[OPE-L:4093] Re: Depreciation -- S.O.S

john erns (ernst@pipeline.com)
Wed, 29 Jan 1997 11:40:53 -0800 (PST)

[ show plain text ]


Now I think I get it. Let me go over it to make sure.
In our picture we actually are considering 3 machines,
all technically the same.

1. At first, there are two machines (both the same age)
one owned by capitalist A, the other by B. For some
reason, they are depreciating their machines differently.
Indeed, A feels he has recovered his investment at the
end of 2 periods and B must produce a 3rd period for
full recovery. This raises a question or two.

a. Given the selling price of whatever they produce is
the same in each of the first two periods, are they
not earning different rates of profit?

b. Why would A buy the new machine at the end of the second
period? His old machine, fully depreciated, is still
functioning and as a fully depreciated machine is clearly
"cheaper" than the newly produced machine whose purchase
price is less than the purchase price of the fully
depreciated machine WAS.

2. Given that a new machine comes into play and capitalist
B can no longer recover the depreciation on his machine, he
has a problem. If he bought it on credit, the bankers
are at least anxious should the selling price not be enough
to cover the depreciation.

3. Where we seem to have some confusion concers the matter
of retiring the old machines. If there is no technical
difference in the machines except for age, the only way
a machine can no longer be used by anyone occurs when it
is physically worn out. Hence, again, I'm not sure why A
gave up his first machine to purchase the other. Somewhere,
Itoh points out that the use fixed capital, fully depreciated,
can be used to produce extremely high profits.


At 10:59 AM 1/29/97 -0800, you wrote:
>> 1. I note that the "old machine" is completely depreciated.
>Let us suppose there are 2 capitals A and B in a branch. The
>depreciation pattern is not equal, so that capital A
>completely depreciated the machine in period 2 (from a
>total of 3 periods). So, only the machine of capital A
>is "completely depreciated" in period 2. The machine of
>capital B is still "alive" one period more.
>> 2. There is no technical difference between the old machine
>> and the new machine except for age.
>The new machine capital A purchases to replace the old
>one is exactly equal, but its cost is only 50%.
>> 3. Why would the new machine be able to sell at a lower
>> price than the old, given the later is completely
>> depreciated?
>I am not sure to understand.
>Capitalist A replace his/her machine at a lower price. Why?
>I do not know. Perhaps, before, it was made in Pittsburgh
>and, now, is imported from Costa Rica where wages are 50%
>from those prevailing in Pittsburgh.
>The fact is after this period, capitalist A is able to sell
>his/her commodity at a lower price because s/he charges
>less on account of fixed capital.
>This affects capitalist B, who is forced to reduce his/her
>selling price. This means that the amount that capitalist B
>is allowed to charge for depreciation is forcefully
>reduced. This would be a "moral depreciation" of his/her
>fixed capital.
>Notwithstanding this, capitalist B still owes to the bank
>the amount corresponding to the "annualy amount of
>depreciation", prevailing before capitalist A replaces
>his/her machine.
>The amount charged for deprecition in the whole branch
>cannot be neither that corresponding to capital A nor that
>corresponding to capital B. It should be an "average" of
>both, assuming that supply = demand.
>> 4. Why would the capitalist with the old machine still owe
>> the bank, given the old machine is completely depreciated?
>Only capitalist B still owes to the bank because s/he has
>not completely depreciated his/her old machine.
>Capitalist A could also borrow to purchase the new machine,
>but the amount annualy paid will be 50% than the precedent
>Alejandro Ramos M.