[OPE-L:3065] RE: John Ernst's OPE-L 3016

Duncan K. Fole (dkf2@columbia.edu)
Fri, 20 Sep 1996 09:24:09 -0700 (PDT)

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Responding to some of John's points:

>Given that Marx assumed that prices tend to fall
>with increasing productivity, the devaluation
>of fixed capital becomes a possibility.

In theory the value of installed fixed capital is equal to the discounted
present value of the revenue stream (cash flow) it generates, given the
appropriate interest rate. This value might decline because the output
productivity or the lifetime of the fixed capital was declining, or because
the revenue stream was declining due to a fall in the price of the output.

The concept
>of "moral depreciation" is introduced. In 3016,
>we see that capitalists knowing nothing of either
>the relation between productivity increases and
>prices or the possible devaluation of even their
>own capitals as they introduce new techniques could
>attempt to preserve capital value by simply setting
>up depreciation schedules which assume falling
>prices over time.

I have trouble with this way of talking. The capitalist cannot "preserve
capital value" by fiddling with his accounts. In the end the amount of
capital is determined by market relations outside his control (either the
market price of the asset, or the eventual conversion of the asset into a
stream of returns.)

>3. My hypothesis is that various methods for depreciating
>fixed capital arose primarily as attempts to assure that
>capital value will be preserved as price drops occur.
>Here, I'll look into a bit of accounting literature on
>19th century methods of depreciation. Any references from
>anyone on this would be appreciated.

I don't know the history in detail, but the first motivation for
depreciation accounts is to prevent the capitalist from confusing depletion
of his wealth with profit (for example, by not taking account of the need
to fix the roof on the warehouse, or the depletion of his stock of saleable
wares through sale.) A prudent capitalist will want to depreciate fixed
assets as well to reflect the drop in their value due to competition with
more productive facilities, to the degree that he can accurately predict

>4. In OPE-3055, Duncan writes:
>A mistake in the formal depreciation accounting simply amounts
>to a misallocation of cash flow between profit and depreciation,
>but from the capitalist's point of view the important issue is
>the cash flow itself.
>John responds:
>This is true and raises a couple concerns:
>A. Given the ease with which profits can allocated to
>depreciation and vice versa, measuring the rate of profit
>is burdened with yet another complication.
>B. By allowing for "moral depreciation", separating dead
>and living labor becomes a bit more involved.

These two issues are problems for us theorists, I guess, since we are the
ones who view the average profit rate as having some political-economic
significance, and therefore we have to define carefully what we mean by it.
For fixed capital assets, it seems to me that the logical advantage lies in
the realized internal rate of return, since it automatically takes account
of the time profile of the stream of returns generated by the asset. As
your initial example shows, it is also consistent with a correct market
revaluation of the asset to keep its price equal to the discounted stream
of remaining returns.


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