# [OPE-L:2154] Depreciation(?);Kliman/McGlone

akliman@acl.nyit.edu (akliman@acl.nyit.edu)
Fri, 10 May 1996 16:58:31 -0700

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I don't really know what to title this post. One discussion of the last
couple of days has been going under different names.

I still owe posts to Fred, Gil, and now Riccardo. Again, I apologize;
I've been extremely busy and extremely tired lately. I do promise
to respond as soon as I can.

But I was fascinated by the discussion of the profit rate(s), so I can't
help but put in a few thoughts here. THUS, THIS POST IS MAINLY A REPLY
TO ALLIN, PAUL C., AND BRUCE.

First, re Allin's ope-l 2115:
(1) Allin seems to misunderstand what he calls K-McG's "transformation
algorithm." The only things it "predicts" are a profit rate of s/(c+v),
total value = total price, and total surplus-value = total profit. It
does not predict an equal rate of profit or individual prices in the
current period. Much less does it predict the future course of prices.
Each period is discrete. Nothing compels firms to engage in simple
reproduction or whatever. The input-output coefficients are not
time subscripted simply because they pertain to THIS period only. (The
only reason prices are time-subscripted is to distinguish between input
and output prices of THIS one period.) If Allin is implying that there
is a determinate intertemporal price path and thus profit rate path
being predicted, he is not understanding us at all.

(2) Let me call the profit rate on reproduction costs, which Allin,
Paul, Bruce, and others seem to favor, the "real" rate (following
Michele Naples' usage). Allin assumes an equal historical rate of
profit but an unequal real rate and asks who'd I prefer to be, the
firm with the lower or the higher "real" rate? Ceteris paribus, i.e.,
based on this info. alone, I'd be indifferent. Why? Well assume
instead unequal historical rates but the same "real" rate. I'd clearly
prefer to be the one with the higher historical rate, becauseI could
use the extra surplus-value to expand into *either* business (or
as Allin notes, retire). Or assume one industry with a higher historical
but lower "real" rate. That's the one I'd prefer to be in, BECAUSE THERE
IS NO LAW COMPELLING ME TO TAY IN THE SAME INDUSTRY. I CAN TAKE MY
EXTRA SURPLUS-VALUE FROM THIS PERIOD AND USE TO ENTER THE INDUSTRY THAT
WILL HAVE THE HIGHER HISTORICAL RATE NEXT PERIOD -- and possibly move
some of my existing capital into it as well. (If we ignore fixed capital,
the other industry, having the higher "real" rate this period, will have
a higher historical rate the next, c.p.)

(3) This relates to the above, as well as Bruce's ope-l 2126: One thus
sees a glaring contradiction in the simultaneist reasoning, namely the
attempt to talk about capital mobility while adopting as a choice criterion
a profit rate based on the lack of any such mobility. If capitalists are
free to move their capital, the rate that they would obtain were they
to remain stuck in their present industry is meaningless as a measure of
their profitability. (It is, however, of key importance in determining
where to put the capital next.)

(4) Also on Bruce's post, which also relates to similar points rasied
by Allin and Paul: Bruce's dynamic scenario seems plausible at first.
The "real" profit rate is higher here than there. Capital enters here,
exits there; price falls here, rises there. The "real" rate tends toward
equality because that's the target. And that's the target because that's
the rate relevant to the future.

Well, I've already discussed why I'd still want the higher historical rate.
But there's another key problem with this story--as presented by Bruce
is seems dynamically unstable. Let's imagine an economy with only
productive consumption (for simplicity), and 2 industries, steel and corn.
Both industries may use both goods as inputs, but steel is a heavy steel
user, and corn a heavy corn user.

Now, assume producers come to market with certain quantities of steel and
corn. And imagine that the "real" rate is a teensy bit higher in steel.
What will happen? Capitalists will want to enter the steel industry,
exit corn, and thus *demand* for inputs to steel production--and thus
*demand* for steel itself--will rise. Demand for inputs into corn produc-
tion, and thus demand for corn will fall. Since supplies are given, we have
*excess demand* for steel, *excess supply* of corn. The price of steel
will *rise*, the price of corn will *fall*. This makes the "real" rate in
steel go even *higher*, the "real" rate in corn even *lower*. And so on,
until the whole this collapses.

