[OPE-L:1347] Re: Better Machines

glevy@acnet.pratt.edu (glevy@acnet.pratt.edu)
Wed, 6 Mar 1996 18:32:24 -0800

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Paul C wrote:

> The issue of whether it is economical to switch machinery
> is not quite the same as whether moral depreciation has occured.
> Even assuming no change in the quality of the machinery, if
> that machinery has become cheaper, the capitalists who purchased
> the machines first will be competing with firms that bought
> newer cheaper versions. The latter, will have to pass on smaller
> depreciation costs and will thus undercut the first capitalists.
> The first group are then forced to pass on only the new, lower
> depreciation value each year. This does not depend on improvements
> in machine quality.

I. Cheaper Machines
The point is that moral depreciation can take different forms. In the
case of new, *cheaper* fixed capital the question primarily concerns the
re-evaluation of the existing stock of fixed capital and how that affects
firm profitability and competitiveness. Even in the instance you cite
above, there is no reason necessarily why a firm is going to buy the new,
cheaper fixed capital since; a) they already have constant fixed capital
of the same quality which is not fully depreciated; and b) you have not
specified the extent to which the newer versions have become cheaper.
Let's assume that last year they bought $100,000 worth of constant fixed
capital, type A, expecting that it would depreciate in a straight line
manner over a 5 year period taking into account both physical wear and
tear and anticipated moral depreciation. After one year, without moral
depreciation, it should be valued at $80,000. Suppose now that they can
buy the same elements of constant fixed capital for $90,000 instead of
the $100,000 that they paid last year. Unless they need to expand scale,
why would they purchase more of the same machinery now when they haven't
fully depreciated the existing stock of fixed capital of the same type?

II Better Machines

A. "Labor-Saving Technologies"

Extreme Case 1:

Suppose that firm A in branch of production Q is currently using the
"standard" technology 1. They purchased technology 1 last year for
$100,000 anticipating as above that it would depreciate over a 5 year
period. One year later, they can buy a newer, better technology,
technology 2 to replace technology 1 with. Suppose that they anticipate
that with technology 2 productivity will increase by 1,000% and
their per unit production costs will drop by 90%, ceteris paribus. Even
though they bought technology 1 last year and it is only 20%
depreciated, what do they do?

Extreme Case 2:

Suppose as above, but the anticipated gain from using technology 2 in
terms of productivity is 1/100%, ceteris paribus. It *is* a
[marginally] better machine. What do they do?

My answers are: a) for extreme case 1, firm A purchases technology 2.
b) for extreme case 2, firm A continues to use technology 1.

In between these extreme, firms have to make more difficult choices
concerning purchasing new elements of constant fixed capital.

B. "Capital-Saving Technologies"

Extreme case:

Suppose as above in terms of Firm A and technology 1, i.e. same cost and
same depreciation schedule. Now, a year later, the firm can purchase
technology 2 which costs $100,000 but, it is anticipated, will result in
a reduction of yearly constant circulating costs from $200,000 to
$20,000, e.g. by sharp reductions in energy costs. What do they do?
Another difficult question.

Note that *all* examples above are instances of moral depreciation.

> Of course, in practice the two processes are mingled
> together making such nice analytical distinctions rather pointless.

In practice, there are indeed price reductions and quality improvements
happening at once, thereby, complicating the firm's decision-making.
However, I would argue, that it is important to distinguish between these
different forms of moral depreciation for analytical reasons since they
deal with different social processes.

In OPE-L Solidarity,