[OPE-L:4988] Re: RRi and The Rate of Profit

Chai-on Lee (conlee@chonnam.chonnam.ac.kr)
Tue, 13 May 1997 07:13:26 -0700 (PDT)

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In addition to the other post of mine on John and Duncan.

Devaluation = When the market price of a machine currently being used is
produced with less labor and thus having less value, the capital value of
the machine currently being used is devalued proportionately to it. This is
different from the capital loss I discussed in the other post.

Moral depreciation = when a new invention in the present industry has
occurred requiring a new machine quite different from the current one, the
machine that has been used in the industry in question may become less
efficient or obsolete. The capital value of the machine must change
drastically irrespectively of its physical depreciation costs. This, too is
not premised on a pre-given interest rate.

So, in conclusion, as far as the devaluation and the mral depreciation are
concerned, the capital gains and losses are irrelevant.


At 04:13 97-05-11 -0700, you wrote:
>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."