[OPE-L:859] John's questions in OPE 855

Alan Freeman (100042.617@compuserve.com)
Sat, 27 Jan 1996 17:49:35 -0800

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>a. Are you saying that the amount of moral depreciation of the
486-ers is equal to the super profit of the 586-ers?



I think it is equal to the superprofit of the 586
*manufacturers*. The people I called '586ers' were 586
*buyers*. The 586 buyers will make a superprofit only if the
586 is more productive, not if it is cheaper. In the simple
case, where the 586 is only a cheaper version of the same
thing, it is the 586 manufacturers who make the superprofit.

But let's say, it's *either* the 586 manufacturers *or* the 586
buyers. If I can call them both 586ers then the answer is yes.

>Why would this be?

See below

>c. What does it mean to say that there is no net gain or loss
of value? What is the standard from which there is neither gain
nor loss?

I think:

The standard is socially necessary abstract labour time, that
is, value. To be precise, the value of 'all commodities
including money in circulation' (Marx's words).

The big question is Simon's: what meaning attaches to the
phrase 'all commodities in circulation'? This is controversial
but I think at the centre of the discussion and the core axiom
of Marx's value theory.

Marx's discussion in Volume I, chapter 5 (Contradictions in the
General Formula) is in my view this core. He discusses
circulation between three individuals A, B and C who exchange
at prices different from values (yes folks, and it's all in
Volume I).

He writes:

"A may be clever enough to get the advantage of B and C without
their being able to take ther revenge. A sells wine worth 40
to B, and obtains from him in exchange corn to the value of
50. A has converted his 40 into 50, has made more money out
of less, and has transformed his commodities into capital. Let
us examine this a little more closely. Before the exchange we
had 40 of wine in the hands of A, and 50 worth of corn in
those of B, a total value of 90. After the exchange we still
have the same total value of 90. The value in circulation has
not increased by one iota; all that has changed is its
distribution between A and B. What appears on one side as a
loss of value appears on the other side as surplus-value; what
appears on one side as a minus appears on the other side as a
plus. The same change would have taken place if A, without the
disguise provided by the exchange, had directly stolen the 10
from B.

"The sum of the values in circulation can clearly not be
augmented by any change in their distribution any more than a
Jew can increase the quantity of precious metals in a country
by selling a farthing from the time of Queen Anne for a guinea.
The capitalist class of a given country, taken as a whole,
cannot defraud itself"

[The unfortunately-phrased reference to Jews and Queen Anne
farthings comes from J. Gray 'The Essential Principles of the
Wealth of Nations, illustrated, in Opposition to some False
Doctrines of Dr Adam Smith' which Marx discusses on p311 vol34.
He characterises this view of Gray's as Mercantilist. Even
though his measure of value is different from the Mercantilists,
he still cites word for word the argument for the conservation
of value]

It is for this reason, Marx argues, that surplus value cannot
arise from exchange and must arise from production. This is
what Paul and myself term the conservation of value in
exchange. But it is in fact just Marx's 'first equality', which
as the above citation shows, is a principle of Volume I and his
whole concept of exchange, not some obscure 'normalisation
condition'. It keeps popping up at intervals throughout his
work, right up to the Marginal Notes on Wagner.

Put another way, it says that production - the labour process -
is the *only* source of value. Value *cannot* arise from
exchange. In a certain sense, the rigorous formalisation of
Marx reduces to a systematic exploration of this single axiom.

This means that in exchange, value can be neither created nor
destroyed but merely redistributed between different owners.
So, whatever the 486 owners lose through moral depreciation has
to go *somewhere*. This is a consequence of the conservation of
value in exchange. The question is, where?

Now, if the price of a 'computer' differs from its value, value
will be transferred between sectors and hence between different
types of commodity. So if the total price of the stock of all
computers rises by 10% to L110bn (say) even though their total
value is L100bn, then some other commodities somewhere else
must fall in price by L10bn. If there is price inflation this
remains true, but prices must first be deflated by the change
in the value of money, or, what is the same thing, both their
prices and their values must be expressed in hours.

In this case it is not the 586-ers who gain, on any definition.

