[OPE-L:7351] [OPE-L:881] Discounted Prime Costs

John R. Ernst (ernst@PIPELINE.COM)
Tue, 13 Apr 1999 02:44:46

RE: OPE-L873

Again, thanks for the example. I've reproduced
your new figures below for the sake of the discussion.

Your figures:
(1) (2)
const cap 100 270
live 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

My comment: Before going back to the RRI and my iterations,
I think there is a problem here. The profit of enterprise
for technique (1) is 18 and for (2) 38.42857143. If we
were to look at the rate of profit of enterprise, re, then
for (1) we would have

re= 18/120 or 15%
and for (2)


re is about 13.25%

Why would any capitalist want to go with lower rate of
profit of enterprise? What I don't see is how the rate
of interest effects the choice of technique. That is, if
funds can be had for either technique at the same rate of
interest, why not borrow the funds to invest where the
profits are larger? Here, the only thing I can think of is
that the longer lasting fixed capital in (2) may well mean
that over the course of the investment the re for (2) may
exceed that of (1). But then we would need to investigate the
rate of return for each investment for the entire life of
the fixed capital. More on this later.