Jurriaan,
Let me go over your post point by point and see if we can clarify
a few things.
I had written:
> 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.
Jurriaan wrote:
Surely you should be able to test that by comparing the actual book values
of fixed capital stocks cited in official statistics, and the result you
obtain by using the perpetual inventory method. If I may suggest this, you
could also try checking out the appendix to Glyn, Amstrong et al.,
Capitalism Since World War 2 (1st edition) and talk with the authors about
it. They have some ideas on this problem.
I comment:
When I mentioned an economic rate of depreciation, I had in mind that
which could be found by changes in the present values of the capital
stock from period to period. Harcourt, Fisher and others are quite
persuasive in arguing against using any type of accounting depreciation
to measure the economic rate of return. As Duncan pointed out a few
posts ago, this is the method now being taught in the business schools.
Hence, I am not trying to compare book values with those obtained using
the perpetual inventory method.
I will check out the Armstrong, Glyn work.
I had written:
> 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.
>
Jurriaan commented:
I don't know what BEA is at this stage, pardon my ignorance. BEA to me at
the moment means (1) the name of an airline, (2) an abbreviation of the
name of the Queen of Holland. I assume you are creating a Marxian
econometric model. What I would say is that often capitalists do not
really know themselves how to value their fixed stocks, and they use a
mixture of valuation methods themselves. And, of course, "creative"
accounting goes on, just as creative accounting goes on with inventories to
understate profits for tax purposes. But what is the margin of error ? You
can, I would say, only find that out by comparing various different
measures. Furthermore what is the magnitude of the problem in relation to
other problems, such as inflation, or inventory valuations ? In other
words, what quantitative difference does it actually make to the trend ?
It seems to me is that the objective is to get as close as you can to "real
profits in the bank", "real taxes paid", "real depreciation written off",
and not get too much into "theoretical profits", "theoretical taxes",
"theoretical depreciation" and so forth. To get to that, you have to go
backwards and forwards between theory and the data. After all, one aim
surely is to bring the theory and the data closer together.
I comment:
Sorry about the initials BEA=Bureau of Economic Analysis (US).
At this point, I'm not into constructing some econometric model but
rather a model that depicts how a capitalist economy moves from
period to period with technical change. The problem with moving
between the theory and the data is that "we" do not collect or
manipulate the data. What seems to bring us down to earth
theoretically is at a very simple level we can't determine the
rate of surplus value for the typical capitalist without simply
asserting what the depreciation charges are.
I had written:
> 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.
>
Jurrian comments:
They are not. Theoretically, capitalist development is always uneven
development in space and time. At the simplest level (for an example) in a
sustained boom phase, investment in Department 1 (capital goods) is
initially likely to be stronger, to the point of "overheating". In a
recession it is likely to be much weaker. And, looked at historically, as
the recession bites deeper and income disparities grow, investment shifts
more to those who have the income to spend, to the "upmarket" sector, i.e.
to luxury consumption.
I now write:
I agree with you and saw "a" as a very unrealistic assumption that
is often made in dealing with data.
I had written:
> b. The overall rate of growth of fixed capital is nearly the same
> as the growth of the various sectors in the economy.
>
Jurriaan commented:
This is not true either for the same reason, and you can see that easily
from the data. (A side issue here is that sometimes, through lack of
adequate data, or because of estimation procedures, the statisticians will
present figures which "level out" big fluctuations a bit. Statisticians
generally don't like big fluctuations in the figures, they distrust them
and will in many cases seek to even them out).
I now write:
Again, I agree and saw this assumption as unrealistic as well. That
leveling out bit to which you refer raises still more questions if
our task is, in the final analysis, to describe the motion of economy.
I had written:
> 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.
>
Jurriaan wrote:
Well, quite. But that "overaccumulation" (overheating) occurs can be
empirically shown. I don't think in the United States or countries like
that there is a big "problem" with "underaccumulation" except in some
"moral" sense (that they "ought" to be investing more in some area). I
think we can trust capitalist to invest where profits are to be made, and
to research the opportunities better than you and I can. Underaccumulation
would imply a lack of capital available for investment, but that isn't
really the case in the "advanced" countries. It's more likely to be a
problem in some "Third World" countries, because of low profitability,
social instability, cultural factors, social structures etc. Of course you
could also view underaccumulation as too much investment in the "wrong"
places such as luxury consumption, but again that's a moral argument.
I now write:
Again, with either under- or over- accumulation, the amount of depreciation
in the output changes relative to "the average." Hence, the rate of
surplus value would seem to increase as capital investment slackens
and decrease as capital investment picks up or, in Marx's terms,
accelerates.
I had written:
> 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?
