[OPE-L:4825] RRI and the Rate of Profit

john ernst (ernst@pipeline.com)
Sun, 20 Apr 1997 21:44:03 -0700 (PDT)

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A few comments on Duncan's OPE-L 4823.

Duncan states:

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.

John comments:

I agree that this is true for the individual capitalist. But the "r" method
is generally used for all capitals in a given period. That is, we look
at the average "r" for a given year. Even abstracting from technical change,
changes in this annually computed "r" will occur as the stratification of
fixed capital changes. Or, as the average age of the fixed capital decreases,
this annual "r" would fall as the RRI remains constant and as it increases
the annual "r" would increase. I hope this is clear. Since in the
latter part of your post, you expressed possible disagreement on this point,
let me see if I can be a bit clearer.

If I invest in a machine and expect a certain return each year, which includes
both profit and depreciation, then as I collect the depreciation funds year
after year my "r" for the latter years increases. Why? I have less invested.

Duncan continues:

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.

John comments:

Given that what you mean by the "internal rate of return" is the RRI, then
I agree. We should note that accountants themselves had no idea of how to
look at the RRI until after Marx's death.

Citing me, Duncan continues:

>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,

Duncan comments:

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.

John adds:

Here, I do not think we need revisit the issue of what living labor adds
versus the "total value product." Indeed, I was trying to raise the
issue of how one can transform values into prices of production without
prior knowledge of prices of production. That is, how do we know how
long fixed capital will last on average if all we know are the embodied
labor values. Clearly, this is not simply technical data. Rather
fixed capital is put out of its misery by its own lack of profitability.
But if we compute the "RRI" (or for that matter "r") based upon
embodied labor values, we generally get a different rate of profit than
that based upon prices of production. The lifetime of fixed capital
thus cannot be known without knowing prices of production. Hence,
the idea that both "c" and "v" are known PoP's ex ante as they are
in Marx's transformation procedure is not a mistake on his part but
rather a recognition that this was the only way to proceed with
the analysis.

John concludes:

Given the differences between "r" and "RRI", it is hardly surprising
that Dumenil and Levy find a lag between the two over time. Why both
are falling, albeit lagged, requires some explanation. Here again, I
would find things much more convincing if the analysis itself contained
examples of how individual capitalists were actually investing. As it
stands, the reader is left inventing scenarios of such investments.