[OPE-L:4404] Depreciation and the Rate of Profit

John Erns (ernst@pipeline.com)
Mon, 17 Mar 1997 01:11:04 -0800 (PST)

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Some comments on Duncan's 4398.

Duncan writes:

The way I think about the problem of the rate of profit is basically the
same as Allin's. Ex post, after all the costs connected with an investment
have been paid and all the revenues collected (perhaps by selling the
"scrap" to Costa Rican capitalists or whatever), you can calculate an
internal rate of return that equates the present discounted value of the
net revenues to the present discounted value of the costs of the
investment, which is an unambiguous measure of the profitability of the
investment. Notice that because this measure is ex post, it does not
require any separate accounting for "depreciation". Furthermore, you can
retrospectively give an unambiguous value to the investment at any
intermediate point in time by using this ex post rate of return to discount
the remaining costs and revenues. This ex post IRR will automatically
account for all types of gains and losses during the period of the
investment due to whatever causes: natural catastrophes like fire and
flood, or economic catastrophes like price changes due to technical change
or shifts in monopoly power.

John comments:

Granted that matters are unambiguous in retrospect or ex post, still
would not the capitalist attempt to predict the IRR ex ante? More than
a few of the problems with which we have been dealing assume the
capitalists anticipate, say, greater profitability as they invest. The
problem is what, for them, is greater profitability. Clearly, ex post
they would like to see an increase in the IRR. Thus, it would seem
"natural" for them to make some estimate of the IRR prior to investing.
Certainly, they would be forced to allow for prices changes due to
technical change, the likelihood of natural disasters, monopoly
pricing, etc. Yet, did not Marx himself point out that capitalists do
attempt to take some of this into account as he introduced the idea
of "moral depreciation"?

Duncan continues:

The concept of "depreciation" is an _accounting_ concept that arises in an
attempt to estimate the profitability of investments that haven't yet run
their course. Since "depreciation" is a concept involving time, it arises
whatever price system one is using to value inputs and outputs in
production, embodied labor coefficients, or prices of production, or market
prices. As such, it seems to me that the same problems arise whether we are
approaching the accounting problem from the point of view of Marxist theory
or neoclassical theory or plain old accounting. The difficulty, from the
capitalist's point of view, is that he or she doesn't know the true
profitability of the investment (in any price system, or using any
particular numeraire), because it depends in part on flows of revenues and
costs in the unknown future. The accountant's practical and necessarily
imperfect method for addressing this problem is to estimate the residual
value of the investment by some kind of rule-of-thumb or formula, such as
the straight-line average over an estimated lifetime. Given this inevitably
arbitrary estimate, an equally arbitrary estimate of the rate of profit can
be made. This whole issue becomes even more tangled in countries like the
U.S. where "profits" are taxed, so that the method of "depreciation"
becomes a matter of considerable significance to after-tax profits.

John comments:

Tax codes aside, I think we agree that the accountant could develop a
perfectly "correct" depreciation schedule ex post for any investment for
any assumed price system. Ex ante, using some depreciation schedule
developed by the account, capitalists can estimate an IRR.

Duncan continues:


It's doubtful to me that the long-run reproductive health of the
capitalist system has much to do with the inherent ambiguity of any
particular accounting system of depreciation. Thus I tend to question
whether issues like the tendency of the rate of profit to fall turn
fundamentally on depreciation issues. I agree with John that it is
desirable to define what we mean by the rate of profit before we discuss
its tendency to rise or fall. But on the whole the Marxist literature does
define this pretty clearly as the ratio of the current flow of gross
profits to the reproduction cost of the capital stock. This is not the same
thing as the anticipated rate of profit, which is important to remember,
but most of the literature on the rate of profit is trying merely to get
the ex post historical record straight, on the assumption that this measure
of the rate of profit is not very far off the ex post internal rate of
return. Dumenil and Levy, for example, take the trouble to calculate the
IRR by keeping track of the "vintages" (which John calls "stratification")
of the capital stock, and find that its deviation from the simple ratio of
gross profit to reproduction cost of the capital stock is relatively small.

John comments:

I agree that the particular accounting system is not going to
change matters relative to the "long-run reproductive health of the
capitalist system." Concerning the falling rate of profit, I agree
that the literature is clear on the definition of the rate of profit.
But it seems to me it's one thing "to get the ex post historical
record straight" and another to show in theory how a falling rate
of profit may occur or to show how values are transformed into prices
of production. To be sure, the projects are not completely distinct.
Indeed, the task would be to show how capitalists investing in
techniques that they assume will fetch ever growing IRR's somehow
end up with falls in both the IRR and what we have called the rate
of profit. We may also be able to show the how's and why's of that
10 year lag that Dumenil and Levy uncover between the IRR and the
rate of profit.