[OPE-L:5876] Re: BEA and Depreciation (Jurriaan)

John R. Ernst (ernst@PIPELINE.COM)
Sat, 20 Dec 1997 17:22:39 -0500 (EST)

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Jurriaan wrote:

Concerning depreciation:

While not claiming to be an expert on the subject, it seems to me that
Marx's views on depreciation are reasonably clear. Depreciation is that
part of the value of the fixed portion of constant capital which is
transferred "in aliquot parts, bit by bit" by living labour to the new
product. Because it is a transfer of the value of constant capital
inputs by living labour, it is "preserved value". So it is not part
of the output of "new value added" in the Marxian sense, therefore
also not part of surplus-value. While depreciation write-offs enter into
the value (and specifically, as Marx says, the cost price) of the new
product, it is not part of "new value added" in the Marxian sense.
Marx further distinguishes between physical depreciation of fixed assets
and moral (economic) depreciation (technological obsolescence). That is to
say the value of fixed assets may alter over time not just because of
physical wear & tear, aging etc. but also because of competition, i.e.
their use-value relative to more advanced equipment produced by new

The measurement difficulties would seem to lie in two areas: (1) the
valuation of fixed assets (the fixed capital stock), (2) depreciation
schedules/methods. Assets may actually be valued for depreciation
purposes for instance at historic cost (acquisition cost) or at market
value (what it would sell for in today's market). Often it is difficult
to know from official statistics precisely what to make of the asset
figures (book values) cited because a mixture of different valuations
are in reality applied by businesses. Depreciation schedules (the
amounts which may be written off annually for tax purposes) are usually
fixed by law, and there may be "tax incentives" in the form of extra
depreciation allowances. In the SNA national accounts aggregate
"consumption of fixed capital" some faux frais of production such
as insurance may also be included. The choices for the purpose of empirical
analysis seem to be either to stick as closely as possible to the actual
stock valuations and write-offs made, or to estimate fixed capital stocks
from benchmarks using gross fixed capital formation data, according to some
variant of the perpetual inventory method. The difficulty then would be to
know which type of depreciation method to use, such as straight-line
depreciation or accelerated depreciation, and we may have to look at the
asset lives of stocks of fixed equipment and customary write-off

John comments:

1. If capitalists are depreciating their fixed capitals according to
an "economic rate of depreciation", then it is not clear to me how
far off estimates based on accounting rates such as straight-line
or declining-balance will be.

2. From what I've looked at concerning the BEA stuff, economic and
accounting methods are used. To get the aggregate they have to
add apples and oranges.

3. All of this may be no big deal if

a. The economy grows in such a way that the rates of investment
in the various sectors are about the same from year to year.

b. The overall rate of growth of fixed capital is nearly the same
as the growth of the various sectors in the economy.

However, making assumptions such that (a) and (b) hold may preclude any
notion of the economy "coming apart" or of crises due to an over- or
under- accumulation of capital.

4. We still face the problem of describing the behavior of the "typical"
capitalist on the general level. That is, is he is using economic
depreciation rather than accounting depreciation? Further, no matter
which he uses we see that the rate of surplus value changes as
capital ages in all cases save perhaps straight-line. Hence,
Marxists seem to adopt the straight-line method and hope that the
data supports this assumption. Given that few if any capitalists
take this method seriously, the Marxian description of the accumulation
process becomes suspect.

5. Generally, in _Capital_ all we are told by Marx is that the
depreciation rate for the first year of an investment is, by
assumption, 10%. Thus, he is clearly using an accounting rate
of depreciation. In the answers Engels provides Marx, he at
first suggests that he uses a declining-balance method and then
follows up with an example that is straight-line. Note that
Marx himself knew nothing of economic rate using present values
since the method of depreciating in this fashion was unknown
during his lifetime.

Jurriaan wrote:

Now why could the value of depreciation affect the estimated amount of
surplus-value, given that depreciation write-offs are conceptually not part
of surplus-value ? Presumably because if the write-offs are somehow
unrealistic or spurious in relation to the real value of fixed assets, then
depreciation can hide a fraction of total profits. The only way to resolve
this issue would seem to be to compare the available data on stocks,
investment, realized profits and consumption of fixed capital, and see what
difference it makes when different measures are used, and what measure
seems most realistic. For instance, what margin of error would be necessary
for the longer term trend in the rate of profit to be totally distorted ?

John comments:

I think we need to know what we are estimating before we estimate. That
is, we need a basic model which shows the accumulation process with
economic depreciation and that allows us to consider the cases where
capital is over- or under- accumulating. Indeed, without this we
may be observing a falling rate of profit simply because profits
are treated as part of depreciation or a rising rate of profit should
the opposite be the case. Marx himself seems to furnish few clues
here since, as I recall in Vol. 2, he indicates that it all works
out in the crisis.

Jurriaan wrote:

Presumably the object of the exercise is not to get a "perfect measure",
but something that allows us to identify the empirical trend, so that we
get an insight into the way capitalist development is actually moving over
time. When we try to obtain a measure, all we need to bear in mind is -
whatever the difficulties of measuring it - that fixed capital is not a
"theoretical entity" but a real value which we can estimate from the data
within certain limits of error. In my own (limited) work in this area I
often found that clever manipulations of asset and investment figures on
the basis of different theoretical assumptions do not really alter the
basic trend result very much.

John comments:

I have yet to see the BEA stats in terms of historic costs. I do
understand they exist. The "real value" of fixed capital is most
often presented in terms of current costs. Thus, as we attempt
to describe the traverse from period to period or from year to year,
we are generally left without a clue as to what took place. In
the meantime, capitalists themselves are not so foolish as to ignore
the actual changes in valuation that take place as their fixed
tangible assets age when they set up their depreciation schedules.
Why is this a problem?

In general, empirical studies concerning Marx's falling rate of
profit attempt to show that it falls when inputs and outputs are
priced according to current costs. Given they can do so, they
then face the problem of describing the how's and why's of
capitalist investment decisions and are forced to argue that
rising real wages play a role in the process of accumulation.
Of course, if real wages were then to fall, we would anticipate
that capitalists would switch back to the old technique. It
seems to me that this is an area to which Marxists ought not
to travel.