[OPE-L:7342] [OPE-L:872] Re: Re: Abstract Labor

John R. Ernst (ernst@PIPELINE.COM)
Fri, 09 Apr 1999 22:43:25

Re: OPE-L 869


Thanks for the example. Although it is clear, I've got a
couple of problems, questions and comments.

1. With the new technique, you doubled the output. Yet the
raw material costs remained the same. Should they not increase?
In your example, we could make all or nearly all of the
savings in circulating costs come from the wage. This would
mean that the wage becomes closer to 0.

2. What the example then turns into is one of labor-saving and
capital-using technical change. Given that more capital can
be used per unit output, the additional capital costs are
compensated by reduced labor costs.

3. Now let's step back a moment. Suppose you were going to the
bank to borrow funds for investing in the old technique or
the new technique. Which of the two is more profitable or
which of the two yields a greater return on investment? With
a bit of iteration and assuming fixed capital lasts for 5
periods, I find that the old technique yields a return of
32.96% and the new technique one of 31.35%. Given that funds
are available for either investment, why not go with the older

4. I am unconvinced that rational capitalists will invest in
techniques that reduce the rate of return that they expect.

5. Paul, I do think we need some more info on this. That is,
my prior query:

"let me ask if you know of any examples of this type of behavior.
(A strange request coming from me to you.)

remains unanswered. I do think we could find many in the days
when products were produced with a relatively large amount of labor.
As unit labor costs fall, there is less and less availabe savings
from "v" that can be used to pay for increased unit capital costs.


P.S. Your discounted prime cost of the newer technique does not
seem to include interest. However, if you use your raw material
figure, then the discounted unit prime cost of the new technique
is still lower as you suggest. I get your 52 for the old and
51.5 for the new.

The prior post (869)

At 12:34 PM 08-04-99, you wrote:
>RE: OPE-L 851
John wrote:

>My comment: I don't quite see this. Let me say why. Let's
>assume that the average rate of return is 25%; on an additional
>investment in one's firm the expected rate is 20%. The rate
>of interest is 15%. To invest or not to invest would seem to
>be the decision at hand. Here, let's back up a bit. Who is
>making these new techniques that earn a lower rate of return
>than the old technique? Why are they doing this? Assuming
>an answer to these questions, let me ask if you know of any
>examples of this type of behavior. (A strange request coming
>from me to you.)
Here is an example using similar but not identical figures
There are two techniques, old and new.
The new technique reduces the undiscounted prime costs from $40 to $37 per
prime cost = wages + raw materials + depreciation

The market price is assumed to stay the same, since
the new producer produces only a small fraction of the total

In deciding whether the new technique is worth applying the
manufacturer looks at the
discounted prime cost= (prime cost + capital*rate of interest)/unit output
to see if it has fallen. It has from $52 per unit to $33 per unit
so it is worth using the new technique at the current rate
of interest.

The new production technique results in lower rate of profit
than obtained on the old technique, but it is more efficient
both in terms of labour input ( assuming input prices are
proportional to values ) and also in terms of discounted
prime costs.

If we assume that manufacturers are willing to adopt a
new technique if its discounted prime cost per unit is
lower than an old technique, then we could see the rate
of profit fall if the rate of interest was below the
rate of profit in a given industry.

> old new
const cap 100 270
dep 20 54
raw mat 10 10
wages 10 10
output physical 1 2
unit prime cost 40 37
unit price 70 70
profit 30 66
capital 120 290
rate of prof 25.00% 22.76%
discount rate 10.00% 10.00%
Interest paid 12 29 at 10%
profit of enterprise 18 37
discounted prime cost 52 33

I am very dubious about the whole concept of an average
rate of profit acting as a constraint on investment.
Rates of profit differ significantly between and within
industries, the nearest thing that firms actually
meet to an average rate of profit is the rate of

The latter is determined by the state rather than
by the rates of profit in industries.
Paul Cockshott