[OPE-L:1603] Fixed Capital in Empirical Work

John R. Ernst (ernst@pipeline.com)
Thu, 28 Mar 1996 07:43:00 -0800

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Again, thanks for your timely responses. What I am trying
to do is connect empirical efforts with the models that
we generate in an attempt to understand Marx. I suppose the
only twist here is that while most models "abstract from"
fixed capital entirely, I think it must be included in the
picture. To be sure, Marx himself often made the same
abstraction from fixed capital. But, here, I am fairly
certain the abstraction came from his need to attain greater
clarity on the matter.

Here let me comment on various aspects of our dialog.

John says:

>My new questions:
>Let's consider that $1000 investment. If it turns over in a
>year and the gross payment is $1200, then clearly the rate of
>return is 20%. But what if it is an investment in fixed
>capital and lasts 5 years with the same annual payment. Then,
>with amortization, we have
> Table I
> r=1.18(rounded to 2 decimal places)
> (Figures below rounded to nearest whole number)
> F.C. A.P. Dep. Profit
> 1000 1200 25 1175
> 975 1200 54 1146
> 922 1200 117 1083
> 805 1200 254 946
> 552 1200 552 648

Paul says:

The assumption that the gross sales will be the same in the
two cases on your part seems arbitrary. You also seem to
make no allowance for wages, assuming that everything over
and above replacement of capital is profit.

John now says:
You're right. I am looking at a simple case of fixed vs.
circulating capital. The difficulty I have is that
depreciation and profit are not cleanly separated. Again,
I am trying to see how the various models can be developed
so that they more closely resemble what you have to look
as you carry out various empirical studies.

John says:
>1. How do you determine the turnover time of the fixed investments
> in measuring the rate of profit?

Paul says:
In working out profit rates it makes no difference whether one
is dealing with fixed or circulating capital provided both
are expressed as stocks, in which case the rate of profit
has dimension 1/t. One can work out an alternative rate
of profit s/(c+v) which is strictly speaking a flow rate
and is a dimensionless number. This is what Marx usually uses.
Here again turnover time is irrelevant provided that everything
is expressed consistently as a flow.

John now says:

You're right about Marx. But, as I stated above, I do not think
that he expressed the profit rate as a flow for any theoretical
reason. Note that the chapter on "turnover" in Vol. III was
a simple blank page; Engels wrote it.

I am not sure what it means to give the rate of profit the
"dimension 1/t." If we were looking at two economies, one with
fixed capital and one without, how, in models, would we separate
depreciation and profit when fixed capital is present?

John says:

>2. Would you use something like Table I in measuring the rate of
> profit on fixed investments? If not, why not?
Paul says:

No one uses the stock quantity in $s and divides the flow quantity
for profit, also in $s by it, and arrives at a rate of profit
with the dimension given above. Remember that one is averaging
over investments at all sorts of stages in their lifetime
when taking an aggregate value for capital stock.

John now says:
Before I can grasp the idea of averaging, I need to be clear on
how one arrives at a rate of profit in a simple case. Here,
I'll plead ignorance and ask what one does to get the rate of
profit. For the sake of simplicity, let me assume the role
of capitalist and say that I am going to invest $1000 for
five years as in Table I. At the end of each year, I am going
to get the payments indicated. Now you come along and are
looking at the Nat. Inc. Acct. over that period of time. How
does my investment look to you from that perspective?

John says:

>3. In computing the book value, what method of depreciation is
> used? Should not the amortization process like the one I
> used to construct Table I be used?

Paul says:

Data in national income accounts will often provide both historic
and replacement cost estimates of the stock. I use the replacement
cost estimate in working our profit rates. The depreciation and
amortization has all been done by company accountants long before
the figures get into the national accounts, though depreciation
figures on a per industrygroup basis are also usually available.

John says:
I think the prior interchange would clear whatever questions I
might have on this save one. That is, are those company accountants
changing the manner in which they calculate depreciation and
amortization or is it done in the same fashion each year.