[OPE-L:5753] RE: RRI and the Rate of Profit

John R. Ernst (ernst@PIPELINE.COM)
Tue, 25 Nov 1997 03:31:12 -0500 (EST)

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Some comments on Duncans post of 11/23/97.

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


John adds:

"Interesting" seems a bit of understatement. Have you read the
paper? Is it distributed in English?

John wrote:

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

Duncan responded:

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 notes:

As I recall, the IRS of the US began to allow forms of depreciation
other than the straight line method after WWII. What "accelerated
depreciation" does is shift what we would call profit into
depreciation in the early part of the lifetime of fixed capital as
measured by straight line depreciation. As fixed capital ages, the
opposite would be the case. Thus, for a particular investment the
rate of profit would increase with age, given constant prices.
If the overall fixed capital structure is aging, then the rate of
profit would increase. With a structure that is becoming younger
and younger due to ever-increasing investment in fixed capital,
then we would observe a falling rate of profit. To be sure, here
I am again getting into the notion of changes in stratification and
note your previous comment that the more sophisticated studies of
the rate of profit take this into account. But, in theory at least,
we Marxists have given scant attention to the notion of stratification.
Did Marx himself? I know of no evidence that he did. Thus, those
doing empirical work are given no theoretical support for their
efforts and are forced to invent techniques and concepts to take this
into account.

Why is this important? First, if we are looking at the rate of
profit as some sort of indicator that capitalist use to make
investments how they compute it would seem to be of import.
Second, if we really want to deal with how capitalists see their
rate of profit, net of taxes, then the manner in which their
depreciation schedules can be developed would seem to be both
a factor in making as well as a consequence of investment decisions.
Further, given that capitalists use an anticipated RRI and
not the rate of profit, the profit net of taxes would be influenced
by the manner in which depreciation is computed.


>John wrote:
>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 commented:

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 now writes:

Here, I must admit that I borrowed Marx's "stimulus of gain is blunted"
(Ch25,Sec.1,para 7) in dealing with this view of the falling rate of

If we assume that the anticipated RRI falls, then the notion that the
stimulus to invest becomes a bit clearer. That is, existing capitals
would appreciate as the actual RRI falls. Rather than make a new
investment capitalists may find it more profitable to buy out others
and seek further "capital gains."

John had written:

>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.

Duncan asked:

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

John responds:

Good questions. For Marx, the "requirements of accumulation" seem
to focus on a growth in capital that will increase the amount of
profit from one period to the next. With a constant or growing
real wage, this would mean ever-growing amounts of investment so
that increases in output outstrip the growing real wage as well as
the growth of constant capital. The requirements, I have in mind,
are met if the average age of fixed capitals decreases. They are
cannot met indefinitely if it stays the same or increases.

Granted the idea needs further elaboration. It is not at all clear
to me that data from any particular country will be immediately
helpful in that process. I do not see this as a concept related to
Harrod's warranted-rate as much as I do to Marx's idea of accelerated
accumulation and Grossmann's crude attempt to develop the idea.

Be well,