Monday, 31 October 2016

Moral Depreciation

Moral Depreciation is a special form of depreciation. All depreciation is a reduction in use value, and consequently value that arises outside the labour process. It, therefore, represents a capital loss. Where moral depreciation differs from depreciation is that the former arises not as a result of any physical deterioration of the constant capital. Its use value declines, relatively, because some new replacement for it provides greater use value. Its value declines either because of this relative decline in use value, or else because rising social productivity means that less labour-time is required for its production. This means that moral depreciation has different consequences than normal depreciation.

Moral depreciation can occur where a new, more productive type of machine is introduced. Suppose machine type A is currently in use. Its value is £1,000, and it is expected to be able to produce, over its lifetime, 10,000 units of output. In that case, it transfers £0.10 of its value to each unit of output, as wear and tear. Now, if a new machine, type B, with the same value of £1,000, but which is expected to produce 20,000 units of output, during its lifetime, is introduced, it will only transfer £0.05 of its value to each unit of output.

In effect, the use value, and value of machine type A has been halved, irrespective of any deterioration in its actual condition it might have experienced. Its use value has halved, because it is only capable of producing half as many units of output as machine type B. Irrespective of its historic cost, i.e. its value or market price, at the time it was purchased, the value of machine type A, has also, therefore, been halved overnight. Its value is now only £500, and this capital has, thereby suffered a capital loss of £500.

Moral depreciation can also occur, where a rise in productivity causes a reduction in the labour-time required for production of the constant capital, and consequently a fall in its value. For example, if machine type A, above, required 100 hours of labour-time to produce the wood, metal, and other materials required for its construction, representing a value of £500, and also required a further 100 hours of labour-time undertaken by the machine maker, for its construction, again representing a value of £500, the value of the machine could fall if either less labour-time is required for the materials, used in its construction, or in the labour-time itself required for its own construction.

If rising productivity means that the cost of wood, metal and other materials used in the machine falls to £250, and if productivity in the machine building industry (perhaps itself due to the introduction of some new machine) rises so that only £250 of new additional value is added, the value of the machine will fall to £500. Again, irrespective of the historic cost of such machines, their value too will be reduced to £500, again representing a £500 capital loss.

But, again demonstrating the difference between depreciation and wear and tear, this moral depreciation does not only apply to fixed capital. In Capital III, Chapter 6, Marx sets out a series of examples of appreciation and depreciation of circulating capital. Also, in Capital III, Chapters 48 and 49, and elsewhere, Marx says that the constant capital must be replaced "in kind", in other words must be physically replaced. However, he goes on to qualify this by adding “at least in effectiveness”. In other words, machine A can be replaced by the more productive machine B, but could not be replaced by a less productive machine type C, if social reproduction were to continue on at least the same scale. Moreover, as Marx says, this could not happen in practice, because firms never choose to replace one method of production with a less efficient method of production.

The value of raw materials held in stock can be morally depreciated, because rising productivity means that they can be now produced more efficiently, and their current reproduction cost is, therefore, less than their historic cost, again representing a capital loss. As Marx sets out in Capital III, Chapter 6, this can occur the other way too, creating a capital gain, if for some particular commodity productivity falls, and the current reproduction cost rises.

“Appreciation and depreciation may affect either constant or variable capital, or both, and in the case of constant capital it may, in turn, affect either the fixed, or the circulating portion, or both...

If the price of raw material, for instance of cotton, rises, then the price of cotton goods — both semi-finished goods like yarn and finished goods like cotton fabrics — manufactured while cotton was cheaper, rises also. So does the value of the unprocessed cotton held in stock, and of the cotton in the process of manufacture. The latter because it comes to represent more labour-time in retrospect and thus adds more than its original value to the product which it enters, and more than the capitalist paid for it.”

(Capital III, Chapter 6) 

But, the value of raw materials held in stock may be morally depreciated for the same reason as that applying to fixed capital where a new machine is introduced. In other words, a new alternative material may be introduced, which is either more effective, or else is cheaper. Iron rails were replaced on railways by the more effective and durable steel rails, for example, and any iron rails, held in stock by railroad construction companies, would thereby be morally depreciated.

