[OPE-L:3023] Re: Straight and Moral

Duncan K Foley (dkf2@columbia.edu)
Sat, 14 Sep 1996 14:09:26 -0700 (PDT)

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On Sat, 14 Sep 1996, John Ernst wrote:

> Duncan,
> I just looked over my post (OPE-3016). The profit
> in each period is specified. The price of output
> falls from period to period and the rate of profit
> is assumed to be constant. It seems to me that
> the rate of profit I calculated for the capitalist in
> the example has to be correct. It is 150f the
> invested capital in each and every period.

Maybe we should try again. Unfortunately I've deleted your original
example from my directory. Could you post it again, explaining exactly
what the assumptions are about the price of output?

> I am curious about what you refer to as the "standard"
> and asked about it in a previous post. What strikes
> me as interesting about this is that there are, as we know,
> various methods for calculating depreciation. When
> and how they came into being as well as the why's of
> when they were adopted may tell us something of
> the degree to which capitalists anticipate price
> decreases.

The issue is not the various methods of calculating depreciation, but the
conceptualization of the rate of profit as an internal rate of return over
the life of the investment. This method exists precisely to take account
of the fact that depreciating investments represent different amounts of
invested capital over their lifetimes.


> John
> On Sep 14, 1996 08:42:32, 'Duncan K Foley <dkf2@columbia.edu>' 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
> >