[OPE-L:3021] Re: Straight and Moral

Michael Perelman (michael@ecst.csuchico.edu)
Sat, 14 Sep 1996 09:53:00 -0700 (PDT)

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I have to disagree with Duncan insofar as Marx was concerned. At the
time, the common practice was to regard fixed capital as being
comparable to the indestructable powers of the soil. Instead of
depreciation, capitalists would deduct the cost of maintaining the
capital intact. You can read Ricardo to see this treatment of fixed

Marx was a pioneer among economists in looking at depreciation. We have
to be careful about reading him in the context of modern accounting.

Duncan K Foley wrote:
> On Sat, 14 Sep 1996, John Ernst wrote:
> (among other things)
> >
> >
> > Let's say that a capitalist buys a machine
> > that costs $800, C, to produce 1000 units of
> > the commodity, Q. To produce with that machine,
> > he must invest $100 in raw and auxiliary
> > materials, c, and $100 in variable capital,
> > v. If the machine is predicted to
> > last 10 periods, then in each period he
> > withdraws $80, y, from the output
> > should he choose to depreciate the
> > machine via straight line depreciation.
> > This means that his invested capital
> > decreases by that amount, again y,
> > after production in each period. If
> > the rate of profit is assumed
> > constant, say, 15%, this means that the
> > amount of profit he anticipates over the
> > life of the machine decreases by 150f $80 or
> > $12 each period.
> This actually isn't the standard method of calculating the rate of profit
> in this type of situation. The more common method would be to regard the
> machine as an investment involving the outlay of $800 in the initial
> period, and returning the cash flow over the ten periods of its useful
> existence. You have to specify the price of output and then you can find
> the profit: the cash flow would be the sum of the depreciation ($80 per
> period in your example) and the profit (unspecified in your example). The
> rate of return that would equate the discounted present value of the cash
> flow to the initial outlay would be the relevant rate of profit on the
> machine (which might depend quite a lot on what you assume about the path
> of the price of the output).
> Yours,
> Duncan

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 916-898-5321 E-Mail michael@ecst.csuchico.edu