[OPE-L:4969] Re: RRi and The Rate of Profit

john ernst (ernst@pipeline.com)
Sun, 11 May 1997 16:13:53 -0700 (PDT)

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RE: OPE-L 4968


Let me summarize some of the areas under discussion.

1. We both agree that new techniques introduced by
capitalists can be capital-saving or capital-using.
We differ on which dominates in given periods of
capitalism. Even though we have given it little
attention, I assume both of us would admit that a
new technique may be neither.

2. You proposed that we take into account losses due
to the devaluation of constant capital as we examine
the movement of the rate of profit. You stated:

"In my accompanying post, I propose distinguishing between
profits on production per se and gains and losses on stocks
of assets held in production due to price changes."
(OPE-L 4959)

3. My position is that your proposal would seemingly do away
with Marx's notion of "moral depreciation." In a somewhat
unclear way, I proposed to incorporate that concept within
the Marxian framework by using the RRI.


In OPE-L 4968, you expressed unclarity about much of what
I wrote in OPE-L 4964. I think this may be due to my
attempt to do three things at once.

(1) make use of the RRI,
(2) account for moral depreciation.
(3) show how Marx's notion of a falling rate of profit becomes
less problematic if the rate profit is not used as the main
criterion for investment decisions in models that attempt to
deal with fixed capital.

Let me see if I can be a bit more clear.

(1) The RRI.

For Marx, this concept did not exist. Indeed, only after his death did
accountants begin using it. As we know, Marx simply calculated the rate
of profit with the formula, s/(C+v). Given that capitalists do use
the RRI in making investment decisions, sole use of the rate of profit
in examining the capitalist process of accumulation is problematic even
in the absence of technical change. That is, Marx's overall rate
of profit would vary as the stratification of fixed capital changes
since the rate of profit on any given capital would increase as capital
depreciates. Thus, the rate of profit would fall even with a constant
RRI in the case where the average age of the fixed capital is decreasing
and increase when the average age is increasing. Again, I am assuming
neither changes in technique nor in prices and merely pointing to
possible movements in Marx's rate of profit.

(2) Moral Depreciation.

On this list in discussions primarily with Andrew, I tried to incorporate
the idea of moral depreciation within the Marxian framework using the
rate of profit. Andrew showed that this was generally wrong.
Yet, within CAPITAL it is clear Marx recognized that capitalists do
consider moral depreciation as they adopt new techniques. Further,
Marx saw that a portion of their returns on investment represented not
only depreciation due to the use of fixed capital but also due to its
moral depreciation. By using the RRI, we can incorporate changes in
asset valuation, generally moral depreciation, within our view of the
accumulation process. What does this mean?

I am willing to assume that in making investments capitalists and their
accountants know that, say, machinery will get cheaper in the future
and that the unit price of the commodity they produce will fall due
to new and better machinery. Using the RRI, this means that much of
revaluation of constant capital need not be made after each change of
technique and/or decrease in prices.(Note 1) The revaluation has
already been taken into account. Moral depreciation is built into
capitalist accounting.

Should capitalists not consider possible decreases or increases in
the prices of their inputs and outputs, they would, of course, compute
RRI's much higher than the ones they actually experience since they
would be assuming the returns each year would be higher and that the
machines would last longer. Losses in asset values would have to
be seen as deductions from profits and the continual revaluation
of constant capital would appear justified. The RRI on a given
capital would be continually adjusted downward. Yet, Marx himself
recognized that this does not happen by including "moral depreciation"
within the concept of depreciation itself.

(3) RRI and the Rate of Profit

As capitalists compute the RRI while anticipating technical change and
falling prices of inputs and outputs, they may still invest in
such a way that the rate of profit falls. Here, of course, I assume
that investments in new techniques will only occur if the RRI available
to capitalists is increasing or stationary and that capitalist base
their investment decisions on the RRI and not the rate of profit.
Investments, then, might be made such that the stratification of
capital changes. If the average age of the fixed capital decreases
with increasing investment, the Marxian rate of profit will have a
tendency to fall. (See Note 2.) If investment slackens, the
average age of constant capital increases and the rate of profit
would have a tendency to increase.

To be sure, "irrational exuberance" that leads to excessive
investment could mean that the RRI itself may fall and that
the anticipated RRI falls short of the actual. Here, we
would perhaps see is a falling rate of profit and a crisis
situation with the devaluation of constant capital.



1. Here, Duncan, I think I am following your idea that "moral
depreciation" means that capitalists guess that their new
machines have economic lifetimes less than their physical
lifetimes. I may be going a bit beyond your conception in
assuming that capitalists also assume that the prices of
the commodities they produce will fall as well.

2. Perhaps we now more clearly see how the rate of falls
as workers become "too productive." It also seems that while
"the law of the falling rate of profit" may well have been
"the most important law of political economy", it may not be
quite as important in its critique nor is it a substitute for
"the economic law of motion of modern society."