[OPE-L:4054] Depreciation without Remorse

john erns (ernst@pipeline.com)
Sat, 25 Jan 1997 06:30:16 -0800 (PST)

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Have you no mercy? My God, have I really slipped
back into the static world of simultaneous valuation?
Before I plead guilty to putting "simultaneism in
sheep's clothing", let's look at your cleverly presented

You summarize some of what I have said about moral depreciation

"(a) firms do recoup wheat they charge as depreciation ..."
"(b) they charge as depreciation an amount that they *expect*
will fully recover the cost of the fixed capital, based
on their *expectations* of its economic (not technological)
"(c) how long the fixed capital actually lasts(economically) is
determined independently of the firm."

You also note what you seem to consider an essential difference
in our positions by noting:

"If firms do determine the rate and amount of value actually
transferred, what then DOES determine them? In my interpretation,
they are given exogenously, based on the technological life of
the stuff. But John denies that the technological life matters."

I grant that if Andrew were correct about technology determining
the life of fixed capital, matters would be simpler. We could
merely consult the engineers or make an assumption for them
in order to determine the amount of value transmitted by fixed
capital to the output in each period of that fixed capital's use.
Time and time again, I have maintained that this is not the case.
The economic life of fixed capital is generally determined
socially, not naturally. That is, when a machine, even fully
depreciated, can no longer compete with a newer machine, the older
machine is seen as scrap. If the only difference between an
old machine and a new machine is that the old machine costs more
when new, then that old machine can be used forever or until
it dies a natural death. In capitalism, the peaceful transition
from one set of machinery to a newer set is the exception, not
the rule. The simple cheapening of machines never renders older
machines obsolete.

Yet, in Andrew's OPE-4050, all we ever see is cheaper machines. The
production process that uses the machine never changes. The whole
notion of capital using or capital saving technical change is
gone as there really is no change in technique. Commodities
produced by the machine and the machine itself are somehow
cheaper. Real changes in technique do not take place. In this
way, we can, in theory, construct a world in which all we need
know is the technical lifetime of the machine. In the simple world of
unchanging labor processes, even I will admit that it is crucial
to know how long a machine can be used before it wears out.

It is to this world Andrew brings us in order to show the error
in my conception of depreciation. He assumes that the machine
will have a "an economic life of n periods" as he begins to
reveal the fatal flaw. We might ask, "Why 'n'?", since the machine
is simply going to be produced more cheaply in period after
period. Or we might ask, "Why the life of the machine is not
infinite since its technical life is not to be considered?"

The questions go unasked and Andrew proceeds to state that:

"John's position basically implies that, if the firm's expectations
are correct, the firm recoups in each new period an amount equal to
the loss of value of the machine during the prior period."

I have no idea why capitalists do not assume that machines will
get cheaper (Especially here, since that's all they ever do.)
and allow for it as they invest. That is, in the very first
period of production allowance might be made for the moral
depreciation that takes place in that period. But let's get back
to this issue later.

Andrew, with a bit of rigor, proceeds to show that the only
way in which this unchanging means of production can be used
from period to period as capitalists collect the expected
depreciation charges is that its price not change. That is,
he shows that


where Pt is the price of a new machine at time t, Pt+1 at time

But why this result? To be sure, it astounded me at least
as much as it did Andrew. But let's consider this a bit more
closely. Are machines really becoming cheaper to the same extent
that depreciation takes place? Absolutely not. Suppose that
a new machine sells for 100 at first, at the end of the second
period for 80, the third 60, the fourth 40, the fifth 20 and
the sixth 0. Then, the manner in which the machine becomes
cheaper would correspond to what we call straight-line depreciation.
But here the various rates of depreciation would differ depending
upon when one bought the machine. That is, for the capitalist
buying the machine at first, things are simple. He allocates
200f the purchase price in each period to depreciation. However,
the capitalist who buys in at 80 would experience a different
pattern of depreciation and find himself unable to recover his
entire investment. Let's consider something a bit different.

Suppose that machines cheapen by 300f their current value from
one period to the next. Thus, a machine, again, sells for
100 initially, at the end of the first period for 70 (700f 100),
at the end of the second period for 49 (700f of 70), at the end
of the third period for 34.3 (70 0f 49), at the end of the
fourth period 24.01(70 0f 34.3) and so on. Given the capitalists
anticipated this manner in which the machine prices fall, they
would adopt what they call the "declining balance method" of
depreciation no matter when they buy the machine. Further, we
should note that the capitalist who bought in at the initial price
of 100 and the one who bought at the price of at the end of first
period both begin the 2nd period with an investment of 70 in
fixed capital. In each and every period of production the rate
of profit would be uniform and, of course, with the ever-cheaper
machines increasing over time. How long the machines last in
production is anybody's guess as we make no assumption about
the technical lifespan and see no better machines that can
displace them.

Would I claim that this illustrates Marx's notion of depreciation?
No, I'm simply not ready for that. Rather, I think we need to
work through this mess. Some time ago, I suggested that even
simple straight-line depreciation, which Marx only hints is his
starting point, suggests some expectation that prices will
fall. That Marx gives us this little to go on in this area
merely means much is to be done.