[OPE-L:5746] Re: John Ernst's RRI and the Rate of Profit

Duncan K. Foley (dkf2@columbia.edu)
Sun, 23 Nov 1997 23:46:38 -0500 (EST)

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>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?

Duncan remarks:

As far as I know, all attempts to measure the actual stock of capital in
the U.S. are based on the "Windfrey" tables that the Census uses to
estimate economic lifetimes of various classes of capital goods. These have
the advantage over the IRS reported depreciation that they are based on
some consideration of actual scrapping practices, rather than just on what
the tax code allows. But as far as I know these tables have never been
revised, and are unlikely to be a sensitive indicator of the actual
evolution of capital goods lifetimes.

When this matters is on occasions where the RRI diverges sharply from the
rate of profit. In a recent CEPREMAP working paper "The Great Depression:
An Anomalous Event?" (or something close to that) Dumenil and Levy offer
evidence that the 1925-1940 period in the U.S. did show a sharp divergence
of RRI from the rate of profit, and also a sharp change in scrapping


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

Well, they do, since the IRS allows a variety of "accelerated depreciation"
methods. Accelerated depreciation presumably shifts profit into
depreciation, and lowers the measured volume of profit. It also lowers the
undepreciated value of the capital stock. How these two offsetting effects
balance in fact, I can't say, but maybe somebody could look into it.

Why do you think it's particularly important for Marxist economists to
clean up capitalist accounting anomalies?
>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.

Duncan comments:

If one thinks that workers' net saving as a class is negligible (which I've
always thought is plausible) then the accumulation rate depends on the rate
of profit and the proportion of the profits reinvested. A fall in the rate
of profit will reduce the supply of funds, according to this reasoning.

But I think the "stimulus to invest" refers to the demand for investment,
not the supply of investible funds. While it's sort of intuitive to think
that capitalists will have less stimulus to invest at a profit rate of 10%
than at a profit rate of 100%, it's not completely clear why this would be
true. If the stimulus to invest is primarily competitive, why wouldn't
there be just as much pressure to invest at a low profit rate as at a high
one? Keynes argued that in the General Theory that there was some inherent
property of money as an asset that made it more attractive than capital at
low rates of profit, but I'm not sure this argument holds water or is
consistent with the Marxian analysis of the interest rate.
John writes:

>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.

What are the "requirements" of accumulation for the next period? Is this a
Harrod warranted-rate idea?


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