But if the price sinks to be equal to the (new) value of
'computers' then all that remains is an averaging process
within a single sector. This is what Marx deals with in the
formation of social values from individual values: (p434 VI)

"The real value of a commodity, however, is not its individual,
but its social value; that is to say, its value is not measured
by the labour-time that the article costs the producer in each
individual case, but by the labour-time socially required for
its production. If, therefore, the capitalist who applies the
new method sells his commodity at its social value of one
shilling, he sells it for 3d above its individual value, and
thus he realises an extra surplus-value of 3d."

By the same token the capitalist who does not apply the new
method sells his/her commodity also at its social value of one
shilling but for 3d below its individual value, and realises a
loss (deduction from profits) of 3d.

The labour-time socially required to produce any commodity is
an average, the total labour time expended in producing it,
divided by the total use-values in which this labour-time is
incorporated. Therefore, to the extent that the more productive
capitalists gain by selling their products above their
individual values, the more backward lose the same amount by
selling below their social values.

This is also discussed extensively in the 'omitted chapter of
Capital' aka 'results of the immediate process of production'
which is printed at the end of the Penguin edition as an
appendix. In particular page 956:

"The individual commodity does not only appear materially as a
part of the total produce of capital, but as an aliquot part of
the total produced by it. We are no longer concerned with a
single autonomous commodity, the single product. The result of
the process is not individual goods...the labour expended on
each commodity can no longer be calculated - except as an
average, i.e. an ideal estimate...This labour, then, is
reckoned ideally as an aliquot part of the total labour
expended on it. When determining the price of an individual
article it appears as a merely ideal fraction of the total
product in which the capital reproduces itself"

and 957:

"How are we to determine the value of the individual commodity,
in this case the ell of linen? Obviously by dividing the total
price of the aggregate product by the number of units as
divided into aliquot parts in accordance with a given measure.
In other words, the total price is divided by the number of
measured units in which the use-value is expressed."

I am surprised that Fred, whose hallmark is his insistence on
the totality, does not draw out the consequences of this
particular reference to the totality. For it means that the
value of a commodity is not what it would cost using the most
advanced means of production in existence, as the 'reproduction
cost' theory of value implies, but an average over all
commodities of this type, which is in general lower than the
reproduction cost.

In my counter-example, to which Fred has not yet replied, I
believe that I showed that the reproduction cost interpretation
leads to contradiction.

But it is, moroever, not what Marx says. For, since the social
average includes existing stocks of the commodity, it is clear
that the bigger these stocks in relation to current production,
the less change there is in the value of the commodity. As can
be seen by scrutinishing the computer magazines, it is not
until after these stocks have been fully replaced using more
efficient methods, that the average value of a computer sinks
to its 'reproduction cost', namely what it costs to produce it
using the most advanced techniques now in existence.

In chapter 6 of Volume III where Marx discusses the impact of
changes in price, this is made fairly clear. Fred cited from
this chapter but omitted the section immediately following his
citation, which reads:

"Without entering into the detailed effects of competition, we
might state for the sake of thoroughness that

"1) if available supplies of raw material are considerable,
they tend to counteract the price increase which occurred at
the place of their origin;

"2) if the semi-finished and finished goods press very heavily
on the market, their price is thereby prevented from rising
proportionately to the price of their raw materials"

In other words, the extent to which value falls towards its
'reproduction' magnitude depends on the relative proportions in
of goods at the new and the old values 'pressing on the

Therefore, the averaging process is a complex one involving
three major 'brother enemies' in whose hands we find computer

1) owners of the older computers

2) owners of the newer computers
3) producers of the newer computers.
Whatever is lost by the owners of the older computers, must be
gained by one of the other two groups.

I think it can be shown, but there is not space here, that it
is the third group - the producers - rather than the second
group, the owners, who benefit from the moral depreciation. Put
another way, I think a company that innovates perpetually, such
as Intel, taps into a permanent source of superprofit.

I think that is why 'intellectual property' is such a big deal
for the North right now.

b. On what basis does the 486-er calculate his profit? Did he
make any allowance for moral depreciation when he bought the


and No(Bozhemoi this is repetitive. Please excuse).

