Allin Cottrell wrote:
> To return to John's original example:
>
> > "Let's take an example. Suppose that the annual cost for the
> > stock of circulating capital is $6000 -- $5000 in constant capital
> > and $1000 in variable capital. The output produced at the end
> > of each year sells for $7000. If the fixed capital is
> > fully depreciated, then the return on this investment would be
> > 1000/6000 or 1/6."
>
> OK, I agree that if you have to put up $6K at the start of the
> year and don't get the $7K revenue till the end, then this
> process can't compete with a new technology offering a 20% rate
> of return. The present value of the old, fully depreciated,
> capital stock is then -6 + 1/(1.2) + 1/(1.2^2) + ... < 0.
> "Can't compete", in the sense that a rational capitalist with
> ready access to funds would prefer to scrap the old plant and
> invest in the new technology, rather than continuing to put $6K
> per year into operating the old.
>
> At a zero discount rate, -- or a modest rate reflecting the real
> growth rate of the economy -- however, it would make sense to go
> on operating the old plant. Is that, in effect, what you were
> saying would be the socially rational decision?
>
> As an empirical matter it would be interesting to know: How
> common is it for old processes to get into the position
> represented in your example, i.e. where the present value of the
> fully depreciated means of production goes negative, when
> discounted at the current rate of return, yet the process is
> still capable of generating positive operating profit? (I
> suspect it may be rare.)
>
> Allin.