The effect of these newer machines was to bring about a 'moral depreciation' of the older machines. A new machine that is twice as productive as its predecessor cuts the value of the older machine in half. Because this fixed capital conveys its value gradually to the end product, via its wear and tear, if the value of the machine halves, the value of the wear and tear also halves. So, there is no way its original cost can then be recovered through this wear and tear. This is one reason capital, at the time, sought to have long hours of work, shift systems and so on, so that the machines were fully occupied, for as much time as possible. That way, this wear and tear was recovered, in the shortest possible time, providing the reserve fund for its replacement, hopefully before any new machine is introduced.
There are a number of different problems that arise. One is to do with new machines that have the same price as their predecessors, but are far more efficient, secondly is the reduction in value of machines due to increases in productivity, and thirdly is the situation facing capitalists who have borrowed money-capital rather than using their own.
If we take the first case, we might have a machine that costs £1,000. It produces 10,000 units in 5 years, thereby transferring £0.10 in wear and tear to each unit. However, if a new machine also costing £1,000 is introduced, but which produces 20,000 units in 5 years, then it transfers only £0.05 in wear and tear to each unit. The first machine can then only transfer this amount, or else its products will be too expensive. Working backwards, this means that machine is worth 10,000 x £0.05 = £500. This is all the owner can recover.
But, when they come to replace it, they need £1,000 to buy the new machine. They will have suffered a £500 capital loss that they will have to make up by the addition of more capital. They, therefore, have an incentive in trying to work the machine as intensively as possible, which means working their workers as intensively as possible, so that the wear and tear can be spread over a larger number of units the same as the newer machine. But, it they can't do that, either they must suffer the capital loss or they must continue to price their commodities uncompetitively, or absorb it from their surplus value.
In practice, its more complicated, because as Marx sets out later, the depreciation fund and the accumulation fund are not strictly separated. In other words, firms accumulate money-hoards made up of the value of wear and tear to cover replacement of fixed capital, and they also accumulate money-hoards made up of surplus value, which cannot immediately be used for expansion. But, there is no reason for these funds to be kept separate. If a firm has £500 accumulated in its depreciation fund, and £500 accumulated as surplus value for expansion, then if a new machine is produced costing £1,000, then they can use both funds together to buy this machine immediately. That does not mean scrapping the old machine. It means, provided they have the necessary capital to fund the additional circulating capital, they can expand now, rather than when they had accumulated enough surplus value.
So, in reality firms will have a spread of machines of different ages and levels of efficiency. If there are five firms, firm A may get a jump on its competitors if it is due to replace one of its machines just as a new, better machine is available. But, a few weeks later, firm B might be due to replace one of its machines, and be able to either buy a yet newer machine, or to buy the same machine as A, at a now lower cost, because as Marx describes the price of new machines always falls rapidly as more are produced. This will be followed in the same manner by C,D, and E in similar vein. Having money available in a money-hoard comprising surplus-value, facilitates taking advantage of such developments. This one reason, as Marx sets out why the accumulation of money-hoards is an inherent aspect of capitalist production, rather than money-capital being immediately invested.
“If, on the other hand, the short period in which the machinery is effective (its short life vis-à-vis the anticipated improvements) is not compensated in this manner, it gives up so much of its value to the product through moral depreciation that it cannot compete even with hand-labour.” (p 113)
In these cases also, Marx says,
“The usual expedient — a reduction of wages — is also employed in this instance, so that this continual depreciation acts quite contrary to the dreams of Mr. Carey's "harmonious brain".” (Note 15, p 113)
But, there is a second type of 'moral depreciation'.
“After machinery, equipment of buildings, and fixed capital in general, attain a certain maturity, so that they remain unaltered for some length of time at least in their basic construction, there arises a similar depreciation due to improvements in the methods of reproducing this fixed capital. The value of the machinery, etc., falls in this case not so much because the machinery is rapidly crowded out and depreciated to a certain degree by new and more productive machinery, etc., but because it can be reproduced more cheaply. This is one of the reasons why large enterprises frequently do not flourish until they pass into other hands, i. e., after their first proprietors have been bankrupted, and their successors, who buy them cheaply, therefore begin from the outset with a smaller outlay of capital.” (p 114)
It is here that the significance of whether the capital is borrowed or not arises. Suppose capitalist A borrows £1,000 to buy a machine, which again produces 10,000 units in 5 years, thereby conveying £0.10 per unit in wear and tear. Capitalist B puts up £1,000 of their own capital for the same purpose. As a result of rising productivity, the replacement cost of the machine falls to £500.
Both machines can now only transfer £0.05 per unit and over their lifetime return the £500. But, at the end of the five years, A and B are now in different positions. A has only been able to recover £500 of the £1,000 they borrowed. To continue operating, they would need not only to extend this loan, but also to borrow a further £500 to buy a new machine at its new, lower price. But, unless they were able to transfer £0.10 per unit of wear and tear, to the commodity, over the next five years, they would still only recover £500, leaving them still £500 in debt.
Capitalist B, however, metamorphosed their £1,000 of money-capital into a machine of the same value. That value then halved. But, in the process of production, the value of the machine was recovered so that the capital-value could be recovered. The sequence was something like M – C..C/2..M/2. But, in the new circuit we still have M-C-M, because although M/2 is nominally only half the original M, its actual exchange value, relative to the value of the machine has doubled. £1,000 was paid for the machine. £500 is recovered in wear and tear of the machine, but now only £500 is required to replace it.
Moreover, although capitalist B has suffered a capital loss – they began with £1,000 of money-capital, and now have only £500 of productive-capital - not only does this not badly affect their situation as a productive-capitalist, but it enhances their position. The machine has the same productiveness as it had before. But, if the firm makes £1,000 of surplus value, then previously it could only have bought 1 additional machine. Now it could buy 2.
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