# [OPE-L:7165] [OPE-L:673] Re: Market Values and Market Prices

John R. Ernst (ernst@PIPELINE.COM)
Mon, 15 Mar 1999 00:47:58

> As long as we insist on measuring profitability as though
> fixed capital does not exist or, put another way, with a
> simple rate of profit calculation, the movements of capital
> from one sector to another in response to changes in
> profitability will appear mysterious.

Jerry [OPE-L:669] wrote:
(snip)

I agree that this *process* can not be grasped with a simple formula,
but what is wrong with the following equation for the aggregate rate of
profit (other than the fact that there is no explanation below for *how*

surplus value
------------------------------------------------------------------------
constant fixed capital + constant circulating capital + variable capital

My comment: Further, I see no reason to not use the formula if
fixed capital is 0. But what if it is not equal to 0? Some would
argue that we continue to use it. First, let's be clear on
the problems that arise when the formula is used.

1. The aggregate rate of profit can change not only with a change in
technique but also with a change in the strafification of fixed
capital. This raises the question of whether or not the rate of
profit depends upon that stratification. We could, of course,
assume that all capitals accumulate and obsolesce at the same rate
in all periods. This would be problematic as well unless we also
assumed that the compostions of capital were equal.

2. We could introduce a new term in the denominator of your
equation -- depreciation funds or hoards. This would mean
that the rate of profit would not change as the stratification
of fixed capital changes. Let me explain this a bit. If
advanced fixed of 1000 is worth 900 at the end of a period,
what is the advanced fixed capital in the next period? If
we say 900, we would be using your formula when we aggregate
capitals. But if we say that in that next period the
depreciation funds recovered at the end of the initial period are
part of the advance of the next, then your formula could simply
be modified to include this term.

But if we do so, a new problem arises that relates to choice of
technique questions. Note that with the new term the advanced
fixed capital remains the same in each and every period -- 1000.
But let's suppose we have a capitalist with 1000 invested in
fixed capital and 1000 in variable capital producing an output
of 2500. The rate of profit would be 25% in all periods if we
also assume that circulating constant capital is 0.

Now suppose a new technique becomes available which requires an
in variable capital to produce the same output. Hence, the
advance in each period would be the same 2000. The rate of profit
becomes useless in evaluating the hows and whys of mechanization
in cases like this. That is, as Marx suggests the hoard formed
with depreciation funds becomes more than a hoard; indeed, it can
become a source of funds for further accumulation.

_________

How do you calculate individual and social value and profit once fixed
capital is taken into consideration?

My comment: I'm not ready to deal with individual and social value
given that we use the RRI as we examine the accumulation process.
Value itself is enough of a problem for me. If we assume a uniform
RRI in a given period, the manner in which surplus value is allocated
to the various capitals is not only effected by the organic composition
of capital but also by the manner in which depreciation takes place.

Let's suppose that in each and every period I expend 100 hours of
living labor. If I work with a capital of average composition, it
would seem that v+s would appear as 100 in each and every period.
But by using the RRI, in a given period this disappears as profit
and depreciation are conflated. To be sure, if over 10 periods
I expend 1000 hours and the fixed capital I work with has an
initial cost of 1000 hours, then at the end of the 10 periods
2000 hours of output would be produced. But the profits visible
at the end of each and every period would not be equal as the
depreciation charges change from period to period. Note that
untangling this muddle is no mean feat since we still have not
dealt with differing compositions of capital and the formation
of prices of production. Clearly, differences in individual
and social value mean that we also bring technical change into
the picture. Sadly, there is much to be done in sorting out
this mess.

John