[OPE-L:2126] Re: Depreciation as such

Bruce Robert (broberts@usm.maine.edu)
Thu, 9 May 1996 12:25:30 -0700

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Paul (in #2123) raised an issue I'd been meaning to raise; I'll go ahead
and add my two cents worth in support.

Alan, in #2087, wrote: "The variable which _is_ equalized is: [(income
from sales of output) less (the outlay made to produce this
output)]/(initial outlay)."

It's not obvious what economic processes would tend to equalize this TSS
ratio. The usual argument for equalization invokes capital mobility--new
firms and/or new infusions of money capital into sectors with above-average
returns, the opposite in low return sectors--entry and exit, in short.

But would a high value for this ratio in any one sector (defined in terms
of past and present market prices, in the TSS way) really attract entry?
Not necessarily, since it could arise either because the current price of
output in that sector is "high" (in which case, other things equal,
entrants presumably *would* find the sector attractive) or because prices
for the sector's inputs were "low" in *previous* periods, when existing
firms purchased them. In this latter case, it's not obvious that the high
TSS ratio would attract entry--at the least, a potential entrant would want
to know the *current* set of input prices, relative to the output price, in
order to estimate the rate of return on a current investment in the sector.
The only way I can see to use price information to define a single
relevant number is

[(income from sales at current prices) less (the outlay necessary to
produce this output, at current prices)]/(the outlay necessary to produce
this output, at current prices).

If *this* number is high, I can see how a potential entrant could see it as
a motivation for investment; on that basis follows the traditional
argument for a tendency to equalize this ratio across sectors, which is
precisely what the simultaneous solution does.

So, this leads to a query for Alan much the same as Paul's: granting that
your formula is a perfectly reasonable way to calculate actual profits
realized by existing capitals based on current and past *market* prices
(which are *not* the same as prices of production), why should potential
entrants care about that ratio? Why is the return on historical outlays
relevant here, when TSS logic itself stresses that current market prices
may be wildly different from the market prices previously paid (the ones
built into your ratio)? And if they don't care about your ratio, how can
you argue that it is "the variable which _is_ equalized"?

Bruce B. Roberts
Department of Economics
University of Southern Maine
Portland ME 04104-9300
(O) 207-780-5503
(H) 207-772-7047
fax 207-780-5507-------------------------------------------------