[OPE-L:4823] Re: RRI and The Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Sat, 19 Apr 1997 21:05:14 -0700 (PDT)

[ show plain text ]

In reply to John's OPE-L:4501:

>I am beginning to understand some of Duncan's
>distinctions between ex post and ex ante concerning
>the rate of profit (r) and the rate of return on
>investment (RRI). Still given that the two methods
>of computing "returns" generally differ, the meaning of
>and significance of the rate of profit (r) is unclear,
>given the presence of fixed capital. Yet, when it comes
>to the frequently discussed issues of Marx's
>CAPITAL, we find debate centered on the rate of
>profit. That Marx used "r" rather than "RRI" is beyond
>dispute. Whether or not Marx knew any method of computing
>the RRI should at least be a serious question. Further, if
>we use the RRI rather than r in carrying out the transformation
>of values into prices of production and in examining matters
>concerning the falling rate of profit, other issues arise.

The "r" method will coincide with the RRI if the depreciation schedule used
by the capitalist accountant turns out to be the true economic depreciation
ex post, which it usually isn't. I take Marx's very careful discussion of
the turnover of capital in the circuits of capital analysis of Volume II of
Capital to be a largely successful attempt to develop a conceptual
framework to grapple with these issues. Of course Marx didn't use the
concept of the internal rate of return, but he's closer to it than most
19th century economists.

>1. Transformation. To compute the RRI, one needs to know
>not only the living labor added in each period of production,
>but also the values and expected economic lifetimes of the
>of the various quantities of fixed capital. Here, we may
>well find that the expected economic lifetime of fixed capital
>computed using values will generally differ from that
>using prices of production. This would seem to justify using
>a transformation procedure that simply assumes that the inputs
>have "values" that are already transformed or, as Fred puts it,

Without getting into the question of what's "given", it seems to me that
the falling rate of profit refers to the actual accounts of real capitalist
firms operating on real markets. What is at issue is the profit rate (in
either the r or RRI sense) calculated on actually incurred money costs.
This is the respect in which I agree with the TSS position. The respect in
which I don't agree (or maybe don't agree, since I'm still not clear on how
TSS defines the monetary expression of labor time) is when TSS attempts to
define the monetary expression of labor time in terms of some concept of
"total value product", and when TSS fails to account separately for the
value actually produced by living labor and the changes in the values of
stocks (in whatever accounting system) due to technical change over time.

>2. FRP. Given that the RRI is constant with no technical change,
>it is clear that "r" will simply increase as fixed capital ages.
>Again, assuming RRI is constant, it is also clear that a great
>deal of investment in fixed capital will lower "r" as the average
>age of fixed capital decreases. In this context, it is not at
>all clear what a falling rate of profit means. Yet, if we are
>going to eventually link the turnover of fixed capital to the
>periodicity of crisis, then it seems clear that tracking the RRI
>will at least force us to give attention to the stratification of
>fixed capital and its changes within the cycle itself.

I'm not sure I agree with the first sentence. Dumenil and Levy calculated
the RRI for U.S. capital to compare it with their various measures of "r"
in their _Economics of the Profit Rate_, and found a close correlation with
a lag. In principle the "stratification" of fixed investment could lead to
waves in real output, but in fact these waves seem to be highly damped and
not much related to the main business cycle movements. Most evidence points
to circulating capital fluctuations as the main component of most business


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu