[OPE-L:5134] valuation of constant capital

fred moseley (fmoseley@laneta.apc.org)
Tue, 27 May 1997 22:15:46 -0700 (PDT)

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I finally have a little time to respond to Michael P's question of two
weeks ago. Michael asked:

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.

My answer:

It depends on exactly what you mean by "profitable". If you mean an
accounting rate of profit that subtracts the capital loss from the profit,
then the firm was not profitable (or not very profitable, depending on the
relative magnitudes of the capital loss and the pre-loss profit).

However, if the rate of profit is defined as I think Marx defined it, as
the total surplus-value generated in production in relation to the current
cost of the capital invested, then this rate of profit will be greater than
the above accounting rate of proft. This example is indeed "bizarre". The
devaluation of constant capital resulting from technical change is usually
much more gradual and without such huge capital losses.

Michael added in a later response to Duncan:

I suspect that these capital losses were a key part of Marx's falling rate
of profit.

I disagree with this. I think that for Marx the (current cost) rate of
profit falls because of an increase in the composition of capital, i.e.
because less living labor is employed in production, which means that less
surplus-value is produced, in relation to the total capital invested,
valued at current costs. NOT because technical change results in a
devaluation of capital and hence a loss of capital. Otherwise, the
"cheapening of the elements of constant capital" would not be a
COUNTERTENDENCY to the decline of the rate of profit, but would itself be
the CAUSE of this decline.

Something like what Michael describes may have happened in a few industries
in late 19th century capitalism, but I do not think that this is what
Marx's theory of the falling rate of profit was about. If it were, then
Marx's theory would no longer be valid, because in late 20th century
capitalism, with a declining value of money and inflation, we have "capital
gains" rather than "capital losses" . If capital losses are subtracted
from profit, then capital gains should be added to profit. On the other
hand, Marx's theory of the decline of the current cost rate of profit is
still as valid today as it was in the late 19th century.

Michael, have I understood you correctly?
Have I clarified my interpretation?
Further thoughts?