[OPE-L:4062] Crying Wolf

john erns (ernst@pipeline.com)
Sat, 25 Jan 1997 18:55:11 -0800 (PST)

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A reply to Andrew's OPE-L 4056.


I'm not sure we are getting anywhere. Let me see if I can
be clearer in responding to your comments.

A reply to John's ope-l 4050.

John said: "The economic life of fixed capital is generally determined
socially, not naturally."

Andrew commented: This is NOT a difference between us. I agree with this
statement 100%. The difference is that, in my interpretation, the *transfer
of value* is not determined by the economic life of the fixed capital.

John now says: I'm not going to accuse you of maintaining something else.
Let me simply note that if you do not know the technological life of a given
piece of fixed capital, it is unclear to me how you determine the amount
of value transferred.

Andrew states:

I note that John has not answered the questions I posed in ope-l 4050
concerning his position; he has merely reiterated it. The questions were:

(a) HOW are firms able to recoup what they charge as depreciation?
(b) Doesn't this depend on the price they get for their products?
(c) What then determines the price they get?
(d) Why are the costs they are able to recover the original costs, not the
replacement costs? Why not any arbitrary amount?
(e) If firms do not determine the rate and amount value actually transferred,
what then DOES determine them?

John responds:
a. No matter how we compute the depreciation charges, they must come
from the revenue at the end of each period.
b. Yes.
c. With or without fixed capital, you could ask this question. Here
firms move in and out of an industry in search of higher profits. I
maintain that in computing their rates of return, they look at the
profitablilty and in looking they know they have to allow for depreciation.
In allowing for depreciation, not being stupid, they know just as that
Manchester Spinner knew, that there is "moral depreciation."
d. Ultimately, the law of value. But this is about like saying "At night,
all cows are black." Given that the accumulation process includes
technical change and hence determines the economic lifespan of fixed
capital, it fixes the rate at which value will be transferred. The value
transferred is determined by initial total value of the fixed capital.

Nota bene. Note that we have few answers relative to the depreciation
process. What I am suggesting is that we look at various cases. Among
them are:
1. Capitalists "correctly" make allowances for moral depreciation.
2. Capitalists underestimate moral depreciation.
3. Capitalists overestimate moral depreciation.

We've not really gotten into things on a case-by-case basis.

Andrew continues beginning with a statement I made.

John: "in Andrew's OPE-4050, all we ever see is cheaper machines."

Huh? I proved that if (i) the amount of value transferred during a period
depends on the input price and the D coefficient (which is *any* number
greater than or equal to zero and less than 1), (ii) the firm recoups this
amount, and (iii) this amount fully compensates the firm for the loss of the
machines' value during the period, then the machine's value must be CONSTANT.
It never gets cheaper. Note that I proved this INDEPENDENTLY of any
assumption concerning technology and any assumption concerning better
machines. Whatever one assumes about technology and better machines, the
price of *this* type of machine cannot change.

John responds:
Check out how you dealt with the assumption or, what you claim you are
assuming about technology. In your proof, I have no idea why machines
last for "n" years. None. You say they do. But I know not why. In
my judgment, you are making an assumption. I think I can now how I
found fault with your proof. In it, you assume that I think that

"the firm recoups in each new period an amount equal to the loss of
value of the machine during the PRIOR period."(emphasis added, JE)

Nope. I think the firm anticipates the moral depreciation and allows
for it in each period. Let's check this out by way of example.
Initially or at t(0), a machine costs 100, after the first period
of production or at t(1) a new machine costs 90. Thus, the capitalist
using the machine in this period will allow for 10 in depreciation.
Thus, at t(1) we have a new machine costing 90 and the original machine
has a value of 90. At the end of the second period, t(2) we assume that
new machines cost 81. Thus, both capitalists using the older machines
must allow for 9 in depreciation. At t(2) we see three machines, each
possessing 81 in value. The three machines are used in the next period
and, at the end of that period, t(3), a cheaper machine again becomes
available selling for 72.9. The three machines used in that period
suffer a loss of 8.1 which our prudent capitalists anticipated (using
the "declining balance" method of depreciation) and computed
depreciation charges of 8.1. At t(3), we see four machines, each
the same save for age, entering the production process with a value
of 72.9 each.

Andrew said:

If we distinguish between cheaper machines and better machines, then "cheaper
machines" means machines of the same type as the existing ones that cost less,
right? Given (i), (ii), and (iii), cheaper machines in this sense are

John responds:
See above.

Andrew stated:

John: "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."

Huh? number 2. First, as I've just noted, my proof holds for any assumption
concerning technology. Second, I then gave an example in which the technique
changes, in order to show that changes in living labor requirements wouldn't
affect the commodity's value, given that (i) through (iii) hold:

John comments:
But (i) through (iii) do not hold.


Quoting me Andrew states:

John: " ... 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."

Again, there are no cheaper machines and, of course, n is arbitrary. How
could I *not* assume an economic life of n periods? Note that nothing I did
requires that the magnitude of n be specified ex ante. (I should mention a
minor point that I neglected, however. If n = 1, so that the machine is not
fixed capital but circulating capital, then my proof doesn't hold. The
equation needed to satisfy (i) through (iii) becomes p1*(1-D1) = p2*(1-D1).
Since D1 = 1 in this special case, we have 0 = 0, and the equation doesn't
determine prices.)

John comments:
Ok. Let's let the case of n=1 alone. Again, its unclear why the
machines ever stop producing. As I have said, a new cheaper machine will
never make older machines obsolete. Further, as I have stated above,
it is unclear in your proof, why capitalist cannot anticipate the
amount by which the new machine becomes cheaper and allow for as
depreciation as that cheaper machine is being produced.


John: "Or we might ask, 'Why the life of the machine is not infinite since
its technical life is not to be considered?'"

I don't know. I'm not sure I understand the point. If it helps, assume that
a better machine appears at time n+1.

John comments: I'm willing to pursue the idea that machines simply
get cheaper. I just do not want them to leave the field of production
without cause. For now, given we are looking at "moral depreciation",
I'd like to refrain from making any assumption about how long they
last, especially if it involves something given us by technology alone.

We should also note that better machines will take us into the
realm of individual and social value. That is, the worker with
the better machine will seem to create more value in a given period
of time than one using the unimproved machine.

Andrew's post goes on, I've saved it. But I think we are stuck.
He's proved something can't happen and in the above I have an
example of it happening. On this matter, it seems the problem
is the timing of the depreciation charges that recoup the
"moral depreciation."