[OPE-L:4011] Re: More Depreciation (Example)

john erns (ernst@pipeline.com)
Fri, 17 Jan 1997 08:59:55 -0800 (PST)

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Previous message: Chai-on Lee: "[OPE-L:4009] RE: More Depreciation (Example)"

A reply to Andrew's ope-l 4008,

John: "In CAPITAL ... the amount of depreciation depends upon the economic
life of the machine not its technological life."

Andrew: Could you please provide citations?

In CAPITAL, Vol. 1, Marx introduces the concept of "moral depreciation"
in Chapter 15, Sec.4 Part B. Note that in a footnote Marx cites
a TIMES article by a Manchester Spinner in which we are told that
the depreciation charges are meant to cover "the loss which is
constantly arising from the superseding of machines before they are
worn out, by others of a new and better construction."

Let's start with this Spinner and go from there. He appears in TSV
as well.

Andrew: And is the depreciation of which you speak all part of the value
transferred to the product.

John: Yes. Unless the moral depreciation is totally unexpected, all of it
is part of the depreciation charges.

Andrew: In my interpretation, please note, it is also the case that the
amount of depreciation (due to wear & tear *plus* moral depreciation)
depends on the economic life of the machine.

John: But it seems to me that the economic life, in your example, is
identical to the technological life. To this claim, you have already

Andrew: Au contraire, mon frere. That was my point in giving two examples,
one in which the machine was used for its full technological lifetime
(3 years), and one in which it was used only for 2 years.

John: As long as your examples only include the possibility of cheaper
machines, it is unclear why any machine cannot be used as long as it is
physically possible.

Andrew: Or, for a starker example, assume the machine is bought now (12:11
am) for $15,000 but becomes obsolete - scrapped and replaced by a BETTER
machine - now (12:12 am), before it is ever used in production. Its
technological life is 3 years; its economic life turned out to be 0.

John: Quite an example. Here it might be worth considering why that
machine never got used. To be sure, you tell us that it has been
replaced by a "BETTER" one minute after it came into being. For me,
this would mean that that better machine could be used in a process
that generates a higher rate of profit than the scrapped machine
could despite the zero cost of the scrapped machine.

John: "He [Andrew] seems to assume as well that capitalists know nothing of
this until after it occurs."

Andrew: As I've noted to Gil, unless I say I assume it I don't assume it.
I was *not* discussing how capitalists keep their books. And my conception
is that valuation is not affected by what capitalists know or don't know.
So assume that capitalists know, or don't know, or know imperfectly, it
doesn't change
the figures that I computed. (This does not imply that expectations have no
influence on decisions; rather, given that the firm's decisions are what they
are, no variations in expectations can influence the figures I calculated.)
John: My point was that you "SEEM to assume that capitalists know nothing" of
these losses via moral depreciation until after they occur. Your claim
that the expectations of capitalists can't affect your figures is valid
iff we stay within the parameters you set. Consider that first machine
and assume that the capitalist estimates its economic life to be not
3 years but 2 years. Using your methods of computing depreciation --
moral and other -- we would see a depreciation charge of 7500 in the
1st year. In the second, the charge would be 4500 since the machine, if
new, would cost only 9000 at the beginning of the period. Now, if it
its economic life was estimated correctly by the capitalist, its use
ceases at the end of the 2nd period. The unrecovered depreciation
would be 3000. In your example, it was 5500. It would seem that
the expectations of the capitalist relative to the economic life of
the machine can affect matters.

Note as well that in OPE-L 4009, Chai-on points out that the "straight
line" method might not be appropriate for loss avoidance. Clearly, it
was not. Indeed, had a method been chosen assuming the same economic
life of the machines (3 years) that allows for accelerated depreciation
in the earlist year the losses due to moral depreciation could be
considerably reduced.


In much of what followed in Andrew's post, we see the basic point of
disagreement --- Do capitalists' depreciation funds include amounts for
"moral depreciation" or not?

Here, I think I follow Marx and claim that, at least, some of the
moral depreciation is recovered by capitalists as they depreciate
their machinery. In his examples, "moral depreciation" means losses
to the capitalists. Here, perhaps, we need to revisit that Manchester
Spinner referred to above.

John: "Note that Andrew has also assumed that machines only get cheaper,
never better."

Wrong. See above. If a machine is scrapped because a better machine comes
along, it transfers no more value, irrespective of how much longer it is
capable of functioning. Period.

John: "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."

Andrew: If I understand this, which I'm not sure about, I think I agree.
Basically, the firm has a free means of production after three years.

John: Yes, we do agree here. I think it was in a piece by Itoh that
I first encountered the possibility of "free" machines. Given they
can exist, I note that they will continue to be used as long as they
are physically capable or until a BETTER machine comes along. Thus,
it is only BETTER machinery that forces them from production processes
given they have not worn out physically.