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From: "John R. Ernst" <ernst@PIPELINE.COM>
To: OPE-L@galaxy.csuchico.edu
Subject: [OPE-L:5728] Re: RRI and the Rate of Profit
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Responding to my recent post on the RRI and the
Rate of Profit, Duncan wrote:


I agree entirely with John that in principle one should use RRI measures
where they are available, and that substantial divergence of traditional
accounting rates of profit from RRI is a real possible source of error in
empirical analyses of the evolution of profit rates.

John comments:

It's good to have some agreement on this. What is strange in the
Marxist literature on the rate of profit is the almost total lack of
acknowledgement that rate of profit may be a flawed way of tracking
the accumulation process. Dumenil and Levy, on this matter, seem
to be the exception.

Duncan wrote:

On the other hand, there are some practical drawbacks to insisting on RRI
figures in all cases. RRI is only computable ex post, which means, given
the average lifetime of capital, that you lose the last 10-15 years of data
when you go to RRI. Since we're often most interested in the recent past,
this is a problem. RRI is computable from actual data only on the basis of
some pretty strong assumptions about capital lifetimes, which themselves
are not beyond question. So one greatly increases the computational costs
of the analysis without necessarily avoiding the peril of error. Since
historically there is a high (though far from perfect) correlation between
accounting rates of profit and RRI, maybe it's worth looking at the
accounting rates to try to get approximations of gross trends, being
particularly careful not to put too much weight on conclusions about
short-term movements in the rate of profit.

John writes:

Granted that the accounting rate of profit may well be an estimator
of the RRI though biased. However, it would seem that problems
like the estimation of "capital lifetimes" are not peculiar to
computations of the RRI. Indeed, in order to separate the
annual depreciation charges from profit we are forced to guess
the lifetime of fixed capital as well. Matters become a bit
more muddled when one attempts to infer that a falling accounting
rate of profit in a given country is somehow meaningful to the
capitals operating within that country. For example,

a. Are the capitalists' estimates of the lifetimes of fixed
capital the same as those made in works that attempt to capture
the movement of the overall rate of profit in a given country?

b. Should capitalists use a method of depreciation other than
straight line, what is the effect on the rate of profit?

John had written:

>4. In their "Post Depression Trends in the Economic Rate of
> Return" (The Review of Economics and Statistics, LXXII,
> 406-413), Dumenil and Levy use data to show that while
> there are differences between various accounting rates
> of return and the economic rate of return, the manner in
> which these measures move in U.S. post depression period
> are similar. Here, as elsewhere, they use the vintage
> technology to measure the economic rate of return. In
> their The Economics of the Profit Rate, they include sectors
> other than those of manufacturing in the U.S. economy and
> note that the economic and accounting rates of return
> are lagged by about 10 years. They also point out that
> the greatest degree of stratification of fixed capital
> occurs prior to and within the Great Depression. The
> how's and why's of these phenomena are unexplored.

Duncan commented:

These are pretty interesting findings. D & L's whole research program tends
to suggest that very rapid capital-augmenting technical change (what they
call the "great leap forward") was the biggest structural fact in U.S.
economic history in the 1920-1950 period, and it is tempting to suppose
that it had an important role in the Depression. I suspect this is what D &
L are working on.

John responds:

I wish D&L luck on this. What is sad is that there has been little
theoretical work on what may give rise to "very rapid capital-augmenting
technical change." Definitional differences aside concerning "capital
augmenting", it seems to me that we may be uncovering Marx's notion of
"accelerated accumulation." As I recall, D&L found that the degree
of stratification of capital peaked prior to the "Great Depression"
in the U.S.

John had written:

>5. Recognition of the problematic nature of the accounting
> rate of profit at the very least forces those measuring
> Marx's rate of profit (an accounting rate of profit)
> for a given country over time to justify its use on
> theoretical grounds. What are the hidden assumptions
> involved? For example, are we tacitly assuming balanced
> growth without technical change?

