[OPE-L:2119] Re: Kliman-McGlone interpretation of the transformation problem

Paul Cockshott (wpc@cs.strath.ac.uk)
Thu, 9 May 1996 03:12:13 -0700

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Andrew wrote
>I don't understand what your point is about stock appreciation.
>Alan's point in ope-l 2087 had nothing to do *fundamentally* with bank
> loans as a source of capital. As I understood him, he brought in the
> banker simply to *show* the objectivity of the rate of return on
> investment; inputs can't be revalued retroactively. The point is the
> same w/out banks: if I bought a computer for $5000 six years ago, and
> got profit of $1000 each year by employing it, my rate of return
> on investment (ignoring some complications) was 20%. If it could
>be replaced for $1000 in the sixth year, that wouldn't raise my rate of
> return that year to 100%.

My point was that it is only in dealing with financial obligations
incurred in the past, that historic cost accounting is valid.

If we consider the type of case you raise, suppose that my business
was computer leasing. If I provided a 6 year write of time for my computer
then I must be charging $1833 per annum for the machine to earn the stipulated
$1000 per annum profit. This is what I plan will happen

year const cap sales dep profit dep accnt profit rate
1 5000 1833 833 1000 0 0.2
2 4167 1833 833 1000 833 0.2
3 3334 1833 833 1000 1666 0.2
4 2501 1833 833 1000 2499 0.2
5 1668 1833 833 1000 3332 0.2
6 835 1833 833 1000 4165 0.2
6000 4998 1.20048

However under the circumstances of falling prices of computers, it will
clearly be impossible for me to lease a 5 year old computer for $1833 in
the last year when a new one could be bought for $1000.
There is a 28 0.000000all in the machines value each year, and thus the sales
that can by had from selling 1 year of the lease in competition with
newly established machines will fall likewise.

The sales will not exceed what could be charged for 1/6th a new machine
plus appropriate 200rofit on that.

What will actually happen will be more like:

PRICE new phys dep c cap sales depacc capital curprof cap acc profit
5000 833 5000 1833 0 5000 1000 0
3624 604 3020 1329 833 4457 725 -543
2627 438 1751 963 1437 4064 525 -393
1904 317 952 698 1875 3779 381 -285
1380 230 460 506 2192 3572 276 -207
1000 167 167 367 2422 3422 200 -150
3107 -1578
In the above the sales are assumed to be made up of the currently
chargeable physical depreciation plus a profit of 200n the current
value of a machine.

The depreciation account now fails to compensate for the moral
depreciation of the capital stock.
The leasing firm is forced by competition to revalue its capital in the form
of equipment each year, and thus experiences a loss on capital account.

Since future changes in prices can not be known, the historic cost
rate of profit turns out to be far from the $6000 that an equal rate
of 205 on historic value would imply.

It is this impossibility of fortelling the future with its consequential
stock appreciation/depreciation effects that makes the historic cost
rate of profit a very unlikely candidate for equalisation.

I am of the opinion that whilst firms may attempt to judge future
projects profitability on the basis of the discount rate and the
current costs of the project, fluctuations in prices and discount rates
over time mean that these calculations are very inaccurate, and that
the whole idea of constructing a theory of prices on the basis of
profit rate equalisation is probably misplaced.
Paul Cockshott