured by straight line depreciation. As fixed capital ages, the
>opposite would be the case.
Duncan commented:
True enough, but a tax deferred is a tax avoided to a large degree. It is
to avoid the distortions in the measurement of the undepreciated capital
stock inherent in the tax code that most economists (Marxist and others)
try to estimate the capital stock by a perpetual inventory method that
cumulates gross (not net) investment and then depreciates each vintage
separately according to the "Windfrey tables".
John comments:
Perhaps I am wrong but I have assumed that in using the "Windfrey
tables" each vintage is depreciated in a manner not unlike
straight-line depreciation. If not, I'd be interested in the
reasoning behind using something other than straight line.
Duncan continued:
I guess I'm a bit puzzled at the Marxist interest in this problem,
since the notion of "measuring" the "stock of capital" is bound up
with the _use-value_ of capital and the neoclassical idea of a
production function relating real output to the "real" capital stock.
John comments:
I think that measuring the stock has been and still is a problem
within the Marxian framework. When we speak of asset revaluation
due to technical change, we somehow have to come to terms with
the changes in the measure of the capital stock. Granted if
we enter the world of neoclassical economics and simply relate
inputs to outputs in terms of use-values, we are nowhere. However,
as we relate inputs to outputs in terms of values and/or prices,
we are forced to consider the changes in valuation that take
place as productivity increases. Further, as
Duncan wrote:
As long as the cash flow from the capital suffices to pay the debt
service the capitalists have incurred to finance it, it doesn't
seem to make too much difference dynamically whether they account
for it as profit or depreciation.
John adds:
I agree and note that implicit in your remark is the notion that
the _real_ measurement of capital is its ability to generate cash
flow. Should it be unable to do so, it is "fully depreciated"
even if all of the original investment is not recovered.
However, as we "mush" depreciation and profit, we as Marxists
encounter a further difficulty. How do we reconcile looking at
matters in this fashion with any sort of labor theory of value?
My sense is that more than a few Marxists resist the notion of
using the RRI because this is a task that remains undone. What
is the rate of surplus value, for example, if profit can not be
clearly separated from depreciation?
Duncan also wrote (Here I have altered the order of his
post.)
Since Marx's idea is that the value of capital is just the
accumulation of value in the production process due to the time-delay
in production, I tend to think of the money accounts as being more
important than an artificially constructed index.
John comments:
I'd go a bit further and say that "an artificially constructed index"
appears to hinder us in our efforts to understand the dynamics of
the accumulation process. Yet, just as those "money accounts" are of
import, so too are the "capital accounts."
(snip)
...
Referring to the manner in which profitability is
measured, I had written:
>Why is this important? First, if we are looking at the rate of
>profit as some sort of indicator that capitalist use to make
>investments how they compute it would seem to be of import.
Duncan commented:
But why, exactly? If they have imperfect or systematically biased
depreciation estimates, they will misallocate the investments to some
degree, but why should this bother us?
John adds:
I see your point. In theory, I am willing to assume that the goal
of the capitalists is the maximum expansion of profit or surplus
value. Taxation matters aside, that expansion is constrained
should choices of technique depend upon arbitrarily adopting
some depreciation schedule. But use of the rate of profit forces
us to do so.
I went on to say:
>Second, if we really want to deal with how capitalists see their
>rate of profit, net of taxes, then the manner in which their
>depreciation schedules can be developed would seem to be both
>a factor in making as well as a consequence of investment decisions.
>Further, given that capitalists use an anticipated RRI and
>not the rate of profit, the profit net of taxes would be influenced
>by the manner in which depreciation is computed.
Duncan:
I think most business schools now teach mbas to value assets using the
cash-flow method, precisely to avoid arbitrary depreciation assumptions. I
suspect that in the U.S., at least, the concept of "profit" is largely a
tax issue, not a real economic issue.
John:
I think we agree on this. But here again we have no way to look at
matters "using the cash-flow method" with a labor theory of value.
Let me also add that in valuing assets using the cash-flow method
one is also forced to make more than a few assumptions concerning
the future. This would imply that the RRI can be and is estimated
ex ante and computed ex post. Granted the two calculations will
generally differ.
Be well,
John