[OPE-L:5162] Re: [JOHN] Re: RRI and The Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Mon, 2 Jun 1997 13:35:03 -0700 (PDT)

[ show plain text ]

Some comments on some of the points in John's OPE-L:5122:

>John responds:
>Given that you are clearly stating that asset revaluation has to be
>taken into account to figure what I'll call the overall rate of profit,
>I'd agree that you are not ignoring moral depreciation. What I
>question is how you want to include it.
>For example, if we were to say that a machine is built to last 10 years,
>but due to moral depreciation will only last 5 years, which of the two
>lifetimes are to be used in calculating the RRI? the rate of profit?
>The way I read what you are saying is that the 10 year period is to be
>used and asset revaluation will be taken into account for each of
>the 5 years the machine actually lasts. Am I reading you correctly
>on this?

I think the rate of profit in production is calculated as if current prices
would be in effect for the whole period of production. A separate account
has to be kept of the gains and losses on stocks (including fixed capital)
during the production period. The capitalist's "bottom line" is the sum of
the two effects.

I think, in fact, this is the way that ordinary capitalist accounts are kept.

It might clarify things if we specified who is calculating the rate of
profit and the RRI (us economists or the capitalists?) and for what purpose.
>Duncan wrote:
>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.
>John responds:
>On this point, perhaps we read the results of Dumenil and Levy a bit
>differently. Let's say at some point the rate of profit is falling.
>At that same point, the RRI is rising. Why the lag? Let me suggest
>one possibility.
>With a rising RRI, investment increases. With the increase in investment,
>the rate of profit falls even more as the stratification of fixed capital
>changes such that the C/(v+s) increases where C is the total undepreciated
>stock of capital invested. Sooner or later, the mass of profits available
>for investment is not enough to maintain a "normal" rate of investment.
>Demand slackens. With falling prices, the economic lifetimes of fixed
>capital decrease, the average RRI falls. With its fall, investment slackens
>further so that the stratification of capital again changes increasing the
>rate of profit or decreasing C/(v+s). This eventually leads to the
>production of enough surplus value for more investment. Increasing demand
>leads to an increase in the RRI.
>BTW. Do you know of studies other than that of Dumenil and Levy that
>attempt to compute and track the RRI? That they do so was extremely
>interesting. Why they seemed to emphasize the rate of profit is
>unclear to me.

I think the reason for the lag is exactly the change in prices. They can
compute the RRI only for investments whose economic lifetime is complete.

>Duncan wrote:
>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.
>John responds:
>I, of course, agree that Marx was aware of the devaluation of capital
>assets due to technical change. What I'm unclear about is how well
>Marx was able to distinguish between a falling rate of profit due to
>enormous increases in fixed capital and one, say, due to what we have
>been calling "Marx biased" technical change. In the former case, we
>could observe a falling rate of profit simply because of the changing
>stratification of fixed capital. In this case, we may find a falling
>rate of profit with a rising RRI as capital saving innovations
>are introduced. The changing stratification of fixed capital could
>appear as "Marx biased" technical change even when the dominant form of
>technical change is capital saving.

I must say I have problems understanding exactly what you have in mind
here. In the 1920s and 1930s the evidence seems to be that the rate of
profit in production rose due to capital-saving technical change. This
probably "devalued" a lot of existing capital, and may have contributed to
the debt crisis.


>2. What we find in V2 is Marx's recognition that the turnover of fixed
>capital may be the "material basis" for a theory of crisis. We also
>see that he could and did develop the idea of an annual rate of surplus
>value. In V3, we know he wrote nothing concerning "The Effect of Turnover
>on the Rate of Profit."(Ch 4) The entire chapter, written by
>Engels, does little more than consider the manner in which the turnover
>of circulating capital effects the annual rate of profit. How the
>turnover of fixed capital influences the rate of profit is not discussed.

I still don't see how this gets rid of the fact that a great part of Volume
II precisely concerns the influence of the turnover period on the rate of
profit. I think the first chapter of Volume III makes the same point, that
turnover mediates the markup into the rate of profit.


>Let me suggest one possibility.
>In Ch 25 of Vol 1, Marx uses the expression "accelerated accumulation."
>For me, this would mean that K in the above is growing quite rapidly at
>times. The average age of machinery is decreasing as the rate of profit
>computed in the usual fashion is falling even as the RRI may be increasing.
>One problem I see in stressing the rate of profit is the tendency to
>ignore the stratification of fixed capital which might change rather
>dramatically in periods where there is "accelerated accumulation."
>My point is that one can generate a falling rate of profit even
>without technical change given "accelerated accumulation."

I'd have to see this worked out in detail before I could comment on it.


>John had written:
>>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.
>Duncan wrote:
>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".
>John comments:
>I like your suggestion. However, I'm not sure that capitalists are
>unwilling to make investments that lower their rates of profit below
>the average. Again, I think the anticipated RRI and not the rate of
>profit is the basis on which capitalists make investments.
>Let me add that if we build moral depreciation into competitive
>capitalist pricing, then using the rate of profit to carry out the
>transformation of values into prices becomes problematic. That is,
>if the rate of profit is not seen as the basis for investment decisions
>by capitalists, why would there be any tendency for the rate of
>profit to equalize among the competitive capitalists? The prices of
>production computed by Marx are without meaning except in models where
>all constant capital is circulating.

On the whole I'm sympathetic with this critique of prices of production.
One point I tried to make in my treatment of the "transformation problem"
was that it shouldn't depend on any particular theory of pricing and
competition, and that the "prices of production" are important only as a
particular example. In real capitalist life technology is always changing,
so there is no chance for competition fully to equalize rates of profit. Of
course, if technology moved very slowly, and competition very rapidly,
competition might keep rates of profit pretty closely in line. Mark Glick
and Hans Ehrbar did some interesting work trying to see how similar rates
of profit are across sectors in the 1980s.

>John had written:
>>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.
>Duncan wrote:
>I don't think we have any disagreement on this point.
>John asks:
>I always like no disagreement. But what I now do not understand is
>why you want to separate asset revaluation from the production of
>surplus value? Here, you seem to agree that Marx made no such

Well, I think he did make this distinction. It also seems to me to be
crucial in sorting out issues like those raised by Andrew's examples. The
value changes that arise in production ought to be linked to the
expenditure of living labor in my opinion, while the revaluation of stocks
due to technical change doesn't arise from the expenditure of living labor.

Maybe it would be more useful at this point to focus the discussion around
a specific question rather than keeping on with these generalities.


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