[OPE-L:7352] [OPE-L:882] Re: Discounted Prime Costs

Tue, 13 Apr 1999 11:39:15 +0100

>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=38.42857143/290
> 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?

I think that I had in mind something that is not brought
out in the figures, that by using a lower cost method
of production it will be possible to capture a larger
market share. This is the argument for technical change
given in vol 1.

I had not taken this into account in the example because
I had assumed that the new product would sell at the same
price as the old one. Let us instead assume that to sell
twice as many items it is necessary to reduce the price
and construct a new example on that basis.

We now have 3 columns. One, relates to the old technique,
the next relates to the profitability of the old technique
in competition with the new one. The third is the new

I have also put in a new row showing the value of the
commodity. Initially we assume that price = value.
In order to sell twice as many items the the producer
would have to cut their price from 50 to 45.

Using the old technique, and using borrowed capital
at 4% the profit of enterprise would now fall to
nugatory levels, whereas with the new technique,
the profit of enterprise rises.

old old in comp with new new
const cap 100 200 400
life 5 5 10
dep 20 40 40
raw mat 10 20 10
wages 10 20 10
output physical 1 2 2
prime cost 40 40 30
value 50 50 35
price 50 45 45
profit 10 10 30
capital 120 240 420
rate of prof 0.083 0.041 0.071
discount rate 0.04 0.04 0.04
Interest paid 4.8 9.6 16.8
p of e 5.2 0.4 13.2
disc pc 44.8 44.8 38.4

What we have here is a fall in the value of the product
a fall in the rate of profit even with the new technique,
but it is favourable to adopt it because the discount
rate is sufficiently low.
This, I think, is what actually occurs when a rising
organic composition leads to a falling rate of profit.
The fact that the rate of interest is below the
rate of profit allows the underlying reduction in
value to offset the higher capital stock required
for the new technique.
Paul Cockshott