Re: Value

[Drewk <Andrew_Kliman@xxxxxxx>]

First, with permission, is Rakesh Bhandari's message, followed by
my reply:  AJK

-----Original Message-----
From: Rakesh Bhandari [mailto:rakeshb@xxxxxxxxxxxx]
Sent: Saturday, June 14, 2003 2:57 PM
To: Andrew_Kliman@xxxxxxx
Subject: Value


>Hence,
>declining prices (or even a decline in their growth rate),
>including declines caused by technological advances, *must
always*
>lower the average profit rate, cet. par.  The decline in output
>prices causes a subsequent decline in input prices, which tends
to
>negate the fall, but a subsequent new fall in prices (or their
>growth rate) tends to negate the negation.


Andrew, this is a compelling vision of the capitalist process. If
possible, could you speak to this bit of skepticism?

If prices are falling, then wouldn't capitalists anticipate that
the
capital goods which they are using up will become cheaper and thus
reduce their depreciation allowances?

If depreciation allowances are reduced, then couldn't even the
nominal profit rate rise even as output prices decline? Moreover,
couldn't real profit rise in the sense that a constant nominal sum
will be able to purchase a greater quantity of use values as unit
prices decline? In fact, couldn't real profit rise so much that
capitalists could still have trouble locating profitable
investment
outlets for their income after depreciation and their own
consumption?



Yours, Rakesh

=============

Yes, they *might* cut depreciation charges, which would boost
measured "profit" (I wouldn't call this "nominal" profit, though,
because it's not the opposite of inflation-adjusted).  But I
believe that standard practice is to amortize, over a number of
years, the full expense of machines, etc., that was originally
incurred.  Profit is what's left over after expenses, and the
expenses are the original costs, not the replacement costs, of
machines, etc.

To reflect what is really happening to the profit rate, i.e., the
rate of growth ("self-expansion") of capital, depreciation charges
should *increase* when prices are falling, because of moral
depreciation.  There are losses of capital-value, and before they
can be wiped off the books and thereby boost the profit rate by
lowering its denominator, they must FIRST be charged against
profit, lowering the profit rate by depressing its numerator.

But measured profit rates are another matter.  That's one reason
why I continually stress that trends in measured profit rates have
little to do with the law of the tendency of the profit rate to
fall, and that theoretical reflection on measured profit rates is
a dubious exercise.


"couldn't real profit rise in the sense that a constant nominal
sum will be able to purchase a greater quantity of use values as
unit
prices decline?"

It's true, by definition, that a constant monetary sum will always
be able to purchase a greater quantity of use values when unit
prices decline.  But again, profit is what's left over after
expenses, and the expenses are the original costs, not the
replacement costs, of machines, etc.  Consider the following
example (from Andrew Kliman and Alan Freeman, "Rejoinder to Duncan
Foley and David Laibman," _Research in Political Economy_ 18,
2000):

"[Imagine a company that produces computers by means of computers,
which] borrowed $1000 a year ago, and used it to buy one computer
in order to produce two computers, completed today.  If the new
computers are worth $500 each, the firm’s net worth has increased
not a whit.  (Since interest is due, its net worth has in fact
declined.)  Its earnings are zero, not only in money terms, but
also in real, physical, terms:  it has no resources with which to
expand its production.  The rate of profit that reflects this
situation accurately is the 0% monetary rate, not the 100%
material rate [or replacement cost rate]."

If the firm goes out and borrows another $1000, it can now buy 2
input computers at $500 each, and produce (say) 4 output
computers.  But if the price of the latter is $250 each, we have
the same situation as before, except that the interest charges are
mounting.  And so on.


We also said the following about "real profit":

"The decline in the value of goods and services relative to the
denominated value of debt that we have depicted –– debt
deflation –– is a crucial determinant of economic crises, as the
recent Asian crisis has made clear.  Marx (1968, p. 496) was
acutely aware of this, as are both Laibman and Foley.  What we
wish to stress here, in regard to the real/nominal distinction, is
a point that Mervyn King (1993, emphasis added) of the Bank of
England has made: 'debt deflation is a real not monetary
phenomenon, and is concerned with a change in relative prices.  It
is the change in the distribution of net worth from debtors to
creditors which leads to a fall in demand and output.'

"THE REALITY OF VALUE

"We do concur wholeheartedly with Foley that the monetary rate of
profit is not the only thing that matters.  '[I]t would not be
very satisfactory to argue that the falling rate of profit is not
a problem for capitalist economies because the monetary rate of
profit can be raised to any level through inflation.'  The real
rate of profit is also important.  We suggest, however, that the
appropriate way to measure the real rate is not to use the
material [or replacement cost] rate, but instead to employ Marx’s
method.  He decomposed price changes into their real and nominal
sources.  The real source of price changes is changing costs of
production.  Thus Marx’s real rate of profit is the rate that
would obtain if changes in the aggregate price of output were
accurately to reflect changes in real production costs, i.e.,
changes in productivity.  It is the average rate of profit that
would tend to result under competitive conditions, conditions that
tend to force prices into line with production costs.

"Since an aggregate price that reflects changes in productivity is
what Marx meant by aggregate value, his real rate of profit is the
value rate.  It is, in other words, the particular monetary profit
rate associated with a constant monetary expression of labor-time,
or, equivalently, the labor-time profit rate.  Contrary to Laibman
’s claim that the value rate of profit subsists in some
'subterranean world,' it exerts its influence in the real world
whenever rising productivity leads to a falling price level, or
even to a declining inflation rate.  Both deflation and
disinflation lower the monetary rate of profit.  The law of value
likewise exerts its influence whenever factors that may offset
deflation and disinflation cause crises to take somewhat different
forms.  For instance, although excessive credit expansion can prop
up prices artificially and thus cause the nominal rate of profit
to rise above the real rate, it leads to debt crises and fiscal
crisis."

Andrew Kliman