[OPE-L:2534] FRP models

Duncan K Foley (dkf2@columbia.edu)
Tue, 18 Jun 1996 11:16:38 -0700 (PDT)

[ show plain text ]

A reply to some of the points Andrew made in his summing up on the falling
rate of profit.

Andrew:
(1) Given profit-maximization, viable tech. change, and a constant real
wage rate, the general rate of profit can fall even if the ratio of
fixed capital to output declines. Thus it can fall if the ratio is
constant or rising. (In an example with positive wages, the tech. change
will be viable if the cost of the additional fixed capital is less than
the savings coming from a fall in the money [or labor-time] wage rate.)

Duncan:
I think it is critical in stating these results to be completely explicit
about what profit rate we are talking about. What the example shows is
that the rate of profit measured as the ratio of current surplus value to
historical cost can fall, even when the rate of profit measured in the
commodity numeraire is rising, and even when the prospective rate of
return to new investment is rising.

I think most people working on this problem are aware that under
conditions of technical change it is possible for the rate of profit
measured on historical cost to diverge from the prospective internal rate
of return, but have 1) taken the prospective internal rate of return as
the relevant variable and 2) regarded these divergences as of minor
practical importance. Andrew's examples push this divergence to its most
extreme form by assuming no depreciation at all.

Andrew:
(3) Since the results do not alter any of the presuppositions of the
Okishio theorem, but come to contrary conclusions on the basis of
the theorem's own assumptions, or assumptions not precluded by the
theorem, the Okishio theorem has been refuted.

Duncan:
I don't think this is the proper use of the term "refuted". What has
happened is that you have changed the profit rate from the one Okishio was
looking at (the prospective internal rate of return) to the ratio of
surplus value to historical cost of capital. A "refutation" is a
counterexample that meets all of the hypotheses of the proposed theorem.
Your example obeys the Okishio theorem, because the internal rate of
return is rising.

Andrew:
One reason Duncan doesn't think this was what Marx was studying is
because,
according to Duncan, Marx was studying "capital-using" tech. change. I
take this to mean a rising capital/output ratio. I know of no evidence
for this in Marx, none. I think this is a myth, albeit one with an
obvious explanation.

Duncan:
What's interesting to me is that the general pattern of capital-using,
labor-saving technical change is widely observed in the course of
capitalist development. I don't have the time or inclination now to go
through Marx with a fine-toothed comb on this issue, but much of what he
says on the FRP and on relative surplus value in Volume I of Capital
suggest this.

Andrew:
(1) That the difference between the anticipated profit rate and the actual
rate will be less if fixed capital has a finite life changes only the
magnitude of the fall, not the possibility itself. Moreover, long-lived
capital (30-40 years) has an IRR almost the same as infinite capital,
because
later returns are discounted so heavily.

Duncan:
The difference in IRR isn't at issue. The problem is that when capital
doesn't depreciate at all, every past investment remains in the capital
stock valued at historical cost forever. This is the source of the
divergence between the ratio of current surplus value to historical cost
of capital and the prospective IRR in the examples. If, for example, the
original factory in the example we worked through lasted a finite time,
sooner or later it would be amortized, and the "general rate of profit"
would become equal to the IRR on current investment.

Andrew:
(2) When old factories go out of business, this doesn't raise the actual
IRR for society as a whole. The value has been invested, and can't be
made to vanish retroactively. Capitalists do write down losses, but
charge them against profits, which lowers the profit rate--this is merely
a
different technique that accounts for devaluation. But it doesn't ignore
it,
the way simultaneism does.
(4) I don't understand why devaluation is a problem for owners
of old factories only if they mis-anticipate the fall in values. They
still go out of business even if they forsaw the fall. If foresight
leads
them not to invest to begin with, then this certainly doesn't spur
the expansion of the system.

Duncan:
Don't capitalists recover the initial investment through depreciation? If
technical change is accelerating depreciation, as long as the capitalists
anticipate it, they will accelerate their recovery of costs. The value
doesn't "vanish", but is recovered in the ordinary course of business. The
owners of completely depreciated and obsolete factories don't exactly go
out of business, since they've recovered their capital and can invest it
in new facilities or a different line of production: they do, of course,
close the obsolete facility.

Andrew:
"The periodical DEVALUATION OF THE EXISTING CAPITAL ... disturbs the given
conditions in which the CIRCULATION AND REPRRODUCTION PROCESS of capital
takes place, and is therefore accompanied by sudden stoppages and crises
in the production process" [my emphases].
"...Added to this is the fact that since certain price relationships
are ASSUMED IN THE REPRODUCTION PROCESS, AND GOVERN IT, this process is
THROWN INTO STAGNATION AND CONFUSION BY THE GENERAL FALL IN PRICES" [p.
363,
my emphases]. "The chain of payment obligations at specific dates is
broken in a hundred places" (ibid.), the credit system breaks down. "All
this therefore leads to violent and acute crises, sudden forcible
devalua-
tions, an actual stagnation and disruption in the reproduction process,
and
hence to an actual decline in reproduction" (ibid.)

Duncan:
These quotes seem to me to have to do with short-run phenomena, crises and
the business cycle. I agree that at this level the deviation of the rate
of profit at historical cost from the prospective IRR can be a major
disequilibrating force for capitalist reproduction and the credit system.
Note, however, that Marx explicitly refers to expectations in these
formulations, and that the disequilibration is a consequence of
unfulfilled expectations.

I think I understand the claims Andrew makes better now, but I remain
doubtful that the FRP in his examples is the one that is relevant to the
long-run evolution of capitalist production.

Yours,
Duncan