[OPE-L:4095] Re: Depreciation -- S.O.S

aramos@aramos.b (aramos@aramos.bo)
Wed, 29 Jan 1997 14:29:27 -0800 (PST)

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> 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.

No, they do not have the same age. The life-span of the
machines is always 3 years. But, capitalist A bought the
machine at the start of 1991 and capitalist B one year
later. In 1993 capitalist A's machine is worn out, while
B's machine can function --with the same productivity--
until the end of 1994. Their "patterns of depreciation" are
"overlaped". (Is this English?)

> Indeed, A feels he has recovered his investment at the
> end of 2 periods and B must produce a 3rd period for
> full recovery.

No, he does not "feel" anything: capitalists have no
feelings... They are hungry wolves... It is a matter of the

Simply, at the end of 1993 capitalist A must replace his
machine because it no longer produce with the same technical
standard. Although the machine could be "remade" with
spare parts, it cannot "produce" with the same productivity.

> 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?

No, until the end of 1993 all conditions for both
capitalists A and B are equal and then their rates of
profit are equal.

> b. Why would A buy the new machine at the end of the
> second period? His old machine, fully depreciated, is
> still functioning

If you want, you can imagine that the machine can funtion
yet, BUT NOT with the same standard (pieces/hour produced).
There is a "natural" ageing which is inavoidable. So, if
the capitalist continues to use it, capitalist B would be
more productive. Capitalist A must, then, replace his

> 2. Given that a new machine comes into play and capitalist
> B can no longer [fully] 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.

Right. Bankers are anxious and capitalist B is even more

> 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.

Right. That is the case. Of course "depreciated" machines
for USA can be used in countries where the competition is
weaker. For instance, in my country --Costa Rica-- an
important proportion of the machines used by industry are
second-hand pieces bought in USA, even in junk-yards!!
But this is not the example. For USA the machine is worn
out and capitalist A must replace it at the end of 1993.
When he bought the new machine, he finds that it is 50%
cheaper and then borrow a credit for only 500f the
precedent. His "amount for depreciation" at the end of 1994
will be only one half of the precedent year, let us say
$500, while this year capitalist B must still pay to the
bank $1000.

> Hence, again, Im not sure why A gave up his first
> machine to purchase the other.

Hope now it is clear.

> Somewhere, Itoh points out that the use fixed capital,
> fully depreciated, can be used to produce extremely
> high profits.

That could be the case of Costa Rican capitalists because
they, using "scrap" bought in a USA junk-yard (probably by
weight), can produce in Costa Rica. But this wouldnt be the
example, simply because the machine has to meet a technical
standard. If not, capitalist B becomes more productive.

Alejandro Ramos M.