[OPEL:6160] L] Re: Historical Costs

John R. Ernst (ernst@PIPELINE.COM)
Tue, 10 Feb 1998 22:04:35 -0500 (EST)

Re: Historical Costs (Comment on Duncan's post of 2/9/98)

Previously, I had written:

>Consider the case where there is general price deflation. If each
>$1000 invested before deflation yields profits of $200, the investment
>of $1000 in the period in which there is deflation produces less profit,
>say, $100. Has the rate of profit fallen? It would seem so. But
>if we revalue that $1000 in that same period or devalue the investment
>by 50%, then the rate of profit stays the same as the capitalist writes
>off $500. By depicting the accumulation process using "end of period
>replacement costs" to value the capital invested in any given period,
>we see no change in the rate of profit from one period to the next.

Duncan remarked:

Surely the individual capitalist's wealth is affected in exactly the same
way by a falling rate of profit in production proper and by the ongoing
devaluation of stocks because of generally falling prices. But it seems to
me that there is a great advantage in separating these two aspects of the
situation analytically: one basically has to do with the exploitation of
labor, and the other with the revaluation of existing assets. (Sometimes,
of course, capitalists make a gain through the revaluation of stocks, which
is often the foundation of great fortunes.) The two are connected through
the capitalist mode of production, since it creates the incentives for
capitalists to compete through technical innovation, which is the
underlying force in the revaluation of the assets. But it still seems
important to separate out the two moments of "ex post" profitability, as
Marx does.

I now add:

I am not going to pretend that I completely understand the separation
of "the two aspects" but here I'd like to explore the matter based on
what I now think of this way of approaching Marx. Further clarification
is definitely in order.

You distinguish between "a falling rate of profit in production
proper" and "the ongoing devaluation of stocks because of falling
prices." Here, I wonder if "production proper" includes moral
depreciation. If so, the two aspects seem to complement each other.
If not, difficulties arise.

How do we compute the total depreciation charge for production in
a given period of production? Ideally, it would be the difference
between the value of the stock in question at the beginning of
the given period and its value at the end of the period or at
the start of next. This overall depreciation charge would
include allowances for wear and tear as well as moral depreciation.
Using this method, we are forced to consider the devaluation of
fixed capital from period to period. This sounds simple but we
know it isn't.

I assume that by a falling rate of profit in production proper
one could hold unit prices constant and still see the fall in
the rate of profit. With these constant prices and the changing
MELT, we would see that the fall is a result of increases in the
fixed capital to output ratio. With such a fall capitalists
could actually be better off since the revaluation of already
existing assets would result in decreases in moral depreciation
and, perhaps, even increases in the value of existing capital
stock when there are large decreases in moral depreciation.
With the decreased amount of depreciation, the economic lifetime
of fixed capital increases. This, in turn, would tend to increase
the profitablilty of the already existing fixed capital.
I'm unclear about the extent of these effects on the "falling
rate of profit in production proper." However, it seems that
moving from production proper with little attention to moral
depreciation and implicit devaluation is not without difficulty.
Perhaps, this why we see so little attention paid to the entire
idea of asset revaluation.

The basic idea is that "good" investments that increase the
profit rate in production proper translate into large increases
in moral depreciation. The result may be a fall in the
overall profit rate. On the other hand, "bad" investments
that decrease that profit rate decrease the amount of moral
depreciation and may result in increases in the overall profit
rate.

I'm skeptical that Marx presents us with such a strange way of
understanding the accumulation process. Rather, he introduces
the idea of moral depreciation as he discusses the process of
production. For him and for us, the actual depreciation
that occurs from period to period includes both physical
depreciation and moral depreciation. The amount of depreciation
is the loss in the value of fixed capital from period to
period. Thus, in the analyses of production and of reproduction
the devaluation of fixed capital is already present.

Be well,

John