[OPE-L] Re: Historical Costs

John R. Ernst (ernst@PIPELINE.COM)
Sat, 7 Feb 1998 02:27:22 -0500 (EST)

Duncan writes:

In a discussion of the unreliability of the realized profit rate calculated
on the basis of some estimate of depreciation as an indicator of future
profitability, John remarks:

>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.

Duncan comments:

It seems to me that this is precisely what happens over and over again in
the course of capital accumulation. Sectors often become "hot" areas for
profitable new investment precisely when the historical costs have been
liquidated through bankruptcy. Isn't this also the theme of Marx's view
that crises have a reproductive role to play?

John responds:

Agreed. In part, crises are part of the reproduction process. But my
initial remark was an attempt to point to the difficulty in capturing
this phenomenon in thought if one uses a valuation procedure that ignores
moral depreciation while recognizing the devaluation of fixed capital.

Consider the case where there is general price deflation. If each
$1000 invested before deflation yields profits of $200, the investment
of $1000 in the period in which there is deflation produces less profit,
say, $100. Has the rate of profit fallen? It would seem so. But
if we revalue that $1000 in that same period or devalue the investment
by 50%, then the rate of profit stays the same as the capitalist writes
off $500. By depicting the accumulation process using "end of period
replacement costs" to value the capital invested in any given period,
we see no change in the rate of profit from one period to the next.

So far this seems like the usual TSS bit. But here we have money in the
picture. Thus, not only do we see it but so does the capitalist (and
for that matter his creditors). Before considering the next period
where input prices may well be $500, should we not agree with the
capitalist that the rate of profit fell as $1000 investment which, at
first, produced a profit of $200 now yields only $100? Should not
an analysis of the movement of the rate of profit take into account
losses due to asset devaluation?

Part of the difficulty in accepting this simplistic way
of looking at things through the TSS prism is that it seems to be
based entirely on the assumption that prices fall. Indeed, non-TSS
defenders of Marx often attempt to construct a general idea of
falling profit rate that is obvious no matter what happens to
prices from period to period. Defending Marx in this fashion
destroys him as it renders his concepts of value and of
money useless in understanding the accumulation process.
Value then attains meaning only within some rather strange
attempts to show that capitalists exploit workers.

Yet, since for most of our lives we have rarely seen deflation,
this defense of Marx seems to be the only way in which his
notion of accumulation can be considered. To convince others,
the TSS view needs to be expanded to cover the cases where
prices are constant or rising. This involves assuming that
the MELT falls as technical change takes place. As a starting
point, we can assume constant prices and show how moral
depreciation takes place. But that is another post.

Be well,