[OPE-L:5115] Re: constant capital at current costs

Duncan K. Foley (dkf2@columbia.edu)
Sun, 25 May 1997 15:08:47 -0700 (PDT)

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In reply to Michael P.'s OPE-L:5023

>Let me ask a simple question about valuing capital at current costs. I
>will first propose a rather bizarre situation. Suppose that a firm is
>in an industry with lightening speed technical change. It invests a
>huge amount in some capital good, which becomes obsolete in the course
>of a year. Next year, it finds itself in the same situation, investing
>in new equipment, which becomes obsolete. At the end of several such
>years, it is bankrupt.
>Could this firm have been profitable each year? If I understand Fred
>correctly, it could.

It could have in the sense of profit on production per se, but not in
"bottom line" sense, since the investment would have had an ex post
negative rate of return, taking into account the capital losses.


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