# [OPE-L:3403] Value Added, IVA and TSS

Alan Freeman (A.Freeman@greenwich.ac.uk)
Mon, 14 Oct 1996 07:13:12 -0700 (PDT)

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Three points. I've mentioned others in a long post in reply
to Fred whose OPE-number I don't yet know.

===================

In [3287] and previous posts, Duncan writes the following
equation

MVA(Andrew) = p(t)X(t) - p(t-1)aX(t)
= p(t)X(t) - p(t)aX(t) + ((p(t)aX(t)-p(t-1)aX(t))

and equates this latter with

MVA(National Income) + Inventory Valuation Adjustment

I think the problems with this equation, which may shed some
light on some of the puzzling discrepancies, might arise
because

p(t)X(t) - p(t)aX(t)

is probably not the National Income Measure of Money Value

Taken literally, this seems to imply that value added in any
given year is equal to the total sales in that year, less
total purchases (for the purposes of production) in that
year. But this would imply, for example, that if a company
this year purchases materials or machinery which are used
next year, this would nevertheless reduce the value added
during this year.

Conversely, if a company entered production this year with
materials or machinery purchased last year, it implies the
value added this year would be independent of the volume of
these prior purchases.

To take things to extremes, a company which entered the year
with a stock of assets produced on 31st December 1995, went
bankrupt and then sold these assets, would add value to the
economy in 1996. But I don't think the NIAs would show this
as new value. I think they would say the assets had
undergone a change of form or ownership.

I'm not sure how the BEA draw up their accounts but I think
the UK statistics take value added from company accounts,
with corrections for uniformity. Companies measure value
added as the difference between sales and 'cost of sales',
that is, the difference between the money they are paid for
outputs, and the inputs that were purchased in order to
produce these same outputs. Replacement purchases even if
undertaken in the current accounting year, are not part of
the costs of the current period unless they are consumed in
the current period. In a certain sense this is the nub of
the argument.

To put it another way, I think the capitalists do their
accounts sequentially even if they conceptualise the results
simultaneously.

IVA
===

At first I thought we had agreement with the introduction of
IVA or what in the UK is called, I think, 'stock
appreciation'. Having re-read Duncan's first post on this
more carefully, I would be more cautious.

In general I think the impact of technical change on the
value of stocks is enormously important. However, most of
this is not accounted for directly by the capitalists who
disguise it, IMO, as 'moral depreciation'. They write down
assets faster than these assets actually wear out, so that
they designate a portion of their profits as if it were a
cost. This allows them to set aside sufficient funds to
cover not merely the loss of physical use-value of their
investments but also its decline in value due to

I don't think this is covered by the IVA adjustment, though
it is possible that I am confusing two different terms in UK
and US accounting parlance. As far as the UK stock
appreciation adjustment is concerned, this is quite small
(about 10f GDP) and more concerned with the impact of
monetary changes than tedhnically-induced changes changes in
asset values. I think it is a mainly monetary adjustment.

The adjustment we ought to be making, caused by technical
change, is much bigger. I haven't got around to measuring it
yet but we can get a general idea of it from the
discrepancies between NIA measures of depreciation, which
are more based on physical asset lives, and accounting
measures of depreciation, which are usually based on a
standard accounting assumption such as a five-year lifetime.

Does the rate of profit decline to zero?
========================================

Duncan has raised this as a criticism of dynamic theory. I
don't know about other dynamic theorists but for my part I
don't think it declines for all time. I think it oscillates

This doesn't conflict with TSS illustrations. All that is
required for example in Andrew's system, is that the process
of technical improvement be suspended for a while. Asset
values will continue falling while no further improvements
in labour productivity take place. As a consequence, the
denominator in the profit rate will sink and the rate of
profit will rise. This is not an unreasonable supposition
since in a slump, accumulation is forcibly suspended or
reversed. There is considerable evidence that Marx felt the
function of slumps was the forced devaluation of capital,
and one way this can happen is through disaccumulation, of
which one form is a decline in asset values, that is, a
drain of value.

Alan