[OPE-L:4118] Re: Another Sheep?

john erns (ernst@pipeline.com)
Fri, 31 Jan 1997 02:14:44 -0800 (PST)

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Previous message: andrew kliman: "[OPE-L:4117] Re: Another Sheep"

Andrew, as I was writing this, you sent 4107. I glanced
that post and decided to go ahead with this since at the
end I suggest a way of bringing things into focus.

Here are more comments on Andrew's OPE-4096 as well as a few
thoughts here and there on depreciation and value. Again,
I must say he did much more with this than I ever imagined he
would.

1. Again, for the 1st machine, given the prices I asked that
he use, Andrew came up with the following table.

t used C L C+L
--- ------- --------- --------
1 683.01 316.99 1000
2 683.01 216.99 900
3 683.01 116.99 800
4 683.01 16.99 700

Curiously, Andrew assumes that the output prices I assumed were those
that would hold iff no new (cheaper or better) machine were introduced
within the lifetime of the machine. What I had in mind was that the
capitalist with this 1st machine had some idea that new machines would
could produce the same output more cheaply would be produced. To be
sure, this simply shows that Andrew is no mind reader. However, it
also reveals our differing approaches to depreciation. It is rather
basic. For me, the lifetime of a machine is limited not only
by its physical durability but also by its ability to produce profit.
Hence, had the no change in technique been expected in our example,
I would have extended the life of fixed capital beyond 4 periods.
Now there was nothing in the figures I gave that said to Andrew

But Andrew's chart does raise some questions. He's clear that the
technique is not changing from period to period. Yet, the value
added in each period seems to be. Andrew notes "The L figures
are not assumed; they are derived by subtraction. If C+L is
true, these must have been the Ls."

Before he considers the introduction of the newer machine at the
end of the 1st period, Andrew notes that he assumes "...for simplicity
only that the value transferred and recouped is not invested. The
IRR is 10%." Here I have a couple of questions:

a. Would reinvesting the value transferred or the depreciation fund
affect the IRR here?
b. Why are we talking about IRR and not the rate of profit?

2. Andrew then moves to a discussion of the new machine itself.
I had in mind a machine that was simply cheaper and was a bit
surprised that Andrew saw it as possibly a better machine as well
as a cheaper machine. Here Andrew is right. Indeed, only a
mind reader would know I was thinking of a cheaper machine. But
then he simple calls it cheaper. Again, he can't be wrong.
Perhaps, I should have heeded at least part Jerry's repeated
the living labor involved in these production processes. Since
I did not, Andrew is free to simplify matters by allowing the
machine simply to be cheaper.

3. With the cheaper machine in mind, Andrew introduces his
cases. In Case A, the new machine is one of zillions of
machines produced but the only that is, by assumption,
able to be sold at the cheaper price. Here, Andrew maintains
that its social value is the same as the more expensive
machine. To be honest, I had not even considered this.

In Case B, the new machine and cheaper machine dominates and
Andrew notes that "...the value of the original machine, determined
by the labor-time needed to RE-produce it, falls immediately to
2415.07 at the end of period 1." Hence, we see some loss of
value. By adjusting the "used c" as well as the output prices
in periods 2-4 of the original machines life we see

t used C L C+L
--- ------- --------- --------
1 683.01 316.99 1000
2 603.77 216.99 820.75
3 603.77 116.99 720.75
4 603.77 16.99 620.75

Here, I think I see some possible common ground with Andrew as he
tells us that the IRR is 6.67%. To compute this, he seems to be
using the original invested amount. But given I saw this by
looking at IRR and figuring backwards, I'll let him explain.
Here, perhaps we come full circle as I pose the following.

Suppose we had started with the same original investment and
assumed the capitalist foresaw the above chart. Andrew notes
that it shows that 237.74 was lost due to moral depreciation.
(sum of used c=2494.31; org. invest = 2732.05; diff=237.74)
Or, given that we seem to be using the original investment
to compute the IRR, can we not find a way to show that the
IRR of 6.670resupposes that all of the original investment
is recovered? Without that, studying the above chart would
make it seem that the sum of the used c = the amount invested.

John