[OPE-L:5754] Re: RRI and the Rate of Profit

John R. Ernst (ernst@PIPELINE.COM)
Tue, 25 Nov 1997 03:47:06 -0500 (EST)

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Some comments on David's post of 11/24/97.
Hi David,

As always, it's good to hear from you even when we find ourselves
disagreeing. Since you state that

"I have not been able to follow all aspects of the discussion between
John and Duncan on this topic, and have not kept copies of all of their

I thought I'd first review some of the points I made in previous posts
and then comment on yours.

1. Using Marx's idea of moral depreciation, I was unable to develop
a way in which the amount of that type of depreciation could be
seen as part of "c" (used up fixed capital) such that the capital
value advanced as fixed capital would be preserved as technical
change takes place. I had rejected the idea that moral depreciation
was simply a deduction from profit.

2. How to separate depreciation from profit using present values was
unknown to accountants until several years (about 6 or so) after
Marx's death.

3. "The Effect of Turnover on the Rate of Profit", the title of Chapter
4 of Vol. 3 of Capital, was entirely written by Engels as Marx left
him with nothing but a blank page for that chapter. There we find
nothing concerning the depreciation and turnover of fixed capital
and its effect on the rate of profit.

4. Dumenil and Levy note the difference between the RRI and the rate of
profit in their study of the rate of profit in the U.S. Concerning the
RRI, they cite Fisher and McGowan's piece published in 1983 in the
AER. The responses to that article and the rejoinder by Fisher are
also noted by Dumenil and Levy.

In that rejoinder Fisher acknowledges his precursors. One of whom is
Harcourt (1965) who in turn traces his interest in depreciation to

Basically, Fisher and Harcourt show why the RRI will generally
deviate from the accounting rate of profit. Dumenil and Levy
respond to this, not by denying it, but by using data to show that
the RRI and rate of profit seem to move in the same fashion over
time. In their book, however, there is a 10 year lag between the
RRI and the rate of profit.

5. In a post last summer(?), I noted that by simply assuming that capital
accumulates with no technical change and a constant RRI, the rate
of profit can fall (It could also increase depending on the
assumptions.) as the stratification of fixed capital changes.
Duncan was quick to point out that the "more sophisticated" studies
of the rate of profit took into account this possibility. Here,
as I recall, he noted the works of Dumenil and Levy and that of
Robert Gordon.

Dumenil and Levy uncover increasing stratification of fixed capital
in U.S. economy shortly prior to as well as after the depression.
As I recall shortly after the end of WWII, stratification decrease.

As Duncan told us recently, they are exploring this phenomenon as
we speak and, according to Duncan, have a paper concerning this

Enough of this, now on to your post.

David wrote:

The rate of return on investment is essentially the internal rate of
return to a specific purchase of capital goods, computed by discounting the
(finite or infinite) stream of future returns and equating the sum of such
discounted returns to the cost of the capital goods. As we all learned in
school, this is formulated as

K = P1/(1+r) + P2/(1+r)^2 + . . . + Pn/(1+r)^n (for the finite case)

John comments:

Here, I think we are talking about apples and oranges. I would write:

K = A1/(1+r) + A2/(1+r)^2 + . . . + An/(1+r)^n (for the finite case)

where An=Pn+Cn, Pn is the profit or surplus value, Cn is the amount of
fixed capital used up in period n, given that advances of circulating
capital are assumed to be negligible. We then have a way of
computing r, the RRI, in the case of depreciating fixed capital.
What I cannot understand is how your formula tells us anything about
capitalists recovering their initial investment. Am I missing
something here or should I give more attention to your concluding
remark that

David wrote:

I can't offer any suggestions concerning depreciation. I have been
working with "pure fixed capital" models too long!

John comments:

Well, as you might have guessed, I think those "pure fixed capital
models" can be misleading.

Take care,