[OPE-L:6507] [OPe-L] Re: Obsolesence

John R. Ernst (ernst@PIPELINE.COM)
Sat, 25 Apr 1998 00:34:31 -0400 (EDT)

Here I continue the dialog among Paul, Allin and myself.
There's a bit of repetition here as the comments I add
are at the end of this post.

> Paul answered:
> I would expect it to be used until the current cost of running
> it rose above the value of the product, where by current cost
> I mean raw materials, maintenance and wages.
> My comment:
> Will a capitalist with fully depreciated fixed capital generally
> stick with the older technique if his rate of return is 1% and
> the general rate is 12%?

Allin wrote:

Will his rate of return be 1%? Take Paul's example of the
ancient aluminum smelter, for which the prime cost is still
below the market price of aluminum. What's the rate of return
on capital here? Well, what's the value of the capital stock?
At this point it has nothing to do with the labour time that
went, once upon a time, into creating it. Rather, it's
"whatever that stock is worth to a capitalist", which ought to
be the present value of the stream of operating profit,
discounted at the current rate of return. But if that's the
value of capital stock, then what's the rate of return on it?
The current rate of return!

John responds:

I think I agree with part of what Allin says but not all.
Note that I assumed that the fixed capital was fully
depreciated yet potentially of use. Consider my original
example in this thread.

"Let's take an example. Suppose that the annual cost for the
stock of circulating capital is $6000 -- $5000 in constant capital
and $1000 in variable capital. The output produced at the end
of each year sells for $7000. If the fixed capital is
fully depreciated, then the return on this investment would be
1000/6000 or 1/6."

Note that there is no way for this investment to earn more
than 1/6 with the given prices of inputs and outputs.

"If the fixed capital is not totally worn out, then the only reason
it may be declared obsolete is that the output can be produced
with new fixed capital at a higher rate of return of, say, 1/5.
Of course, this assumes that the capitalist has enough capital to
invest in the new technique. The old fixed capital is abandoned."

John now writes:

1. Consider that original investment. I assumed it was fully depreciated.
Hence, given that the fixed capital can be used, then the maximum rate
of profit or rate of return is 1/6 since there is no value left in the
fixed capital. Should one try to sell the used fixed capital,
its present value would be negative since it is competing with a new
technique with a rate of return higher than 1/6. By assumption, the
rate of return on the new technique was 1/5. There's no way to
get a rate of return of 1/5 on the old technique. In this case
let's consider Allin's question -- what is the rate of return?

If we set the value of the fixed capital at 0 and ask if it still
might be used, we can compute the rate of return or rate of profit
using the stocks of circulating capital in the denominator. Note
that the older technique was earning less than 1/6 in its
younger days when the value of the fixed capital was greater
than 0. Hence, when it becomes fully depreciated but potentially
useful, we can consider this "maximum rate of return" as the
benchmark which must be lower than the rate of return on the
new technique for the older fixed capital to become obsolete.
If a higher rate of return can be attained with the new investment,
why would the old technique linger?

2. When Allin considers what the stock is worth to
the capitalist and writes:

"... it's 'whatever that stock is worth to a capitalist', which
ought to be the present value of the stream of operating profit,
discounted at the current rate of return. But if that's the
value of capital stock, then what's the rate of return on it?
The current rate of return!"

I fail to understand how this applies to my example or Paul's.

a. My example. The old investment earns 1/6 and the new
1/5. There's no way to make the old investment produce a
greater rate of return save making the present value of the
fixed capital negative.

b. Paul's example. The question posed to Paul was not meant
to be an example of the smelting plant he mentioned. Indeed,
we have no price data on that process. Rather, I simply asked
why a technique with a rate of return of, say, 1% would be
used if one that earns 12% is available. Clearly, if there
is undepreciated fixed capital, then by writing off a great
deal of its value or, in Marxian terms, by morally depreciating
it, one might be able to arrive at a rate of return of 12% on
the old investment. However, if that investment has a maximum
rate of return (as defined above) of less than 12%, then there
is no way to achieve a rate return greater than 12%.

3. I think Allin's answer to my question might be correct if one
assumes that there is enough undepreciated fixed capital involved
in the process. If there is none, it is not. A better way to
pose my question is -- "How do you determine when fixed capital
becomes obsolete?" The question could be answered several ways.

a. We could say that occurs only when it is physically worn out
when we assume that input and output prices are constant. Here,
obsolescence becomes a natural property of things and something
generated by the accumulation process itself.

b. We could assume falling output prices relative to input prices
and simply say that as long as the capitalist is making some
profit, he'll stick with the old technique. However, if the
older technique becomes incapable of achieving the new and
higher rate of return without the value of fixed capital becoming
negative, then we must give some reason for the capitalist's
choosing the less profitable technique.

i. It may be that he has not amassed enough capital and cannot
borrow sufficient funds to purchase the new plant and equipment.

ii. The new investment may produce so much output that the
capitalist is forced to consider the lack of effective demand
for his increased output. We would then have to look at the
source of this lack of effective demand which may well be
the lack of investment in new techniques.

iii. It may be that the pace of innovation is increasing and
with it -- moral depreciation. If so, the rates of return are less
than they would be under "normal conditions." In Vol III,
Marx mentions the possibility that increasing moral depreciation
may choke off new investments.