[OPE-L] Re: Historical Costs

John R. Ernst (ernst@PIPELINE.COM)
Mon, 2 Feb 1998 03:34:45 -0500 (EST)

Lurking behind some of the discussion of historical costs
is the unanswered question -- What is to be used in
the denominator of rate of profit calculations as
"moral depreciation" takes place? If we assume that
iron is stockpiled as Alan does or that there is "corn in
the barn" as Andrew has used in past examples, we are left
with an unclarity. That is, is the old iron (at $10) used
in competition with the new iron (at $8)? Or, is the
"corn in the barn" used in the same fashion as corn
on the market? Is stockpiling necessary to the processes of
production we are considering? Put another way, can goods,
not used and "merely" stockpiled, be used in examples of moral

Clearly, without these stockpiles, the price or value of the
commodity entering production as circulating capital should
be used in computing the rate of profit at the end of the
period. I say clearly knowing that this is not Fred's
position nor that of many present-day Marxists.

But a machine or any other element of fixed capital is different.
Indeed, Marx only defines the concept of "moral depreciation"
in dealing with fixed capital. In figuring the rate of profit
or the rate of return on investment with fixed capital, it seems
clear that moral depreciation cannot be ignored as it is when
one simultaneously values inputs and outputs. It is an essential
aspect of the process of accumulation itself. Without getting
into the rate of profit vs. the RRI bit, let's simply consider
how one might examine the question of to invest or not to invest
given moral depreciation.

For Marx, it is clear that the capitalist knows of this type of
depreciation and, to some extent, anticipates it. Or, ex post,
the capitalist would look at his profits on a particular investment
by using the historical cost of the investment, perhaps adjusted
for inflation. Indeed, his calculation presupposes that the entire
historical cost is recovered.

With simultaneous valuation, the rate of profit itself loses much of
its meaning as capitalists can no longer use it as a guide in deciding
whether or not to invest. A capitalist who suffers huge losses due
to moral depreciation may well be told that his rate of profit is
rising as he suffers bankruptcy. Moral depreciation disappears in
this type of ex post analysis.

The difficulty in using moral depreciation as part of the analysis stems
from accounting for the losses due to moral depreciation. Here, I think,
those of us often labeled TSS may differ. For example, if a new machine
costing $1000 will last 5 years if there is no moral depreciation and only
4 years with moral depreciation, what is the yearly depreciation charge?
Clearly, it would be $200 without moral depreciation and $250 with it, using
the straight line method of depreciation. Further complications arise with
other methods of depreciation. Assuming that moral depreciation is part
of the overall depreciation charge, the separation of dead and living labor
becomes problematic. But it seems to me it can be resolved given that we
bear in mind that the task is to explain how the matter is dealt with in the
world of appearance.