# [OPE-L:1600] Re: Fixed Capital in Empirical Work

Paul Cockshott (wpc@cs.strath.ac.uk)
Thu, 28 Mar 1996 02:41:19 -0800

[ show plain text ]

In &lt;199603271939.OAA26419@pipe4.nyc.pipeline.com>, John R. Ernst wrote:

>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
>
>

The assumption that the gross sales will be the same in the
two cases on your part seems arbitrary.
You also seem to make no allowance for wages, assuming that
everything over and above replacement of capital is profit.

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

In working out profit rates it makes no difference whether one
is dealing with fixed or circulating capital provided both
are expressed as stocks, in which case the rate of profit
has dimension 1/t. One can work out an alternative rate
of profit s/(c+v) which is strictly speaking a flow rate
and is a dimensionless number. This is what Marx ususally uses.
Here again turnover time is irrelevant provided that everything
is expressed consistently as a flow.

>2. Would you use something like Table I in measuring the rate of
> profit on fixed investments? If not, why not?
>
No one uses the stock quantity in \$s and divides the flow quantity
for profit, also in \$s by it, and arrives at a rate of profit
with the dimension given above. Remember that one is averaging
over investments at all sorts of stages in their lifetime
when taking an aggregate value for capital stock.

>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?
>

Data in national income accounts will often provide both historic
and replacement cost estimates of the stock. I use the replacement
cost estimate in working our profit rates. The depreciation and
amortization has all been done by company accountants long before
the figures get into the national accounts, though depreciation
figures on a per industrygroup basis are also usually available.