[OPE-L:6513] Re: [OPe-L] Re: Obsolesence

Allin Cottrell (cottrell@ricardo.ecn.wfu.edu)
Sun, 26 Apr 1998 17:06:17 -0400 (EDT)

To return to John's original example:

> "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."

OK, I agree that if you have to put up $6K at the start of the
year and don't get the $7K revenue till the end, then this
process can't compete with a new technology offering a 20% rate
of return. The present value of the old, fully depreciated,
capital stock is then -6 + 1/(1.2) + 1/(1.2^2) + ... < 0.
"Can't compete", in the sense that a rational capitalist with
ready access to funds would prefer to scrap the old plant and
invest in the new technology, rather than continuing to put $6K
per year into operating the old.

At a zero discount rate, -- or a modest rate reflecting the real
growth rate of the economy -- however, it would make sense to go
on operating the old plant. Is that, in effect, what you were
saying would be the socially rational decision?

As an empirical matter it would be interesting to know: How
common is it for old processes to get into the position
represented in your example, i.e. where the present value of the
fully depreciated means of production goes negative, when
discounted at the current rate of return, yet the process is
still capable of generating positive operating profit? (I
suspect it may be rare.)