[OPE-L:5886] Re: Re: BEA and Depreciation (Jurriaan)

jurriaan bendien (Jbendien@globalxs.nl)
Tue, 23 Dec 1997 00:03:06 +0100

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Thanks John for your post. I have a bout of the 'flu myself (I don't know
if it's the Asian 'flu) but I will try to stay coherent...

> the rate of surplus value would seem to increase as capital investment
> and decrease as capital investment picks up or, in Marx's terms,
> accelerates.

Well certainly you would expect that. A general increase in
industrial investment implies an increase in employment and a stronger
bargaining position for workers, and vice versa, a general decline in
investment increases unemployment and reduces their bargaining position.
But are you now suggesting that, if investment slackens (implying a lower
increase in capital stock), then the value of depreciation write-offs
decreases, thereby increasing declared profits (operating
surplus) and hence (assuming that wages remain constant or rise more
slowly) raising the rate of surplus value (?).
> By economic depreciation, I mean the annual loss that occurs in
> the present value of an investment.

This "loss" occurs presumably due to both wear and tear, aging, the state
of the
market, and technological obsolescence, therefore both physical and moral
depreciation. You might then conclude that "economic" depreciation does
not necessarily
accurately reflect the magnitude of the value transfer occurring over the
useful life of the asset. That is to say, the current potential selling
price of the fixed capital stock estimated may fluctuate within limits
according to what happens in the sector, or in the economy, affecting the
amount of depreciation charged, so that it bears no relationship to
historic cost.
But changes in the valuation of capital are also a practical problem for
capitalists, since they may have to build up special reserves to replace
fixed assets, as Marx notes. He also remarks that "The constant
improvements which rob existing machinery, factories etc. of a part of
their use-value [referring to physical depreciation], and part of their
exchange-value [referring to moral depreciation]. This process is
particularly significant at times when new machinery is first introduced,
before it has reached a certain degree of maturity, and where it thus
constantly becomes outmoded before it has had time to reproduce its value.
This is one of the reasons for the unlimited extension of working hours...
If this short working life of the machines (their short life-expectancy
vis-a-vis prospective improvements) were not counterbalanced in this way,
they would transfer too greet a portion of their value to the product in
the way of moral depreciation and would not even be able to compete with
handicraft production" etc. etc. (Capital Vol. 3, chapter 6, "Effects of
Changes in Price", p. 208-9 in the Penguin edition).
> 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.

You seem to be arguing now that because fixed capital has depreciated in
value in year 2, the value of output must decline as a result ? What about
annual net new additions to fixed assets ?

> 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.

Economic depreciation implies that the amount written off reflects not the
historic cost of the asset, but its current market value, which may be
higher or, more usually, lower. If the potential current sale price of
fixed capital is valued to be higher, other things being equal,
depreciation will be higher, or if fixed capital is valued lower,
depreciation will be lower.

> 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 based my observation on the relative stability of the VOLUME of
depreciation charges year-to-year on (1) a statistical comparison I did
many years ago of the long-term trend in the annual volume of "consumption
of fixed capital" with the trend in the annual volume of operating surplus
and net new additions to fixed assets, using disaggregate UNSNA-type data
for the New Zealand economy, (2) circumstantial evidence on the prevailing
depreciation practices actually applied (referring to balance sheet data,
taxation schedules, and standards of accounting practice).
I also computed "gross" annual capital stock levels from a benchmark year,
just ignoring depreciation altogether (simply adding on annual net
additions to fixed assets), and calculated the ratio (operating surplus +
consumption of fixed capital)/gross capital stock. If memory serves me
correctly, a falling tendency of this measure of the rate of profit could
still be observed.
Obviously an increasing capital stock will result in an increasing VOLUME
of depreciation, even if the RATE of depreciation remains constant.
You are saying the rate of depreciation charged may vary year to year due
to factors which are unrelated to historic (acquisition) cost. And indeed
they may.
But I am saying that fluctations in depreciation as such can only affect
the rate of profit to a limited extent, simply because of the relative
magnitudes involved. I base myself on what I observed about the data on
capital, investment, depreciation and profits for different countries.

For me, current costs valuation takes
> into account the current price of new asset as well as the age of
> the asset.
It would be the same for the statistician I guess. They ultimately base
themselves on prevailing depreciation norms.

> 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?

No. Well, I don't rule out some sort of "profit squeeze" by rising wage
costs as an empirical possibility, especially where there is a strong
labour movement and a low organic composition of capital. But generally the
higher the amount of fixed capital advanced becomes, the less falling
profitability can be attributed to wage costs. Mostly "profit squeeze"
theories are an ideological argument referring to the fact that capitalists
have little control over the fixed capital they must advance, and wage
costs are the only capital outlay they have some control over. Actually,
one point which is ignored in most Marxian discussions of the rate of
profit is that the stock of variable capital tied up at any time during the
year (reserves to pay wages) is usually much lower than the annual amount
of wages paid out, and, actually, for businesses of any size, a very small
fraction of the annual fixed capital outlay. That is to say, capitalists do
not keep the whole amount they have to pay workers in wages over the year
(as shown in the annual account) in reserve, they pay wages out of current
revenue, during the year. (One way to approximate the variable capital
stock is to divide "intermediate consumption" (annual value of raw
materials used up) by the average stock level during the year to obtain the
number of stock cycles (rotations) during the year, and then divide annual
wage costs by the number of cycles to approximate the average amount of
capital which must be reserved to pay wages.

Why would competition hold them back? If the
> old technique is more profitable, would not competition dictate that
> they adopt it?
>Once new techniques have been introduced and the old technique discarded,
it may not actually be feasible to switch back to the old technique.
Capitalists may be forced to adopt and maintain new production techniques
by competition, these become the norm for the branch of industry.

> I think this ultimately leads to a theory of accumulation in which a
> technique is adopted because of rising wages.

I don't think this reflects real investment behaviour very well as far as I
have observed it. Capitalists adopt new techniques (1) because they
increase productivity, and profitability - at least in the longer term, (2)
because they are forced to do so by competitors, to adopt the norms of the