[OPE-L:4041] Depreciation Answers

john erns (ernst@pipeline.com)
Wed, 22 Jan 1997 19:51:46 -0800 (PST)

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Andrew responded to various posts of mine in his
OPE-L 4036. With his post, I have a better understanding
of his position on the question. Before responding to
his post in detail, let me see if I can clarify the two

Let's suppose that a new machine costs $3000. Engineers
predict that it will last 6 years. Capitalists have found
that the normal life for this type of machine is 3 years.
That is, they have found that they can no longer use them
profitably after 3 years since better machines generally
come on the market within that time frame. This means that
after 3 years even if the machine is fully depreciated it
can no longer compete with a new machine.

For me, this means that capitalists must depreciate the machine
in such a way that the $3000 is recovered as depreciation at
the end of the 3 years. The $3000 in value is transferred over
that period of time given that capitalists expectations are
correct. Need they be? No. Indeed, fearing further moral
depreciation, the capitalists have every incentive to lengthen
the working day, intensify labor, put on extra shifts and so on.
The predicted 3 year life of the machine is no guarentee of
anything. Rather it simply acknowledges that capitalists are
well aware of moral depreciation and make every effort to
recover their investments.

If, on the other hand, we assume that the transfer of value is
technically determined we set capitalists expectations aside
and assume that the $3000 is to be recovered after the machine
has been used for 6 years. We need also assume that the machine
is to be used more or less in the a same fashion in each of the
six years and thus transfers the same amount of value in each of
those years to the output. Thus, the value transferred in each
year would be $500. But, given that the machine is only used for
3 years, capitalists would experience a loss of $1500 at the end
of the 3rd year as it is no longer profitable to use the machine
after that period of time IF the better technique is in place at
that time. My question to Andrew is -- "How do we incorporate
such losses into the rate of profit calculations?" Note that
capitalists who use the 3 year schedule would have recovered
their investment but would have gotten a lower rate of profit
than those who use a 6 year schedule.

(Andrew, note that I am asking you for something different than
we found in your earlier examples concerning moral deprecitation.
Here, the machine is not cheapened but replaced by a better
machine at the end of the 3rd year.)

I do agree with Andrew when he maintains that capitalists'
bookkeeping cannot alter the rate of profit. Indeed, in the
above example we could assume that one capital is depreciated
over 6 years even though it lasts only 3 years while the other
is "correctly" depreciated over 3 years. Clearly, in either
case the gross returns would be the same no matter how the
fixed capital is depreciated. Here, it is a question of how
to separate depreciation from profits, on the one hand, and,
on the other, how to calculate the rate of profit.

Now let me turn to Andrew's post.

A reply to John's ope-ls 4011, 4012, 4028, and 4031.


John wrote: "I do think that it is fairly clear that Marx himself was
including some amount of value as "moral depreciation" in determining the
value of constant capital used to produce a commodity. If there is another
way of reading Marx on this, I'd sure like to know more about it."

Andrew responded: First of all, the issue is not what determines the *value
of constant capital* but what determines the *value transferred to the
product*. Beyond that, I don't think the passages that John has cited
support his interpretation against mine.

What John has argued is that *firms determine* the value of their products by
determining the amount of moral depreciation transferred to the product. I've
argued that this notion contradicts Marx's value theory because leads to
circularity and contradicts successivism, and because firms would never need
to worry about moral depreciation if they could recoup it. Hence, if Marx is
to understood consistently, John's reading can't be right.

John now writes:
No. I do not think that "*firms deteremine* the value of their products
by determining the amount of moral depreciation transferred to the product."
The key here is "knowing" how long fixed capital lasts. Indeed, that is
what connects the value of the fixed capital and the value transferred.

Both of us agree it is the value of the fixed capital that is transferred
to the output over the life time of that fixed capital. For you, the life
time is initially given by technology. Here, I do not assume that you
think fixed capital will always be in use for its entire natural life. For
me, it is initially based upon the average time that fixed capital of its
type "lives" in capitalism. I do not assume that in using this average one
is always correct. Thus, no matter what one predicts the life time of
fixed capital to be, "mistakes" will occur.