Duncan commented:

There are some special assumptions that mathematically minimize the
difference between the profile of accounting profit rates and RRI, and
balanced growth without technical change, or with a uniform rate and
pattern of technical change simplifies the mathematics a lot. On the other
hand, does it make sense to insist that unless these strong mathematical
assumptions are exactly satisfied there is _no_ information in the
accounting rate of profit series?

John responds:

I'll not say that there is "_no_ information in the accounting rate
of profit series." But we should note that the very assumptions
implicit in such studies may well rule out any serious theoretical
work concerning "accelerated accumulation." Indeed, as you suggest
D&L's current efforts would seem to stem from the rise and fall of
the stratification of fixed capital and not from their work on the
accounting rate of profit series.

John had written:

>6. For those of us seeking to understand Marx's own efforts
> in CAPITAL, problems concerning this matter also arise.
> For example, given that capitalists use the economic rate
> of return to evaluate their investments, what is the
> significance of the accounting rate of profit? Marx himself
> notes that, on the one hand, a falling rate of profit blunts
> the stimulus to invest and, on the other hand, a falling
> rate of profit can lead to an insufficient mass of profit
> to meet the demands for growth of capital in the next period.
> If capitalists are using the economic rate of profit for
> investment decisions, then it is difficult to agree with
> Marx that a fall in the accounting rate profit blunts the
> stimulus to invest. However, it would seem that a fall
> in the accounting rate could lead to a shortage in the
> mass of profit produced even if the economic rate of profit
> is rising.

Duncan commented:

I find this remark hard to follow, and would appreciate some expansion and
explanation of it. Capitalists don't have a crystal ball (or "rational
expectations") to tell them exactly what the RRI of their investments is
going to be. They do specialize in evaluating risky prospects and finding
ways to cope with the resulting risky positions. They are frequently wrong
as individuals. But are you suggesting that these facts are a structural
weakness of the capitalist system? Wouldn't socialist investment have many
of the same problems? Individual mistakes tend to cancel out in the
aggregate, but there are historical periods where the capitalists as a
group over- or underestimate the RRI of investment, as recent events in
Southeast Asia remind us. It seems to me that capitalists will use some
expected rate of return, if they get that fancy in evaluating investment
projects, not the historical profit rate anyway.

John responds:

Sorry for the confusion. Let me first attempt to clarify. As Marx
develops his rate of profit, there are two ways in which a fall
in the rate of profit effects the accumulation process.

The first is that it blunts the stimulus to invest. This view is
not peculiar to Marx but found in the works of nearly every
classical economist. For those who see this process as the core
of Marx's falling rate of profit face the task of showing the how's
and why's of a falling RRI.

As Marx describes the accumulation process and the falling rate
he also presents of profit he also presents us with the
idea that the profit of one period may not be sufficient
requirements for accumulation in the next period. (To see
this in value terms we are forced to compare the output
of one period with the inputs of the next. Because of this,
I would argue that the TSS approach to valuation is the
only one that always allows such inter temporal comparisons.)
Some time ago, we discussed the possibility that with a
constant RRI the rate of profit may fall due to changes in
stratification of fixed capital. We saw that with a constant
or increasing RRI, the rate of profit can fall. Here, then
we see that possibility that the gross profits of one period
may not be sufficient to meet the demand of next. Since
gross profits include depreciation charges, we can then
introduce the turnover of fixed capital into the theory
of accumulation. Further, as we know according to Marx,
it is that turnover which was to form "the material basis"
for a theory of crisis.


I'm not into imputing the use of crystal balls to capitalists.
Indeed, in theory I think we can begin with the assumption that
all prices remain constant and capitalists expect them to be
constant. The possibility of crises still exists since the
investment decisions are made on an individual basis. Again,
the demand for capital inputs in a given period may exceed the
gross output of the previous period. One would hope that in
any planned economy such a situation would not arise.