[OPE-L:2117] Re: Depreciation as such

Alan Freeman (100042.617@compuserve.com)
Thu, 9 May 1996 00:09:05 -0700

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Continuation of last post in response to Paul's 2101:

profit defined as:

[(income from sales of output)
less (the outlay made to produce this output)]
/(initial outlay)

will do nicely. But with respect to the capitalists ability to
command labour and resources in the future, this is false accounting.


Absolutely. And Marx's value theory is not a theory of labour commanded.

This excellent formulation of Paul's is very clarificatory. It makes
the required distinctions completely clearly. It says: the equation
of value is a correct summary of the past but a bad guide to the
future. Good. Very clear.

Since when was clairvoyance the function of value theory?

Profits arise from the effects of the past. If this can be used
differently in future, I agree we have to 'account' for that. But not
by retrospectively rewriting profits and values which already exist.
We have to leave the past intact and show where the discrepancy
manifests itself in the present.

Marx makes this accounting adjustment under the heading of 'release
and tie-up of capital' in chapter 6 of Volume III and briefly
in TSV III in the discussion on Ramsay. Here he shows that if the
capitalists choose, having replaced their money outlays, to continue
production on the same scale, they will find their accumulation fund
larger than profits if prices have fallen, and smaller than profits
if prices have risen.

I think this is exactly the way to put it. The profit itself is
unaffected by anything that happens after that profit is realised.
But its *use* changes. This shows up as a discrepancy between the
accumulation fund and profits, not as a change in profits. If we lose
sight of this distinction we part company from the normal scientific
conception of causation, according to which the past determines the
present and the present determines the future.

First, the capitalists make their profit, independent of what they
do with it. This takes the form of money. Then, having got the money
they spend it, in the form of goods. Their profit is not the goods
but the money.

Moreover. Whatever the appearances generated by the credit system (and
Paul's proposal to abstract from banks and credit makes this much easier)
they cannot actually spend their profits until they have actually made
them. And by this point these profits are already objective data,
already in the past, and cannot be altered.

(1) profit is not what money buys; it is the money itself.
(2) Accounting for the *future* cannot change *past* profits.


"To present the matter clearly one should abstract from the additional
complication of bank loans and assume that the capitalist is operating
with his own capital, otherwise one is introducing redistribution
effects between the bank and the firm into ones calculation.


Totally agree. And to completely eliminate such effects, we should
also (like Marx) abstract from credit.

I talked about bankers only to remark that if I could persuade mine
to look at my profits as Allin proposed, I could get money from him.
Actually I could con any sucker the same way. I say 'look, to you
this pile of money looks like $2000, but don't forget we can save
$1000 on my next computer. You can have it for $3000, bargain at the
price.' This would be a difficult con but provided the sucker was a
simultaneist I could carry it off. He doesn't have to be a banker.

So I'm happy to abstract from credit in discussing depreciation. I think
it is an excellent simplification, one of the best proposed yet. If we
could all agree to it we could take the discussion a long way.

There is a consequence of this excellent way of doing things. It means
that we cannot construct any theory that requires the capitalists to
spend money they do not have. We'll come back to this.

Now turn to appreciation and depreciation.

(1) what the capitalists attempt or claim, and what happens, are two
different things. We have to be careful not to include their
accounting mistakes in our calculations.

(2) most discussion on depreciation on OPE revolves around the
following: to what extent can we detach from what the capitalists
claim or think, an underlying objective reality which really
'exists', regardless of what they think? Can we only define
depreciation by enquiring into what they think, or can we define
it regardless of what they think?

This is a fraught issue, because capital is actually alienated
subjectivity. We made these damn things, how come we can't
control them? The question is, to what extent does free human
subjectivity become an alien object independent of human will?
Do our own creations confront us only as monsters?

I think value magnitudes exist completely independent of capitalists'
subjective perceptions. Only when class struggle challenges the
nature - not just the size - of capital, does human subjectivity
assert itself. Subjective elements in the theory of value are not
at all excellent. If you claim the magnitude of value is determined
not by what capitalists *do* but by what they *think*, then no amount
of protestations about labour embodied can save you from the fact
that you have a subjective value theory.

(2) appreciation or depreciation in the future (which, I agree, do
happen and must be allowed for) can alter neither the firm's *past*
receipts nor its *past* expenditures.

Once in the past, these money sums become objective data given
independently of how they enter the books. This is why I think
the foundation of an objective value theory is *past* data.

(3) Stripped of clairvoyance, what accountants actually do is allocate
these receipts and expenditures to various headings. We should not be
deceived if they call a present sum a claim on the future. They don't
know the future any better than we do. A monetary claim on the future
is no more a real value than Chamberlain's piece of paper.

(4) This is why it is so useful to abstract, as Paul has agreed, from
credit. Most of the appearance that the future can actually determine
the present, results from the fact that the capitalists, by raising
loans on the strength of labels, invest these phantoms of the future
with real present existence. But this apparent ghost of Christmas yet
to come is really a forecast in disguise. Take the price from the label
and the phantom returns to the jar.

