[OPE-L:7344] [OPE-L:873] Re: Re: Re: Abstract Labor

Mon, 12 Apr 1999 10:18:13 +0100

At 10:43 PM 09-04-99, you wrote:
>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?
It all depends on what the industry is. If we take the
industry producing dynamic random access memory, and we take
our unit to be 1 megabyte of memory. A doubling of output in
terms of bytes produced would involve no increase in the
use of silicon, since the greater memory output came
from more efficient use of silicon.

One could construct other examples in which savings in raw
materials were smaller.
>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
Could you please give me your working here, as I would have
thought that I had taken this into account by calculating
which technique had the lowest discounted prime cost.

the discounted prime cost is given by
(undiscounted prime cost+(capital stock* rate of interest))/output

but possibly there is a mistake in this?

>4. I am unconvinced that rational capitalists will invest in
>techniques that reduce the rate of return that they expect.
I am not claiming that they would, merely that if one
uses the interest rate rather than the existing profit rate
as ones criterion for calculation, different techniques
are optimal.
>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.

My belief is that the rate of profit is in the very long run
regulated by the rate of interest,as this sets a ceiling on the
organic composition of capital that is acceptable to industry.

I can give a general economic historical argument to this
effect, that during the period of Keynesianism in the UK -
say from 1945 to 1975 the organic composition of capital rose
and the rate of profit fell under conditions of 'easy money'.
When monetarist policies were adopted subsequently, the rate
of profit rose. This was accompanied by a rising organic
composition of capital, but this rise, between 1975 and 1987
was not due to positive capital accumulation - there was
actually net capital destruction, but to v=(employment times
wage rates) falling faster than capital stock. In this case
the higher rate of interest forced companies to 'make their
assets sweat', destroying capital assets that could not
meet the new higher rate of return demanded by the banks.

>P.S. Your discounted prime cost of the newer technique does not
>seem to include interest.
It does
>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.
You are right, there was a mistake in my calculation of dicounted
prime costs as I took prime cost per unit output, rather than
total prime costs. When I correct that, I get the same figure
as you.

Below is a clearer example where the higher capital stock
also has a longer life, which shows more clearly the
effect that I am aiming at.

const cap 100 270
life 5 7
dep 20 38.57142857
raw mat 10 10
wages 10 10
output physical 1 1.8
prime cost 40 32.53968254
price 70 70
profit 30 67.42857143
capital 120 290
rate of prof 0.25 0.232512315
discount rate 0.1 0.1
Interest paid 12 29
profit of e 18 38.42857143
disc prmcst 52 48.65079365

>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
Paul Cockshott