Andrew continues:

There must be another reading.

There is.

The key is that accounting and value determination are distinct things;
capitalists' decisions and expectations do not influence value determination.
With this in mind, the passages that John cites can be interpreted in the
following way:

(a) CAPITAL, Vol. 1, Chapter 15, Sec.4 Part B. The text does not deal with
value transfer, but with the value of the machinery. A footnote seems to
indicate that capitalists include in their depreciation charges an amount that
is meant to cover moral depreciation. I have already shown how this is
consistent with my interpretation, according to which the value transfer does
NOT depend on how firms keep their books. As I read it, then, the footnote
indicates that capitalists are aware of moral depreciation, and probably that
their accounting reflects their *fear* of it. Indeed, their *fear* is the key
point of Marx's discussion of moral depreciation here: moral depreciation and
the fear of it impels capital to prolong the workday. Likewise, firms are
afraid of property damage, and they take out insurance to protect themselves
against it, but they still pay for it (by paying for insurance) and their
action does not prevent fire, flooding, etc.

John now comments:

I disagee with you when you claim that here Marx is not dealing with the
transfer of value. In my Int. Ed. of CAPITAL, he states

"The productiveness of machinery is, as we saw, inversely proportional to
the value TRANSFERRED by it to the product.(emphasis added, JRE) The longer
the life of the machine, the greater is the mass of the products over which
the value TRANSMITTED by the machine is spread, and the less is the prortion
of that value added to each single commodity."(emphasis added)

John now also says:

With you, I agree that value transfer does not depend on how firms keep
their books. Rather, before we deal with bookkeeping or the transfer of
value, we have to deal with the issue of what determines the lifetime
of fixed capital. Do we say that a machine, say, a PC will transfer value
over 10 years assunming it is built to last that long or does it transfer
value over 3 years or less, given the continual improvements in the industry?

John now goes on:
I'm glad you brought up insurance. Nota bene, Marx here makes no mention
of it. For you, losses due to moral depreciation are to be treated as
losses due to disasters covered by insurance. Yet, Marx states that

"Entirely different from the replacement of wear and tear and from the
work of maintenance and repair is *insurance*(Marx's emphasis), which
relates to destruction caused by extraordinary phenomena of nature,
fire, flood, etc. This must be made good out of the surplus-value
and is a deduction from it." (CAPITAL, Vol. II,p177, Int. Ed.)

Note that Marx, in dealing with moral depreciation in either Vol. I or
Vol. II, states that losses due to it are to be deducted from surplus
value as he does here with insurance. Indeed, for him, moral depre-
ciation is not "entirely different" from the replacement of wear and
tear, rather "moral depreciation" is seen as something that occurs
in addition to it.

Andrew continues:

(b) Collected Works, Vol. 33, pp 372-73. Marx quotes a Lancashire spinner,
without commenting on the substance of the remark. He does not contest the
quote, however, which he generally does if he finds fault with it. The quote
concerns the fixed costs of the spinner, i.e., the losses he incurs when his
mill is not working. One of them is "allowance for deterioration of
machinery"; part of this "deterioration" is moral, not physical. "Allowance"
seems to indicate that the issue is one of accounting --- how does the spinner
calculate his total loss? Also, since the spinner refers to "reserves,"
another issue may be whether the firms' reserves are sufficient to cover the
fixed costs when the mills aren't operating. The quote says NOTHING about
value transfer. (How could it? Capitalists don't care about value
determination.). It has nothing to do with value determination. It deals
solely with capitalists' decisionmaking and accounting.

John now comments:

I'm not sure that the matter can be so neatly separated. That is,
would we not both agree that it is value determination that dictates
the manner in which capitalists keep their books. Why are capitalists
generally setting something aside to cover moral depreciation?
Because of the constant devaluation of their constant capital
that we see as we analyze the system. It is not simply a loss that
occurs either continually or suddenly but rather one that is part
of the system itself. It is part of the cost of capitalism itself.
To be sure, it is a cost that can be minimized by prolonging the
working day, intensifying the labor process, working folk day and
night, etc. Nevertheless, it remains a cost.

