[OPE-L:4968] Re: RRI and the Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Sun, 11 May 1997 00:09:15 -0700 (PDT)

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In reply to John's OPE-L:4964:

>My only fear here is that we will lose sight of Marx's
>concept of "moral depreciation." But given that none of
>us has successively included any charge for moral
>depreciation within the overall depreciation charge I
>can hardly dismiss the proposal.

Maybe I'm missing the point, but I thought "moral depreciation" was simply
acknowledging the possibility that the price of commodities would fall or
wages would rise to the point where a machine would yield a negative profit
and would be scrapped even before its physically usefulness was exhausted.
Real capitalists operate with considerable uncertainty about the physical
lifetimes of machines, as well as considerable uncertainty about their
economic lifetimes in this sense. In both cases they need to make a kind of
practical estimate of the decline in the value of the machine, which we
call "depreciation". I don't think this point can be lost sight of in any
model that systematically allows for price and wage changes over time.


>I had suggested that to arrive at a falling rate of profit:
>>1. We could use the idea that constant capital is valued with
>> historic values (TSS).
>I find Fred Moseley's case that Marx revalued the stocks of assets held in
>production to reproduction cost convincing, and that rules out this as a
>general strategy. (snip and restored above and below)
>I find Fred's efforts less than convincing primarily for two reasons:
>a. I have no idea how Fred incorporates the idea of "moral
>depreciation" into the revaluation process. Moral depreciation
>seems but an afterthought to the entire accumulation process.
>(More on this later as I think using the RRI we can finally
>fully integrate the concept of moral depreciation into the
>"choice of technique problem" as well as into the accumulation
>process itself.)

I'm puzzled by this. Presumably the revaluation of stocks of existing
machines in the light of their value after technical change has changed
prices is moral depreciation. How is this different from the revaluation of
stocks of raw material inputs (say raw cotton) in response to changes in
cotton prices? Real economic accounts deal with these gains and losses all
the time--at the level of the economy as a whole in the form of the
"inventory valuation adjustment" and the "capital consumption adjustment".
I don't see how Marx's account is at all inconsistent with these modern
accounting techniques, which have developed in response to the constant
flux of prices in capitalist reality.

>b. Most, if not all, of the evidence Fred presents are passages
>from Marx in which we are told that the value of some quantity
>of constant capital is determined by the amount of labor
>time it takes to reproduce that constant capital. The
>language is rather plain and the concept seemingly simple. At
>its best, TSS calls this apparent simplicity into question. In
>my view, what is too often forgotten is that the determination
>of value in this fashion has to be shown, not merely asserted.
>That is, just as one has to show how the social value of a
>commodity falls to its individual value, one has to show
>how the value of constant capital falls to the value determined
>by the time it takes for its reproduction. Or, put still
>another way, Fred's quotes are often read as though there
>is an immediate revaluation of constant capital from period
>to period.

But I think that's exactly what capitalist accountants do. If the price of
steel is raised, and they have a bunch of steel in their warehouse, they
write up the value of their inventory of steel to reflect the change in
prices. When they calculate the cost of the goods produced with that steel,
they value the steel at the current price, not at its historical cost. The
revaluation is kept in a separate account, and is charged or credited to
the stockholders separately from profits on production.

> Two questions remained unanswered:
> i.) Why and how does the value of, say, a machine produced for
> sale fall from its social value to its individual value?

I'm not sure I understand this question. A machine produced for sale is
part of the inventory of goods awaiting sale. Typically capitalist
accountants value inventories of goods awaiting sale at cost, not at their
sales price, and credit the profit only when the good is actually sold.
(This is inconsistent with Marx's insistence that the whole value added is
contained in the good once it has been produced, but the correction between
the two accounting conventions is not a major problem. When the good is
sold it's presumably sold at its "social value" (i.e., market price), and
then the capitalist discovers how much surplus value he's realized on it.

> ii.) Why and how does the value of constant capital fall?

I'm not sure I understand this one, either. Do you mean, how does
competition from lower cost producers force down the price of the
commodities constituting constant capital? or do you mean, how and when we
do capitalists account for the change in their accounts? If the latter,
I've tried to explain the process as I understand it above.


>It seems to me that you and Fred look for a falling rate of
>profit after the revaluation of constant capital takes place
>since both of you revalue constant capital after each and
>every period of production. Why? I have little doubt that
>as capitalism develops from the period of manufacture to that
>of large-scale or modern industry you may well find a
>secular fall in the rate of profit. But with the domination of
>living labor by dead labor in the process of production, why
>would we not expect the replacement of machines by machines to
>prevail in the accumulation process? Or, in other words, why
>would we not expect capital saving albeit with some labor saving
>techniques to be the typical form of technical change?

There are important epochs of capitalist accumulation where capital-saving
technical change appears to be the main process. For example, during the
period 1929-1949 (Dumenil and Levy's "Great Leap Forward"), technical
change in the U.S. was capital-saving. Maybe two points are getting
confused here: I tend to read Marx's discussion of the falling rate of
profit (and of relative surplus value) as sketching a stylized picture of
"Marx-biased", that is, capital-using and labor-saving technical change.
This seems to have been the pattern of industrial capitalism up to the
First World War, and it is no mean achievement of Marx to have recognized
its importance and explained its significance formally. I don't argue that
this pattern is universal (and I don't think Marx did either, despite the
rhetoric about "inevitability" in chapter 10 of Volume III of _Capital_,
which I take in a Hegelian rather than positivist sense), but it does seem
to be frequent. When it is interrupted, as in the "Great Leap Forward"
period of Dumenil and Levy, it seems to me that something quite significant
is happening in the structure of capital accumulation, and that we ought to
study that carefully to understand it.


>I had written:
>>3. Since our nominal topic is "RRI and the Rate of Profit", it
>> seems appropriate that we acknowledge that an increasing
>> RRI, the basis on which capitalists' investment decisions are
>> made, is completely compatible with a falling rate of profit.

If what you mean here is that when the RRI is rising due to technical
progress (say Hicks-neutral, capital-saving and labor-saving technical
progress), the owners of existing capital are suffering losses due to the
fall in the value of their holdings of existing machines, and that they
have to absorb these losses from the surplus value they appropriate in
production, I don't have any problem with it. Again, I think it would help
if we distinguished between the rate of profit on production and the gains
or losses on stocks of assets due to price changes.


>Note that the newest investments even with increasing
>RRI's will generally have lower rates of profit than those not
>yet fully depreciated. As depreciation of a particular capital takes
>place, its rate of profit increases. Old capitals could function
>beyond the time they are fully depreciatied as long as the profit
>rate exceeds the RRI's available with a new investments. Given that
>the older capital are retired from production due to obsolesence,
>they would be displaced by capital with RRI's higher than their
>profit rates while the newer capitals would have lower profit rates.
>The falling rate of profit marches on given there is enough capital
>to make these type of investments.

I'm not sure all of what you say here is compatible with actual accounting
practice. As I said above, the scrapping decision depends on whether the
machine still returns a positive yield given the wage bill necessary to
operate it (including servicing, etc.)


>I accept that Marx used this (to me rather metaphorical) concept of
>cooperation of machines.
>John: I'd like you to see a bit more than a mere metaphor here.
>Indeed, I would venture to say that if we were to write down all
>the ways the productivity of living labor can be increased that
>Marx describes in his discussion of "co-operation", all apply to
>machinery as well (save the bit about increasing productivity
>via increasing the "animal spirits" of those working cooperatively.

I'll think about this some more.



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