[OPE-L:5312] Re: Ernst on RRI

Duncan K. Foley (dkf2@columbia.edu)
Wed, 2 Jul 1997 06:37:15 -0700 (PDT)

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In reply to John's [OPE-L:5273]:

>Duncan continued:
>This is why more sophisticated studies of the rate of profit, like
>Dumenil and Levy's or Robert Gordon's, actually keep track of the
>vintages of capital, to try to control for these stratification
>effects. In fact, however, the stratification effects are not
>very big, because the fluctuations in the scale of investment
>year to year are bounded, and growth rates are not very high
>absolutely. So while in principle this could be a big conceptual
>problem, it doesn't seem to be so in practice.
>John comments:
>I am not familiar with Gordon's work save for its mention in
>Dumenil and Levy. It's not clear to me how Dumenil and Levy
>control for stratification effects. To be sure, they are
>aware that they exist. But I'm unclear how their rate of profit
>is corrected for them. Further, given that they seem to compute
>depreciation charges using a discard schedule rather than the
>"actual" depreciation that occured in a particular period, I'm
>unclear about the manner in which the correction can be introduced.
>They do look at the degree of stratification within a given period
>but I am unaware of how they take into account possible changes
>from period to period.


The basic idea is to calculate the internal rate of return on each year's
investment separately. This requires some assumptions to allocate the
profits of each year over the past strata of investment, which is a point
of sharp controversy among the different studies. I think Dumenil and Levy
explain their method quite clearly in the Economics of the Profit Rate.

John continues:

>We might find also consider observing stratification within
>the sectors where surplus value is actually produced as opposed
>to all the sectors that Dumenil and Levy include prior to
>concluding that the problem "in practice" is of little consequence.
>I realize this may open the entire productive/undproductive labor
>issue. But given we are considering the US economy with the
>relatively recent shift from manufacturing to services, such an
>effort might be of interest.


In my mind the problem of stratification and the time profile of the RRI
and the rate of profit are separate from the productive/unproductive labor
issue. Of course, how one resolves the productive labor question will
change one's estimate of the whole profit to be allocated across
investments, so the numbers will change, but the conceptual issues
involving the RRI don't seem to me to be either resolved or worsened by
considering the productive labor question.


>Data aside, the question remains about the extent to which
>Marx did or did not take into account stratification effects
>in formulating his idea of the falling rate of profit. In
>Ch 13 of V3 Marx's illustrations show enormous increases in
>constant capital relative to the sum of v+s. This would seem
>to indicate that at times Marx might have ignored the vintage
>effects as capitalism moved from the period of manufacture to
>that of modern industry. On the other hand, he may have taken
>them into account without mention since the effects would tend
>to strengthen the tendency of the rate of profit to fall during
>periods of rapid accumulation and to weaken the tendency during
>periods of disinvestment and devaluation.


I think that in some of his writing Marx, like most other economic
analysts, ignores the stratification (or vintage) issue, especially when he
is talking about large sweeps of time over which vintage effects tend to
wash out. He does take it specifically into account, as I recall, in two
other places: one is in the Volume II discussion of the circuits of
capital, where the turnover of capital concept inherently keeps track of
vintages; the other is in one of his theories of the business cycle, where
he toys with the idea that a wave of investment can set off echoes (an idea
that a lot of other people have spent time on before and after Marx,
including Leontief, Schumpeter, Samuelson, and Goodwin.) The problem is
that in a growing economy these echo effects will become relatively smaller
and smaller over time.

John concludes:

>Given that the FRP is often used as the basis of a crisis theory
>in Marx, perhaps we should consider the ratio of
>(profits+depreciation)/total capital
>as we examine the movement from year to year or period to period
>while bearing in mind that the amount of depreciation does not
>necessairly equal that needed for replacement of discarded fixed

Duncan comments:

Well, yes. Dumenil and Levy consider this type of "gross" profit rate
including depreciation. It's a much more solid empirical measure of what's
going on, because it doesn't include any dubious and arbitrary assumptions
about depreciation, which is an inherently unobservable concept that has
not market manifestation.


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu