[OPE-L:4930] Re: The High Cost of Prices

john ernst (ernst@pipeline.com)
Tue, 6 May 1997 02:07:32 -0700 (PDT)

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Thanks for looking this thing over. It's always good to get a
reaction from someone you know comes from a different point
of view.

You begin:

John says:

>In most treatments of the transformation problem the
>starting point is either a set of values or a set
>of physical quantities. The values most often used
>are determined by the embodied labor times. To derive
>prices of production from the given, several additional
>assumptions are made. Here let's focus on one, not often
>acknowledged -- the economic lifetime of fixed capital.
>That is, no matter what we use to perform the
>transformation -- values or physical quantities -- we
>are forced to assume that fixed capital has some given
>lifetime. Indeed, this is the case even when we include
>only the depreciated portion of fixed capital as the
>transformation is carried out.

This characterization would be incorrect. Most of the transformation problem
literature assumes no fixed capital. All constant capitals are taken as
circulating capital. This is, of course, a simplifying assumption. But then,
when simple problems are hard enough, why complicate it even further.

John responds:

Agreed, most treatments of fixed capital do not explicitly treat
fixed capital. However, in Marx's CAPITAL we find that part of
the constant capital transformed stems from the depreciation of
fixed capital. In that sense, as I pointed out in the above,
fixed capital and its economic lifetime are part of the transformation
problem. Here, it seems that something other than simplification is
going on. That is, if we work out and agree upon a procedure for
transforming values to prices or for deriving prices from physical
quantities without any depreciation and find that such a procedure
is useless when we consider fixed capital, what is accomplished?

Quoting me Ajit continues:

>On what basis do we impute economic lifetimes to
>the quantities of fixed capital involved? Further,
>do we need to know the prices of production themselves
>in order to determine the prices of production? This,
>of course, would mean that deriving prices of production
>from values based upon embodied labor times or from a
>given set of use values is impossible.

Ajit commented:

I simply do not understand this. But in general, I think when firms buy new
machines they have a good sense of its economic life time. Even when we buy
durable goods such as refrigerators or cars etc. we have a fairly good sense
of its economic life time.

John states:

>From where does this good sense come? That's both the problem and the
question. IMHO, it is based on rational calculations concerning
profitability. That is, fixed capital is put out of its misery
when it becomes more profitable to abandon it because funds can be
invested in a new technique that will yield a greater return.
Indeed, even completely depreciated capital will be used if the
funds tied up in circulating capital yield a higher return
than they would with a new technique. The point here is that to
determine how long fixed capital will last one needs to estimate
profitability. But in so doing, we must know not only the rates
of return but the prices used in computing those rates. Yet it
is the profit rate and the rate of return that we are deriving.
The circle is vicious.

Again, Ajit begins by citing me:

>The simplest way to resolve this dilemma is to assert that
>the economic lifetime of fixed capital is given by its
>physical properties. In other words, fixed capital is
>fully depreciated only when it is completely useless.
>That fixed capital can become obsolete because of the
>introduction of better techniques must be ignored.
>Marx's concept of moral depreciation must be set aside
>as the derivation of prices of production takes priority.
>Do we pay too high a price for prices?

He continues:

Since you have so much problem with fixed capital, why don't you look into
the joint production method, John. The joint production approach should, in
my opinion, take care of most of your major problems with fixed capital. I
had sent you some references privately sometime ago. I still think Schefold
is your man.

John responds:

Yes, you did give me that reference and thanks to Alan Freeman I got
my hands on it. I do not see how treating fixed capital as both an
input and an output will solve the problem I pose. That is, as we
set up a model which contains machines of various ages for how many
periods should we extend the model? When will the machine cease to
be used? Does the capitalist make his calculations based on a rate
of profit or on a rate of return on investment? If the latter, how
can a joint production model be used? Those were some of my questions
as I read the piece and they remain questions.

BTW, Schefold's treatment of Marx's regression to Ricardo's notion of
diminishing returns was both interesting (worth discussing) and, IMHO,
wrong. A belated thanks for the reference nevertheless.