[OPE-L:4121] Depreciation SOS

john erns (ernst@pipeline.com)
Fri, 31 Jan 1997 12:14:23 -0800 (PST)

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Continuing the dialog with Alejandro, hopefully
with a "better" understanding.


> 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
"overlapped". (Is this English?)

So the patterns are overlapping.

> 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.

Ok. It might be a good idea to spell this out a bit. But
I do understand what you are saying.


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, I'm not sure why A gave up his first
> machine to purchase the other.


Hope now it is clear.


Again, I'm now clear about the overlap. But am unclear about
why A has not enough funds to repay the banker. Perhaps we
can borrow something from Andrew's falling IRR in OPE-L 4096.


> 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 wouldn't be the
example, simply because the machine has to meet a technical
standard. If not, capitalist B becomes more productive.

You raise an interesting point by "scrap." When does the
machine truly become "scrap." For me, this occurs when
the amount to be invested in the old process will bring
a lower rate of profit than that same amount would fetch
as an investment in a new machine. Here, of course, we
would have to consider those "fix up" costs you mention
as well as any unrecovered depreciation in the old
old machine.