# [OPE-L:1588] Re: Fixed Capital in Empirical Work

John R. Ernst (ernst@pipeline.com)
Wed, 27 Mar 1996 11:45:41 -0800

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Paul,

I am puzzled. First, let's take a look at that question and your

My question:

>On the use of "book value" in your definition, for me, questions
>arise.
>
>1. Would not \$1000 assigned to the stock of circulating capital
> soon to be used be no different than the \$1000 machine "on the
> books"? Yet, if the machine is to be used for 10 years and
> the stock of circulating capital to be consumed next year,
> would not the rate of profit differ, assuming that either
> investment produces, say, \$100 in profit? Just asking.
>

I see no difference. The \$1000 soon to be used up will have
to be replaced by another \$1000 worth of stocks if production
is to continue - give or take some stocking/destocking during

My new questions:

Let's consider that \$1000 investment. If it turns over in a
year and the gross payment is \$1200, then clearly the rate of
return is 20%. But what if it is an investment in fixed
capital and lasts 5 years with the same annual payment. Then,
with amortization, we have

Table I

r=1.18(rounded to 2 decimal places)

(Figures below rounded to nearest whole number)

F.C. A.P. Dep. Profit

1000 1200 25 1175
975 1200 54 1146
922 1200 117 1083
805 1200 254 946
552 1200 552 648

Here, r is the rate of return is 120%. F.C. represents the capital
tied up in a given period, A.P. the annual payment, Dep. the amount
of that payment that goes to depreciation, and the profit is profit.

My point is that it does seem to make a difference whether or not
the \$1000 is invested in fixed or a stock of circulating capital.
If it is circulating capital, turning over once a year, as we
said above, the rate of profit is 20%. If it is fixed capital, at
the beginning of its 5 year life, the rate of return is 120%. The
gross annual payment of \$1200 is assumed to be the same in both
cases.

Now, I will admit that if the ratio of fixed to circulating
constant capital remains the same AND the turnover times of each
are unchanging, relative results will not be affected. These
seem like strong assumptions to me. Hence, let me ask

1. How do you determine the turnover time of the fixed investments
in measuring the rate of profit?

2. Would you use something like Table I in measuring the rate of
profit on fixed investments? If not, why not?

3. In computing the book value, what method of depreciation is
used? Should not the amortization process like the one I
used to construct Table I be used?

Note, again, this is not an attack on empirical work, but rather
an attempt to understand how we can relate it to the rate of
profit when fixed capital is present. I have a feeling that
those dealing with the empirical may be closer to the answers
then those who proceed from CAPITAL as Marx often "abstracts
from" the presence of fixed capital and depreciation in computing
the rate of profit.

John