[OPE-L:4379] Depreciation & Profit Rates

john erns (ernst@pipeline.com)
Thu, 13 Mar 1997 11:56:16 -0800 (PST)

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The "wall" Allin and I hit in solving the problem I posed
is becoming familiar. I suspect that beneath the problem
that confronted us lurk some very fundamental difficulties.

1. If we, following Marx in CAPITAL, use a "straight line"
method of depreciation, we face the following problems:

a. "What is the rate of profit on a given investment?"
becomes a serious question with no definite answer. If
we look at the rate of profit for a given period of time,
say a year, we get one answer. If, on the other hand, we
look at the total profits and total returns over the life
of an investment, we get a different answer. Which is
"correct"? Clearly, to get at the "choice of technique"
problem with fixed capital, we would have to come to
grips with this.

b. Further, how does one transform values into prices of
production given that there would generally be two rates
of profit for each sector prior to and after
transforming values into prices of production? To make
matters even more complicated, the idea that as the
transformation of values into prices of production takes
place the rate of profit is equalized becomes problematic.
That is, it is fairly clear that if one equalizes one of
the rates of profit, the other would generally not be

c. If we leave the realm of value and focus on prices, we
still find the same problem both in theory and in empirical
studies of the rate of profit. That is, capitalists may
invest heavily in fixed capital in a given year and as we
consider that year's figures alone in computing the rate
of profit, it may appear less than that of a prior year
where not as much investment in fixed capital occurred.
Yet these investments may bring about much higher returns
as they age. Thus, the stratification of fixed capital
according to its projected and actual lifetimes should be
considered in theoretical and empirical studies of the
rate of profit. If this stratification itself is changing
as capital accumulates, one rate of profit could be rising
as the other is falling.

2. If one abandons the idea of straight line depreciation
and/or most forms of depreciation proposed by accountants
and often required by tax bureaus, and amortizes fixed
capital, it's unclear how the valuations in terms of
values relate to those in terms of prices.

Awaiting definitive solutions,