[OPE-L:3424] Re: Value Added, IVA and TSS

Duncan K. Fole (dkf2@columbia.edu)
Tue, 15 Oct 1996 09:41:31 -0700 (PDT)

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In reply to Alan's [OPE-L:3403]:

>NIA and value added
>In [3287] and previous posts, Duncan writes the following
> 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
> 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.

I've tried to be explicit that the equation you quote applies only to the
pure circulating capital 1-sector model. With more complex and longer time
patterns of production, value added would have to include an allowance for
depreciation, as you point out. I would argue that the usual NIA definition
of value added, as applied to the 1 sector circulating capital model, would
correspond to my equation.

>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
>circumstances external to their business.
>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.

As I explained at more length in my post replying to Fred, the IVA will
make only a small difference to the measurement of the monetary expression
of value given price, quantity and labor time data in most real economies,
but it makes a qualitative difference in the paths implied in examples that
take the monetary expression of value to be a given constant. This is
important, as you pointed out in your post on dynamics, because it gives
rise to a divergence of the implied price and profit rate paths.

>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
>with the business cycle.

The question I'm asking is hypothetical. Suppose we confronted a 1 sector
circulating capital economy undergoing a constant rate of labor-augmenting
technical progress (or a close approximation thereto), would we expect to
see the money rate of profit on historical costs go to zero? I wouldn't.


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