[OPE-L:4015] Re: More Depreciation Questions

andrew kliman (Andrew_Kliman@msn.com)
Fri, 17 Jan 1997 16:27:04 -0800 (PST)

[ show plain text ]

A reply to Michael P's ope-l 4010, and to the whole discussion.

He wrote:

"Andrew, consider this simple example: I buy a computer. The expected
lifetime is 10 years. New technology makes me scrap it in 3 years. I would
say that the transfer of value takes place over 3, not 10 years, but this
transfer can be calculated only ex post."

I agree with this. As I noted in ope-l 4008:

"Or, for a starker example, assume the machine is bought now (12:11 am) for
\$15,000 but becomes obsolete - scrapped and replaced by a BETTER machine - now

(12:12 am), before it is ever used in production. Its technological life is 3

years; its economic life turned out to be 0. It transfers no value to the
product (what product?); it immediately depreciates from \$15,000 to \$0; all
the depreciation is moral (if indeed it is no longer worth anything at 12:12).

[...]

"If a machine is scrapped because a better machine comes
along, it transfers no more value, irrespective of how much longer it is
capable of functioning."

But I'm not sure we agree about the following. I understand Marx's concept of
moral depreciation to be such that, if the machine is scrapped after three
years instead of its technological lifetime of 10 years, it does not therefore
transfer additional value per year during the first three years. If the
machine had a price of \$15,000, and no price drops occurred during the first 3
years, my interpretation implies that a value of \$15,000/10 = \$1500 is
transferred each year for the first 3 years (assuming the machine is run at
normal intensity), for a total of \$4500. The transfer *per year* is identical
to what it would be were the machine used the full 10 years. The moral
depreciation is \$15,000 - \$4500 = \$10,500, which is a loss to the firm.

If firms could make the values of their products rise by somehow (through
accounting? markup pricing?) dictating that \$15,000/3 = \$5000 would be
transferred each year, capital would never have to worry about moral
depreciation.

I remain convinced that, in Marx's theory, how capitalists keep their books
and what they expect cannot influence the determination of commodity values.
To think that capitalists themselves determine the amount and rate of transfer
to value is to think the opposite, and it contracts successivism. So I remain
convinced that the discussion is getting ensnared in needless difficulties by
mixing up two quite different things, value determination and accounting. My
preference is just to deal with the former. But because everyone else keeps
talking in terms of accounting and expectations, I think I should indicate how
the two problems are related. It is quite simple: if firms anticipate moral
depreciation, what they do is *count* some of their profit (surplus-value)
from operations as depreciation. In other words, they record their profit as
less than it really is, and they record as depreciation not only the value
transferred to the product but also some of the moral depreciation.

This in no way affects the determination of value. Let me illustrate this by
means of a simple example. Say a firm produces by means of 1 machine, which
was worth \$15,000 when bought, and living labor, which adds a value of \$8000
per year. Workers' wages are \$2000 per year. The firm sells its output at
its value. The machine is technologically capable of lasting 5 years. After
three years, however, it is scrapped, replaced by a better (or BETTER)
machine. During the first 3 years, the price of a replica machine remains
\$15,000.

Hence, in the first three years, we have the following, as the ACTUAL
situation:

used-up C V S value
-------------- -------- ---------- -----------
\$3000 \$2000 \$6000 \$11,000
\$3000 \$2000 \$6000 \$11,000
\$3000 \$2000 \$6000 \$11,000

The machine thus transfers a value of \$9,000. Moral depreciation, a loss to
the firm, is \$15,000 - \$9,000 = \$6000.

Now, assume the firm expects, correctly, that although the machine is
physically able to run for 5 years, it will become obsolescent after 3, and
therefore it "accelerates its depreciation." So it records depreciation
charges of \$15,000/3 = \$5000 during each of the first 3 years. The key thing
to note, however, is that the firm does NOT determine the price of its output.
That is determined by the law of value. Here, in particular, the price is
assumed to be exactly equal to the value. The price, minus wages and what the
firm counts as depreciation, is what it *counts* as profit.

Thus we have the following APPARENT situation:

Price Wages "Depreciation" "Profit"
----------- ---------- ----------------- -----------
\$11,000 \$2000 \$5000 \$4000
\$11,000 \$2000 \$5000 \$4000
\$11,000 \$2000 \$5000 \$4000

According to Marx (as I interpret him), the sum of surplus-value is \$18,000.
But the sum of "profit" here is only \$12,000. Where did the other \$6000 go?
Well, each year the firm counted \$5000 as depreciation, which is \$2000 more
than the actual amount of value transferred, \$3000, and this additional \$2000
was "charged against profits." \$2000*3 = \$6000.

Notice that how the firm keeps its books doesn't affect the numbers at all.
It seems to matter, but actually the firm is just juggling the figures. Why?
Because firms don't determine the value of their products, or the wages they
pay.

If the value of output equals the price of output (and therefore surplus-value
equals profit) --- as is always true in the aggregate --- then

Price = Value Transferred + Wages + Surplus-Value

"Profit" = Price - Wages - "Deprecation"

and so

"Profit" = (Value Transferred + Wages + Surplus-Value) - Wages -
"Depreciation"

= Value Transferred + Surplus-Value - "Depreciation"

so that

(Surplus-Value - "Profit") = ("Depreciation" - Value Transferred).

So they're just shifting surplus-value from profit to "depreciation." The
firm's books imply that it recouped the whole value of the machine, \$15,000,
and made a "profit" of \$12,000; whereas actually it recouped only \$9000 of the
value of the machine and its actual profit from production, surplus-value, was
\$18,000. Whatever you call it, the fact remains that the firm brought in
\$33,000 over 3 years, shelled out \$15,000 + 3*\$2000 = \$21,000, and wound up
with \$12,000 net, which is the surplus-value of \$18,000 minus the \$6000
capital loss.

This is the way that firms "anticipate" and "guard against" moral
depreciation. You can't change something by changing its name.

VALUE: IT'S THE LAW!

Andrew Kliman