[OPE-L:4001] More Depreciation (Example)

john erns (ernst@pipeline.com)
Thu, 16 Jan 1997 13:16:33 -0800 (PST)

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In replying to Michael's 3998, Andrew gave us a
simple example of how to take into account moral
depreciation. Here let me comment on that example.

Andrew states:

Now assume (note that "assume" doesn't constitute a claim that something is
true in reality) that the machine has the technological capability of lasting
3 periods, that it cost $15,000 at time 1, and that the prices of new machines
of that type are $9,000 at time 2 and $4500 at time 3.

John comments:

Andrew makes some curious assumptions here. Let's examine them.

1. He knows the technological capablity of the machine. In CAPITAL,
the depreciation charge is not based solely on this. Rather the
amount of depreciation depends upon the economic life of the machine
not its technological life. For Andrew, the technological life and
the economic life seem to the same. Hence, what he later computes
as moral depreciation is simply a deduction from profits. He seems
to assume as well that capitalists know nothing of this until after
it occurs.

2. Let's look at that first machine which in his example costs 15000
and has a known technological life of 3 years. Let's assume a rate of
profit of 10%, and set aside those new machines for now.

Year Amt Invested Amt. transferred Profit Output Price
1 15000 5000 1500 6500
2 10000 5000 1000 6000
3 5000 5000 500 5500

Now at the end of Year 1, Andrew's new machine worth 9000 is
available. The old machine has a book value of 10000. Is the
price of the output dictated immediately by the new machine or
does the capitalist with the new machine garner a super profit
by selling at an output price of 6000? If the later is the case,
then why the first machine is to be devalued seems mysterious.
On the other hand, in the former case, it is not at all clear
why, again, capitalists do not anticipate at least a bit of
this "moral depreciation" and include it in their calculations.

3. With that 2nd machine, we can set up the following schedule
and, again, assume a 10% rate of profit.

Year Amt Invested Amt. transferred Profit Output Price
2 9000 3000 900 3900
3 6000 3000 600 3600
4 3000 3000 300 3300

Now if the selling price of the machines output at the end of
Year 2 is 3900, then the first machine's schedule changes into
that of 2nd and its year 2 becomes

Year Amt Invested Amt. transferred Profit Output Price
2 9000 3000 900 3900

or does it? What happened to the 10000 that was tied up in Year 2?
It has now become 9000. Here's a loss of 1000 and a profit of
900. Is there a profit at all? At the same time, this capitalist
needed 5500 to keep going with the normal rate of return of 10%.
Yet he only gets 3900. That would seem to be a loss of 1600.

4. What's wrong with all this? Before we can say, perhaps we need
to look at the matter while including circulating capital and not
make any assumption about the technological life of the fixed
capital. That is, let's let capitalism itself put the machine out
of its misery by allowing technical change to be such that it
is no longer profitable to produce with the fully depreciated
machine. (Note that Andrew has also assumed that machines only get
cheaper, never better.) In other words, if I can make one of
these machines last longer than 3 years, then Andrew's cheaper
machines pose no problem to me as a capitalist.