I think:

The allowance for moral depreciation is factored into the
allowance for depreciation in general, which is an annual
charge made against current earnings by the capital account. It
is not made when the 486 is bought but in the years that follow
this purchase, during which time funds are accumulated to
finance the next purchase (presumably a Pentium Pro)

This allowance in the accounts is shown as 'capital
consumption', which is a deduction from profits on the P&L

This is the sense in which it has the same status as a cost of
production. It is a deduction from profits, which looks just
like a deduction from sales revenue, that is, a current cost.
'Capital consumption' is treated as a cost of production just
like the purchase of raw materials. The only difference is that
with a current cost of production the bill is issued and
settled in the current year; with capital goods, the purchase
is made all at once and the money to make this purchase is
recovered over its useful life. So, the 'allowance' for
depreciation is settled when the accountants determine what
convention they will use to determine the useful life of the
asset. If they deem that its working life is three years and
depreciate by the straight-line method, then they will in each
year set aside a sum of money equal to one-third the cost price
of the asset.

This goes into a sinking fund so that by the end of the
'accounting life' of the asset, the capitalist should in
principle have accumulated enough money to replace the asset.

[in this whole post I omit the complications which arise if the
liquid funds thus set aside are managed by a treasury and re-
invested on a more short-term basis either internally or on the
money markets. I assume for simplicity it accumulates as money]

Thus, if its normal actual physical life is ten years and it
cost $3000 then its physical wastage per year is $300; but if
the accountants depreciate it over 3 years then each year they
set aside $1000 instead of $300. Hence, of this $1000, 30 0s
real wear and tear and 70 0s moral wear and tear.

You might think of it this way: if the capitalist leased the
asset over three years, then in each of these three years s/he
would pay the leasing company one-third of the cost of the
asset, and by the end of three years would own the asset and
discharge the debt. If, however, the enterprise finances the
purchase internally, then it acts like a lease company towards
itself. It lends itself the full cost of the computer out of a
capital account, and pays for it. Then, each year, the current
account pays one third of the price of the computer into the
capital account until, at the end, the capital account again
stands at a level that allows the whole thing to start again.
The capital account behaves like an internal leasing company.

Does that explain it adequately? If not please say.

In either case, the 'allowance' for depreciation consists in
setting aside a definite quantity of the returns from sales
each year by deducting it from profits.

However, if at the end of this period the accountants have got
things wrong the company will be obliged to make an adjustment.

If it is found the asset is still worth something, its 'scrap
value' will enter the books as an increase in value, a deferred
profit. This means the company has working balances
(accumulated money assets) which it set aside for replacement
and which have turned out to be excessively prudent, so that
some of these working balances are released and become part of
profits. If the accountants mess this up, the company's value
will be understated on the books and it will become vulnerable
to a raiding takeover followed by asset-stripping.

If on the other hand the 486 becomes worthless before the three
years are up, so that it is overvalued on the books, then at
some point the company must make an additional provision to
cover this loss. If it doesn't, the book value of the company
will overstate its real value and at some point it will be
unable to meet its current liabilities and go bankrupt.

Thus although the accountants can make 'prudent' or 'imprudent'
allowances, in the end it is the real state of the market which
determines what happens and these allowances are only guesses;
just the same as when they set aside cash accruals for the
settlement of ordinary current account bills and then get
caught out by sudden price changes.

For this reason I believe that in calculating the size of the
capital of the company (the denominator in the rate of profit)
it is also necessary to include money balances, in fact all
assets of all kinds. If this is done, an error by the
accountants will not affect this magnitude. The accounting
error will then affect only the distribution of company assets
between physical assets and money balances. Thus, this method
of calculation extracts what is invariant with respect to

The same applies to society as a whole. Money balances should
be included in the calculation of capital stocks, and the
valuation of physical assets should reflect their real physical
capabilities rather than their replacement cost. These two
calculations combined set things right. The national accounts
people know about this, and they don't calculate the value of
stock in the same way as the companies: they do it on the basis
of physical asset life. Thus, I believe it should be possible
empirically to calculate moral depreciation as the difference
between the company and NIA estimates of capital stock. In

I'm afraid this has turned into a long answer to a short
question. I hope this is because it is a big problem.