[OPE-L:5116] Re: constant capital at current costs

Michael Perelman (michael@ecst.csuchico.edu)
Sun, 25 May 1997 16:44:54 -0700 (PDT)

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I want to thank Duncan for replying to my note:

Duncan K. Foley wrote:
> 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.

Yes, this was the point that I was trying to make. I suspect that these
capital losses were a key part of Marx's falling rate of profit. A
couple of decades later, after the U.S. Civil War, this realization
became commonplace -- so much so that the American Economic Association
was founded in large part to oppose the Laissez Faire policies that were
leading to the sort of falling rate of profit that I described as
bizarre above. To my knowledge, Marx was the first to put his finger on
this phenomenon, other than Charles Babbage.

Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 916-898-5321
E-Mail michael@ecst.csuchico.edu