[OPE-L:4000] Depreciation Questions

john erns (ernst@pipeline.com)
Thu, 16 Jan 1997 12:16:09 -0800 (PST)

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Previous message: andrew kliman: "[OPE-L:3999] Re: More Depreciation Questions"

Gerald Levy wrote:
> For all of the above reasons, any decision that a firm makes about future
> depreciation of constant fixed capital is very uncertain and, ultimately,
> is no more than a "guesstimate" regardless of the mathematical
> sophistication of the depreciation method chosen or the state of market
> research within the firm. Quite simply, they don't know. They can't know.

Michael Perlman commented:

Yes, yes, yes. I think that John was intending just this point. It is
the one issue that I have been raising all along. Unless you have
rational expectations marxism, you cannot calculate the c in c+v+s.
Thus, questions of algebraic exactitude go out the window. So far,
John is the only one who has picked up on my theme.


Agreed. They don't know and can't know. Yet, despite this, our
stalwart capitalists bite the bullet and invest in fixed capital
with the idea of making profits. For those of us trying to
understand how the system works what questions and problems does
this raise? Here are a few.

1. The unknowns for the capitalists as they invest in fixed
capital include (1) the life of the fixed capital,(2) the
prices of the other inputs that will be used over the life of
the fixed capital, (3) the possible changes in the prices of
the commodities produced by the fixed capital, (4) the possible
changes in rate of profit during the life of the fixed capital,
and (5) the possible changes in the rate of interest during the
life of the fixed capital.

In CAPITAL, Marx seems to assume that capitalists base their
guesses on the life of fixed capital based on experience. In
general, he assumes a machine will last 10 years. The anticipated
prices of inputs and outputs are INITIALLY assumed to be those
that exist when the investment is made.

2. What method of depreciation will the capitalist choose? For Marx,
the choice seems to have been straight line. Yet, as I have said
earlier, this presents problems for rate of profit calculations and
seems to imply that there is an assumption that prices will decrease
during the lifetime of the fixed capital. In saying this, my
assumption is that the depreciation funds are invested rather than
hoarded. In other words, they serve as funds for further accumulation.
We could get rid of some of the difficulty here by assuming
that the funds are simply hoarded and used only when the fixed capital
needs to be replaced. Of course, given Marx's query to Engels on
September 11, 1967, this does not seem the way he intended to proceed.

3. Given that capitalists do choose some method of depreciation, how
do we incorporate the revaluation of fixed capital into those models
constructed on the basis of simultaneous valuation? That is, the
amount of revaluation would be affected by the method chosen. For
example, if a machine is assumed to last 10 years and in its 5th
year can be reproduced more cheaply, the amount lost in the revaluation
would clearly depend on that which has already been recovered. With
a method that accelerates depreciation, less would be lost than with
one that assumes simple continuous depreciation. Further, if the
price of the output does not change what forces the capitalist to
revalue the fixed capital?