Jurriaan wrote:
He will use whichever depreciation technique results in the biggest
realised profits and the lowest tax liability, while trying to present a
rosy picture to shareholders. I am not really sure what exactly you refer
to here. Statements of business activity must be related to the purpose
for which they are made, and the questions asked. Capitalists may tell the
taxman one story, the shareholders another, and the statistician yet
another story. Of course if the stories get out of kilter too much then
they lose credibility so there has to be some relationship between all the
stories.
I now write:
Here I think there may be a bit of unclarity in the terms I used.
By economic depreciation, I mean the annual loss that occurs in
the present value of an investment. In the U.S., firms are required
to tell the taxman and the shareholder the same story. The
statistician at places like the BEA seem to figure out matters for
themselves so that they can construct the stats from year to year
in current costs. Recently, in the US accountants are urging firms
to look at investments in terms of present values.
I had written:
> 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.
Jurriaan asked:
What sort of measurement of the rate of surplus-value do you have in mind
here ?
I respond:
With all but the straight-line method, the depreciation charges
for a given investment in fixed capital will decrease with age.
For example, if we consider an investment of $1000 and assume
that the depreciation charges are $100 in the first year and
thus see a capital worth $900 at the beginning of the second year.
In this later year, we might assume that 100f that $900 is
depreciated or $90. Now if in both years the living labor added
is the same, then we would see a fall in the total value of the
output from the first to the second. Or, if we assume that the
value of the output is constant, we would have to admit that
the value created by a living labor hour is changing without any
change in technique.
I had written:
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.
>
Jurriaan wrote:
I think you can trust capitalists to write off as much as is in their
interests to do, and what they can get away with, operating within the laws
of the land (complex international schemes may be devised to dodge taxes,
as known). The point is to concentrate on profits actually realised, and
assets value actually written off, getting as close to that as possible.
Another thing you can do is compare the figures using the perpetual
inventory method with balance sheet data. I mean, if you get a rate of
return on the balance sheet of 12% and the result from using the perpetual
inventory method is 23% then obviously some adjustment is desirable. But I
would say it is probably impossible to get to the deepest and darkest
secrets of the "true" profit rate, you can at best identify margins of
error and show what quantitative difference, it makes if different
assumptions are adopted.
I now write:
Again, I'm not trying to adjust some data but rather simply attempting
to grasp the concepts of the rate of surplus value and of the rate of
return on an investment. Granted that matters like taxes an the like
play a role in the actual data but my claim is that the Marxian
understanding of some very basic concepts tends to assume away problems
involving depreciation charges.
I had written:
> 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:
Agreed. Marx also makes some remarks on depreciation in his correspondence
but I haven't got the texts handy here. I think one should go by the
depreciation "tactics" which capitalists actually use, real capitalist
behaviour, but that is something that can be settled through investigation,
even if maybe not perfectly satisfactorily.
I now write:
Before we consider actual capitalist practice or, perhaps as we do, I
am suggesting that we look at how use of an economic rate of depreciation
using present values effects the concepts used to find the rate of
surplus value and the rate of return.
I had written:
> 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:
I don't deny that you need to have a good concept of what it is that you
are trying to measure. All I am saying is (1) you will never get a perfect
measure, (2) you will never be able to test the "pure concept" adequately
because of deficiencies in the data. But I believe you can demonstrate a
falling rate of profit IRRESPECTIVE of whether you include depreciation in
profits OR NOT, simply because depreciation rates remain fairly stable from
year to year whereas observed profit volumes fluctuate much more strongly
from year to year, and from decade to decade. Just look at the data, and
you will see what I mean. What I would do is put all the
methodological/measurement problems in a list, and then look at the
official statistics, accounting practices, balance sheet data and the
taxation regime in order to arrive at a solution which approximates the
real behaviour of capitalists. You cannot do better than that !
I now write:
a. Again, my point is that we have no pure concept here. Hence, the
perfect measure is not, at this point, an issue.
b. By whose reckoning, are the depreciation rates stable? If we
have an increasing organic composition of capital, would not the
amount of depreciation increase relative to output? If the
accumulation of fixed capital is accelerating, would not the
depreciation charges be increasing relative to output?
I had written:
> 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.
Jurriaan wrote:
Capitalists are generally interested in what assets are worth today, the
value of assets today, not some historic value. Statistical surveys tend to
reflect this. Capitalist can be relied on to understate or overstate the
value of assets depending on the resulting tax liability, and what they can
get away with in terms of their shareholders. To find out what is more
likely to be the case you have to know more about the actual taxation
regime applied among other things.
John now writes:
Historic valuation furnishes us with a way to compute the rate of
return on an investment over its lifetime. To be sure, the effects
of inflation are of import in making such calculations. However,
historic valuation becomes crucial should deflation be the case.
