[OPE-L:5112] Re: RRi and The Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Sun, 25 May 1997 15:08:18 -0700 (PDT)

[ show plain text ]

In reply to John's OPE-L 4969, on RRI and the rate of profit.

>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.

Certainly nothing logically precludes any pattern of technical change, and
in the Penn World Tables data, for example, you find all four possible

>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.

I don't want to do away with "moral depreciation", which I take to be the
idea that capitalists take account of the possibility of technical changes
which will alter the valuation of their stocks of assets held for
production. (Usually this type of technical change will lower the value of
existing stocks, but it might be otherwise.) What I want to do is to
separate out two components of the individual capitalist's profit: the
profit on production per se and the profits or losses on stocks of assets
held as part of the production process.

I think we agree that the individual capitalist cares about the sum of
these two components: he calculates, ex post at least, the total change in
his capital, that is the sum of profits on production and gains or losses
on stocks of assets, plus whatever he has consumed as his personal profit.
Ex ante, the capitalist presumably tries to anticipate both components of
profitability in deciding whether or not to undertake a given investment
project. Furthermore, it is logically possible that a capitalist might make
a profit on production per se, but an even larger loss on his asset stocks
through the period of production, and thus wind up with a negative total
profit. Am I correct in assuming that what you think of "moral
depreciation" as the anticipation of these possible losses on assets
through the period of production?

In macroeconomic data, I think the total profit, including the losses (or
gains) on stocks of assets, largely follows the profit on production per
se. Dumenil and Levy's attempts to calculate the RRI and the profit rate,
for example, tend to show that the RRI follows the profit rate (on
production) with a lag.

I also read Marx's discussion of the falling rate of profit as focused on
the profitability of production per se. I think Marx was quite well aware
of the devaluation of capital assets caused by technical change, as well,
but that this was not the issue he had in mind in discussing the falling
rate of profit. I think this may be a point of disagreement, and as such
worth pursuing further.

>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).

Well, I'm not comfortable with this formulation, since I read Volume II of
_Capital_ as largely concerned with the stock-flow issue. s/(c+v) is,
properly speaking, the markup on costs. The gross profit rate is s/K, where
K is the stock of capital tied up in production, and is equal to
(s/(c+v))((c+v)/K), where (c+v)/K is the average rate of turnover of
capital. As I read it, these formulas concern the profit on production per
se. To get the individual capitalist's "bottom line", we would have to add
or deduct from s here the gains of losses on stocks of assets held during
the production period. When Marx writes the rate of profit as s/(c+v), he
is at pains to make the explicit assumption that the rate of turnover is 1,
which he acknowledges to be an unrealistic assumption adopted for the sake
of pedagogical simplicity.

>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.

In my view this has to do with the calculation of K, the capital tied up in
production. I've always read Marx as calculating K as the average capital
tied up over the production process, and thus not changing as depreciation
changes, but I might be missing something there.

>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.

I think we need to be very careful with this argument. The individual
capitalist does not consider the impact of his innovation on the value of
other capitalists' stocks of assets, and there is no reason in a
competitive capitalist system why the individual capitalist should. It is
true, however, that capitalists in judging investment projects consider the
capital losses they may sustain through other capitalists' innovations over
the life of the investment. For example, Phillips would not release CD
technology until it could make sure that it would not suffer these kinds of
losses due to the introduction of other technologies or to a rapid fall in
the sales price of CDs over the life of the initial investment.

>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.

At this point I think you're shifting from accounting to pricing theory.
Competitive capitalists in a system with a given average rate of profit
will not compete the price of a product below the point where the
investment to produce it yields the average rate of profit including the
losses on stocks of capital assets due to anticipated price changes. I
would rewrite your last sentence to say "moral depreciation should be built
into competitive capitalist pricing".

>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.

I don't think we have any disagreement on this point.

>(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.

Yes, because of competition, but also, as we know from Okishio, because of
the tendency for the wage share rather than the level of real wages to
remain constant.

>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.

I think they try to predict both.

>2. Perhaps we now more clearly see how the rate of (profit) 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."

I think Marx uses the phrase "the most important law of political economy"
to mean the most important law discovered by Smith and Ricardo. I think he
views it as important because he sees it as a reflection of the
technologically revolutionary character of the capitalist mode of
production in contrast to other technologically stagnant modes of
production. In this sense the "falling rate of profit" for Marx is the
other side of the coin of "relative surplus value".



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