So what actually happens if not this? I'm not entirely sure. This is a
complex issue. In any case, it is ludicrous to refrain from acknowledging
the accuracy of the TSS interpretation as an interpretation of Marx's
value theory until a compelling, airtight explanation is found ...
especially because the simultaneist dynamics (as might be expected from
such an oxymoron) are so shaky.

But let me take a stab at what I think happens. In response to excess
demand, supply increases above its "normal" rate. Price rises, but the
price rise is absorbed by higher costs of production due to strains on
existing capacity. This tends to stabilize things so that the profit
rate movements are bounded, and fluctuate within these bounds until
(c.p.) equalization is reached.

I'm not ready to put this in writing, because it is so complex and it
needs a lot of checking out. IN any case, what is clear is that this
expalnation is simply not consistent with the simultaneist dynamic
story, because once we admit increases and decreases in supply in relation
to normal capacity, THE INPUT COEFFICIENTS UPON WHICH THE 'REAL' RATE IS
COMPUTED WILL NOT REMAIN THE SAME.

A different sort of story can be told, I presume, in which firms normally
operate with excess capacity. What are the implications of this? I'm
not sure.

(5) In response to Paul's ope-l 2119:

I agree *completely* that the idea of constructing a theory of prices
based on profit rate equalization is misplaced. I have no intention of
doing so, and I don't think Marx was trying to do so. Ch. 9 of Vol. III
really concerns the limits within which profits and prices can move.
Prices can't rise such that the "price" rate exceedes the "value" rate
of profit.

I'm not ready to put this is writing, because i haven't studied the numbers
enough, but Paul's numbers for the computer leasing business seem
correct, as do the implications he draws from them. I apologize for
giving the impression that profit understood as net current income +
capital gains will be 20%. It will not, as Paul shows clearly. The
dynamic Paul models, not so incidently, is absolutely crucial to Marx's
law of the FRP.

Of course, simultaneism tells us that, in this example, the capitalist's
profit rate *rises*, not *falls*! I guess one can rescue simultaneism
by saying that the simultaneist profit rate is not meant to talk about
the actual tendency of the profit rate. But then you must answer two
crucial questions:

(a) how, then, pray tell, can the simultaneist rate be said to have
any relation to the rate of profit that Marx talks about in Part III of
vol. 3--where he definitely IS concerned with the actual tendency of the
profit rate?

of the profit rate, and prices, etc?

IN THE WHOLE DISCUSSION OVER THESE LAST SEVERAL MONTHS, THESE TWO
QUESTIONS KEEP COMING BACK AGAIN AND AGAIN IN DIFFERENT FORMS. BUT
NO SIMULTANEIST EVER BOTHERS TO ANSWER THEM. (This is, inter alia,
my response to Paul's post about levels of abstraction a couple of
months ago. I want to see critics of the TSS interpretation come
up with some actual models of the tendency of the profit rate, the
determination of aggregate price and profitability of the real world,
not just static solutions and stories about dynamics which never get
developed so that their presumed relation to the static solutions
can be TESTED. Isn't this part of being "scientific"?)

My only disagreement with Paul's conclusions from his example is this:
it really doesn't say anything about whether it is the historical or
the "real" rate that tends to get equalized. What it does indicate is
that the historical rate changes over time, so that if this is the
profit rate that tends to get equalized, it is not some fixed point
to which profit rates move.

Finally, once more, because this too seems to keep getting put out there
and not responded to, only the most myopic capitalist would take
the "real" rate as an objective function. They are concerned, when
they invest, with their rate of return on investment over the whole
future life of the investment. That depends on prices during that whole
span of time. Only the most myopic firm would presume that prices will
remain constant during this whole time.

Andrew Kliman