Andrew continues:

(c) Capital, Vol. II, Ch 8, Sec. 2. The key sentences seem to be "After ten
years have elapsed, it is generally possible to buy the same quantity of
carriages and locomotives for L30,000 as previously cost L40,000. A
depreciation of 25 per cent on the market price must thus be reckoned with on
this material, even if there is no depreciation in the use-value." Fine.
Firms know from experience that the stuff costs 25 0.000000e+00ss, and they set aside
funds in the form of "depreciation charges" to take account of this. Again,
this has nothing to do with value transfer.

John now comments:
>From where do they get the funds to set aside the 25%. Obviously, from
the gross revenues. To be sure, this is a capitalist calculation. How
do we account for it as we attempt "value determination"? Are we to
ignore this side of the depreciation process and simply deduct the funds
necessary from what we had called profits or surplus value? Does not
this ex post calculation give us the same result as one in which we
assume ex ante that such depreciation occurs? Why pretend it does not
happen until it happens? To be sure, we cannot know whether or not
the amount of moral depreciation anticitpated will equal that which
occurs but why assume nothing will happen unitl it happens given it
always happens.

Andrew continues:




This is exceedingly clear. Moral depreciation is NOT included in the value
transferred to the product. ONLY wear and tear is included. And what
determines the transfer of value due to wear and tear is the average (degree
of) loss of use-value; in other words, the average TECHNOLOGICAL (physical)
life of the element of fixed capital. This paragraph states exactly what I
have been stating. Those who disagree with this conception are disagreeing
with Marx, not with me.

John comments:

Perhaps clarity is in the eye of beholder. Why, given Andrew's reading of
these passages, does Marx need to say "apart from moral depreciation" in
the first, and why need he state "moral depreciation excepted" in the
second? In both passages Marx simply asks his readers to consider matters
as if there were no moral depreciation. Note he has to tell us to do so.
Further, note he seems to feel no need to tell us to abstract from
insurance, the costs of natural disasters, etc.

Andrew continues:
In one of his posts, John wrote: "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."

This is self-contradictory. If moral depreciation is recovered, then moral
depreciation does not mean losses to the capitalists. But John is right that
"moral depreciation" does indeed mean losses to the capitalists. Hence, moral
depreciation is not recovered. As we have just seen, Marx himself says that
moral depreciation is not transferred to the product.

John now states:
I admit that my statement is unclear. But here perhaps my position
will be clearer although in your judgment still incorrect.

Moral depreciation can be partially recovered by capitalists as part
of depreciation. At the same time, should it not be fully recovered
they would see it as a loss. Indeed, again, given that losses can
occur via moral depreciation, it impels them to lengthen the working
day, intensify labor, etc.

Andrew continues:

John wrote: "For Marx, depreciation charges like the wage rate are socially
determined within the bounds given by technology."

I've learned to keep my hand on my wallet when Marxists talk about "levels of
abstraction" AND when they talk about "socially determined."

John now states:
I'm not sure it is his wallet Andrew needs to keep his hand on, but clearly
this remark given the lack of explanation deserves Andrew's skepticism.
Forgive me but in the good old days we used to be able to get away with
this stuff.

Andrew continues:

John: "Machines that should last 20 years by engineering standards only last,
say, 10 years because of 'moral depreciation.' The value transferred over
those 10 years sums up to that invested, given that 'moral depreciation' is
part of the reality in which that investment occurred."

Well, as we've seen, Marx disagrees. And were John's conception true, firms
would never fear moral depreciation, never prolong the workday or speed up
production because of it, never suffer losses because of it, since they would
recoup their full investment in any case. This goes directly against Marx's
whole point when he introduces the concept of moral depreciation in Vol. I.

John now comments:

I think that I've been fairly clearly that capitalists do indeed behave as
nefariously as Andrew suggests in order to MINIMIZE the costs of moral
depreciation. At no point, do I we even imagine that capitalist
suddenly change into morally undepreciating folk simply because they
set aside some funds for the moral depreciation of their fixed capital.