[OPE-L:4332] Problems in Vol. III

john erns (ernst@pipeline.com)
Mon, 10 Mar 1997 10:28:55 -0800 (PST)

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I am not sure we are communicating. Let me review
some of what we've said so far and add a comment
or two.

John wrote:

Let's me pose a question that, hopefully,
can help me gain some clarity. Let's assume one capital that is
composed of a stock of circulating capital of $1000 that produces
an annual profit of $100. The capital turnsover once a year.
The rate of profit would be 10%. Let's also assume another
capital of $2000 of which $1000 represents investment in a machine
that will last 10 years and the other $1000 an investment in
a stock of of circulating capital. It produces an profit of
$200 in the machine's first year of use. In that year, it would
seem that the two rates of profit are the same. Assuming
capitalists wish to maximize their returns, which capitalist would
you want to be?

Paul responded:

>From the standpoint of the rate of profit the situation
of the two capitalists is the same. From the standpoint
of risk, the capitalists with his money in circulating
capital is in a safer position, since it can be moved
more rapidly into a different line of activity.

John comments:

Granted the capitalist with only circulating capital has
"the safer position." Unfortunately, I failed to be
explicit about my assumptions concerning the capitalist
with the less safe position. As he collects his $200
in profit for the first year of his machines existence,
he also receives some monies for depreciation of the
machine. Thus, assuming price stability, the first
capitalist can invest the $1000 again and get a profit of
$100. Given straight line depreciation, the second
capitalist need only invest and/or tie up $1900 to get
his profit of $200. His rate of return seems to be
increasing as he withdraws funds from this process via
depreciation. The rates of return which, at first, seemed
the same, diverge over time as the capitalist with the
machine withdraws funds collected as depreciation. Risk
aside, of the two this capitalist seems to be in the
better position. Agreed?

If so, how we compute the rate of profit becomes the problem.