We are then left with nothing but sums of money. What the accountants
actually do is put these sums of money in jamjars with labels on them.
This jar is labelled 'depreciation' and contains money set aside for
replacing machinery; that jar is labelled 'profit' and contains money
the owner can withdraw.

(4)They can put the money in the wrong jamjar. They can take profits
and call them costs, and they can take costs and call them profits.
The problem is not the labels but the jamjars. If we take the labels
for the contents, then we make the classic mistake of confusing
appearance and reality. And we make seriously bad sandwiches.

(5)They can even misspend the money. The capitalists can be so deceived
by labels that they take money really needed to replace equipment, but
wrongly put in the jar marked 'profits', and spend it on riotous living.
UK shipbuilding did this for fifty years during which it declared record
profits and recorded zero depreciation. But during this same period it
declined from 50 per cent of world ship production to nothing. To put
it another way, it decapitalised: it *withdrew* its capital from
production and called it profits.

Or they can make the reverse error and leave money in the depreciation
jamjar which they in fact could have spent elsewhere. This
is not such a disastrous error because they then find they
are able to expand more than they thought. But it understates profits
and overstates costs, so it is still wrong accounting.

But they can't spend money that isn't there. We just agreed that. We
agreed there was no credit - which is just another word for spending
other people's money.

You go to the jamjar and try to spend it. If the jamjar is empty, you
might go to another jamjar. But if *all* the jamjars are empty, that's
it. You don't get to spend it, no matter how optimistic you are about
the future. That is how the objective character of value asserts itself.

(6) If one really wants to see what is going on, the right procedure in
my opinion is thus to do what Marx suggests on p343 of TSV III:

"The matter would be simplified if we considered it
first of all without regard to the reproduction process,
that is if we assumed that the tenant farmer was withdrawing
from the business and selling his whole product"

The first step is to understand that there is *no* *necessary*
requirement to spend the depreciation fund on replacement. Frequently
capitalists don't.

We cannot therefore base our theory on the assumption that they do.
We have to treat the whole life cycle of the fixed capital exactly
as if the capitalist set up shop, ran the business until the machinery
gave up, and then took away the proceeds.

In this case, what we find is that a certain sum of money was
spent on the machine, a certain sum of money on raw materials
during the life of the machine, a certain sum of money was spent
on wages and a certain sum of money realised in sales. Profit is
the sales less the expenditures. The complications all arise and
only arise because this profit is realised over a period of time,
instead of all at once.

(7)The capitalists are under no compulsion at all to take the
proceeds thus secured and re-invest them. This is the great illusion
of the method of calculating profit which replaces the actual costs
of the capitalists with a fictitious cost based on the assumption
that they will just carry on as before.

(8) The correct method is thus that which Marx proposes in TSV II which
is to study the business as if the capitalist withdrew her or his entire
capital at the end of the process.

(9) In that case we should study total receipts and total expenditures
over the whole lifetime of the invested capital (till the machines
have materially depreciated). This is certainly the way Marx looked
at it.

In this case the calculation is exact. Over the life of the capital,
the capitalists spent a certain sum and over this same life they
received a certain sum. The difference between the two is profit.

(10) It is possible that the capitalists are forced out of business
before the machine ends its natural life, because of technical
progress. In that case they do not realise the full value of
the machine. It is scrapped before its natural life is over.

But this does not alter our calculation. They spent some money,
they ran a business, they made some money, they stopped the
business. They closed early - tough. Their profit is calculated
exactly the same, revenue minus cost. The difference is that

(a) because they terminated the business early their revenue
and their profits were less than they thought.
(b) if on termination the equipment can be sold this should be
added to revenue
(c) in reporting their profits we should recognise explicitly
when these have been diminished through transfers to other capitalists
in competition. At a certain point, even though its workers are
successfully creating and transferring value to a product, the
surplus value being transferred out of the business in
competition becomes so great that it cannot function.

The surplus value created over the life of the machine is different
from the profit. But surplus value is always different from profit.
A capitalist who is competed out of business is thus in principle no
different from a capitalist who is taxed or priced out of business.
The calculation is therefore the same: profit is revenue minus cost,
surplus value is total value added less wages, over the life of the
business. We just have to be mindful - as ever - that profit
is not the same as surplus value and careful in explaining where the
surplus goes in circulation, is all.

(11) It is possible that over the lifetime of the machine the
value of *money* changes, so that the money profit does not
represent the same number of labour hours at different points in
time. The correction which has to be made for this is complex
and I don't want to confuse the issue here, but it can be done
within the parameters I suggest. I would prefer it if we adopt
Marx's own simplification at this point which is to assume a
constant value of money.

The whole thing is in its underlying form exceedingly simple and
straightforward. Real profit is what real people really earn.
Real profit in value terms is the real social labour this really
represents. The problem of value theory is not to prove Marx's
profit is really something different from capitalist profit,
but to discover what capitalist profit really is. Anything
else leads to hermetically-sealed insanity.