[OPE-L:6520] Re: Obsolesence

John R. Ernst (ernst@PIPELINE.COM)
Mon, 27 Apr 1998 23:37:05 -0400 (EDT)

Commenting on my example (reproduced below) Paul wrote:

I suspect that Johns example is rather unrealistic because it assumes
no fixed capital and yet has an organic composition of 6. In my
experience if one looks only at the constant capital flows, such
high organic compositions are almost non-existent with the possible
exception of flour milling (ignoring the fixed capital value of the
silos ), and edible oil processing. In these industries the high
organic composition arises from the seasonal character of the
harvest. Under these circumstances Johns example might hold but
it is most rare.

John comments:

I must say I am surprised. A ratio of constant circulating
capital to variable capital of 6:1 did not seem high to me.
Yet, I'd be the first to admit you've seen more data
than I. Let's say the ratio is 1:1. The question then becomes
what is the price of the output.

Holding the value of fixed capital at zero, should productivity
double would not the new ratio be about 2:1, assuming that raw
and auxiliary materials double as well?

I'd like to be a bit more clear on where you are coming from
on the question of obsolete fixed capital. With that in mind,
let pose the following questions:

1. Are you, like Allin (see below), doubting that a process with
a negative present value will generally have a positive operating

I would suggest that the two are more likely to coexist in an
age where there is a conscious effort to maintain prices both
on the micro and macro levels. Drops in the output price in
my example would provide a faster route to negative operating

2. Have you looked at data concerning the transition from the
period of manufacture to that of modern industry? In my
example, fixed capital is 0 or negative. In the period of
manufacture it is not a large cost. We know the capitalist
moves beyond that period in an effort to increase his
rate of return. Here we have a similar situation within the
period of large scale industry. We agree the capitalist
purchases new fixed capital. The questions become:

a. As machinery is first introduced do the old processes
have a positive operating profit?

b. For how long are the old processes used once machinery
enters the picture?

3. Do you agree that the elements of fixed capital are generally
discarded prior to becoming physically useless?


Allin Cottrell wrote:

> 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.)
> Allin.