[OPE-L:2373] capital stock and interest rates

glevy@acnet.pratt.edu (glevy@acnet.pratt.edu)
Mon, 27 May 1996 11:36:47 -0700

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Iwao wrote in [OPE-L:2372]:

> OK. But the problem you suggested above is actually the problem of
> depreciation. The factor that "a certain proportion of capital is "tied up"
> in existing fixed capital and can't be used for investment in other branches
> of production where the anticipated rate ofprofit is higher" is not physical
> characters of the existing fixed constant capital but the way capitalists
> devalue it as a economically dominating class.

The value of constant fixed capital depreciates over time. Yet, constant
fixed capital also has a material side which affects investment. In many
branches of production, capitalists invest in a group of inter-related
technologies which have a limited usefulness (e.g. "hard automation").
Investment in this fixed capital is frequently not incremental since new
technologies might require an entirely new plant. When they do invest in
new and better constant fixed capital, the scale of investment frequently
requires external financing (unlike incremental changes in technology
which can be generally financed internally). A complicating factor, in
practice, is where in the presence of oligopolistic markets, oligopolies
might hold-off on investing in major changes in plant and equipment in
order to reclaim a larger proportion of the value invested in existing
fixed capital.

> For example,
> suppose a large semiconductor manufacturer. If it produces 4M DRAM
> and 16M DRAM and the latter (better maschine?) brings more profit rate,
> it will put its cash flow into investment in 16M DRAM production lines.
> And also allocate more employee into the section. Then, more variable capital
> there. Isn't this an example of capital mobility?

Yes, it is an example of capital mobility. However, if the semiconductor
manufacturer had to scrap its entire plant and equipment, it might *not*
invest in 16M DRAM process technologies. In other words, while they would
in the long-run be straddled with out-of-date capital equipment, the
effective cost of shifting to the newer, alternative technology might mean
that they put-off this decision since they would have to write off the
full value of existing plant and equipment.

> In my understanding, *in general* stock prices begin to increase in
> the latest period of the depression to the half way of the boom due to
> the time lag between the profit rate and the (long-term) interest rate.
> If this is true, the long-term interest rate is not dependent only on
> profit rate expectation but also expectation on inflation, etc.

I think I agree with the above. The rate of interest could be expected to
increase during the boom as the demand for loanable funds increases. As
capitalist profitability increases, their demand for loanable funds for
the purposes of investment ordinarily increases. To the extent that the
boom also is accompanied by increases in real wages, the demand for
loanable funds for major purchases in consumer durables also increases. As
for the inflationary effect, one would also have to consider the role of
the state and its borrowing and deficit financing. To raise a somewhat
controversial point, is there a kernal of truth behind the magical
monetarist mystical shell regarding the "crowding-out effect"?

In OPE-L Solidarity,