That is, it's impossible for a capitalist to tell his banker that
his operation is operating at a high rate of return when profits
are down and assets are devalued. The over-valuation of assets
seems to be a problem currently associated with "the Asian flu."
Jurriaan continued:
I presume valuation at current cost refers to "what it would cost to
buy the asset new today", which is not the same thing as "todays
market (sale) value of used fixed equipment".
John now writes:
Yet the two are not unrelated. For me, current costs valuation takes
into account the current price of new asset as well as the age of
the asset.
I had written:
>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.
Jurriaan asked:
Why is that ? And why is that a problem ? Because you want to predict
capital stock-values in the future ?
John writes:
No, stock-values are not the issue. Rather it seems to me that
we need something like Marx's schemes of reproduction which take
into account technical change, economic depreciation, rates of
return on investment and periodic crises.
By revaluing assets at the end of each period, we lose the
connection to the prior period. Hence, how the economy grows
as it moves from one period to the next is not considered.
Rather the focus shifts to the changes in the data over time.
Thus, matters like the trends in the rate of surplus and in
the rate of profit over time become poor substitutes for a
real description of the manner in which the economy moves
from period to period and of the way in which periodic crises
can and do occur.
I had written:
> 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.
Jurriaan commented:
Agreed. But they cannot do any old thing. It has to be credible to the
taxman among other things. (Well, in New Zealand the Fletcher Challenge
corporation some years didn't pay hardly any tax, but I don't think that
was because they fiddled with depreciation figures !).
John writes:
I do not have a clue about the specific case you mention. I suppose
I should have been a bit clearer initially. That is, abstracting from
taxes, the depreciation of fixed capital should be computed on the
basis of changes in present values and not on some fixed schedule.
Granted using present values means that expectations are to be taken
into account. But then Marx himself implicitly suggests this when
he introduces the concept of moral depreciation.
I had written:
> 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.
Jurriaan wrote:
True (although some studies get a bit more sophisticated, for instance
Shaikh adjusts for capacity utilisation, price inflation and so on). That
will usually suffice to get a rough idea of the longer term trend, of the
real results of the accumulation process over let's say a decade. But that
is not the same as getting a good view of real profitability from year to
year.
John comments:
On OPE-L, given the TSS concept of valuation, we have questioned the whole
idea of a falling rate of profit using current cost valuation. Without
accepting the Ricardian notion that rising wages cause a fall in the
rate of profit, it is difficult to imagine how such studies relate to
Marx's notion of accumulation.
I had written:
> 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.
Jurriaan wrote:
There is nothin unMarxist about that, surely ! To paraphrase Shaikh,
capitalists are continually engaged in a dual battle: a battle to cut costs
(including labour costs) and to increase sales.
John comments:
I'm not sure if you are saying that an increase in the real wage is
necessary to Marx's notion of the falling rate of profit. Are you?
In Shaikh's 1978 piece on Dobb, he holds real wages constant as he
attempts to show how the rate of profit can fall. I sympathized
with his goal but disagreed with his argument.
Jurriaan continued:
Where the Keynesians go
wrong, when they argue that "higher wages would produce more economic
growth", is (1) that you cannot force capitalists to invest where they
don't want to (such being the nature of private property) (2) capitalists
may not invest in additional production capacity, they may simply put their
prices up, (3) additional demand may not in fact substantively restore the
rate of return (although increasing profit volumes) or international
competitiveness. And, to paraphrase Mandel, the real problem for
capitalists is that an end to the recession requires both an increase in
the rate of return AND a sustained increase in aggregate demand AT THE SAME
TIME.
John comments:
Let me simply say that Mandel seems on the mark here.
I had written:
> Of course, if real wages were then to fall, we would anticipate
> that capitalists would switch back to the old technique.
Why ? They might want to switch back to the old technique if they could,
but maybe they cannot because of competition.
John comments:
I'm not clear here. Why would competition hold them back? If the
old technique is more profitable, would not competition dictate that
they adopt it?
I had written:
>It seems to me that this is an area to which Marxists ought not
>travel.
Jurriaan commented:
Well it depends what you mean there. And we could discuss that if you wish.
John concludes:
I think this ultimately leads to a theory of accumulation in which a
technique is adopted because of rising wages. When wages fall, the old
technique becomes the more profitable. When they rise again, the newer
technique is introduced again. This is not a notion of technical progress
but an economic system caught in some strange dilemma from which
escape is all but impossible. If real wages fell to the level they
were in Smith's day, would the present-day pin making capitalists
adopt the techniques used in his day? I think not.
A bit exhausted,
John