As Marx also suggests in the quote above, labour-power can also be depreciated in this manner. Workers may have negotiated a wage for the current year, which would be based upon the value of labour-power. That would then be the historic cost of labour-power, paid by the firm. But, if rising productivity means the value of labour-power falls, because the value of means of consumption falls, the actual value of the labour-power employed by the capital will be less than what is paid in wages, equal to the variable-capital. It would again represent a capital loss for the firm. This is one reason that modern large-scale capital does not like deflation, and prefers an element of inflation, so that as social productivity rises, and the value of labour-power falls, the rate of surplus value can increase without the need to introduce reductions in nominal wages.

This moral depreciation has different consequences to those of ordinary depreciation. A firm that has constant capital with a value of £1,000, might see it depreciate by 10%. That depreciation might be because some of it is eaten by mice, is spoiled by damp etc., or may be because the entire productive supply loses some of its use value. For example, a market trader might find that all of their stock of produce deteriorates during the day, so that they have to sell it for less money; a producer of clothing may have a stock of material of one design or colour, which becomes unfashionable, so that the clothes they produce with the material have less use value, and have to be sold at a lower price

In each of these cases, the firm will have suffered a capital loss equal to the difference between the historic cost of the capital, and its current value. When they come to replace the consumed capital, however, they will again have to cover its full value, which they can only do via an injection of additional capital, equal to this capital loss. But, this is not the case with moral depreciation.

If a firm employs a machine with a value of £1,000, then, if the machine is depreciated by 10%, because it lies idle, and is not maintained, when it is replaced, the firm will again have to pay £1,000 for the replacement machine. The firm will have suffered a £100 capital loss. However, suppose the machine suffers a moral depreciation of 10%, because a rise in social productivity means that it can now be produced for only £900. The firm again suffers a £100 capital loss. If it came to sell its machine, it would only be able to get £900 for it.

In addition, if the machine gives up 10% of its initial value, each year, as wear and tear, then instead of it transferring £100 of value to the end product, it will now only give up £90 per year – 10% of its now depreciated value. Over ten years, a sum of £900, rather than £1,000, will have been built up in the fund for its replacement. However, a new machine, now only costs £900, rather than £1,000, so that the fund for replacement, built up from the value transferred to the end product, and thereby reproduced within it, is now adequate to acquire the replacement machine without any injection of additional capital. This applies also to the circulating constant capital in terms of the difference between a normal depreciation of value, as opposed to a moral depreciation of value.

In other words, if the value of cotton falls, due to a rise in productivity in cotton production, the value of the cotton held in stock, work in progress, or in the final product yet unsold, is likewise depreciated. It transfers less value to the final product, but less value is, in turn, required, to replace this constant capital, as a result of the same reduction in its value, so that the value of the now depreciated constant capital is still reproduced in the end product. This is the true meaning of the circuit C – M – C. In terms of a simple reproduction of the capital.  If a producer holds a stock of materials C, with a value of £1,000, if this material falls in value to £800, it now only transfers this £800 of value to the end product, which is then realised in money, as £800 of money-capital. But, this £800 of money-capital, is now adequate to replace the original mass of consumed commodities.

But, as Marx sets out in Capital III, Chapter 6, this moral depreciation has a significant consequence for the rate of profit. This can again be compared with the situation in relation to a normal depreciation. Suppose a capital is comprised of a building with a value of £100,000, a machine with a value of £10,000, materials comprising £5,000, labour-power of £3,000, with a 100% rate of surplus value. The capital turns over once per year. The building is expected to last for 100 years, and the machine for 10 years, so that each transfers £1,000 per annum to the value of the end product in wear and tear.

We would then have for the annual rate of profit:

Advanced capital of £100,000 (building) + £10,000 machine + £10,000 materials + £3,000 wages = £123,000. The surplus value is £3,000 giving an annual rate of profit of 2.44%.

The rate of profit/profit margin is:

Laid out capital of £10,000 materials + £3,000 wages + £2,000 wear and tear of fixed capital = £15,000. The surplus is value is £3,000 giving a rate of profit/profit margin of 20%. The value of output is £18,000.

Suppose that the materials are depreciated by £2,000. The firm suffers a £2,000 capital loss. These materials can only transfer £8,000 of value to the end product. The same would be true if the machine suffered a depreciation, and required £2,000 of additional capital for its repair etc. In this case, the £2,000 capital injection is required immediately. In the case of a depreciation of the materials, it is only when they come to be physically replaced that the £2,000 of additional capital is required. The firm now sells its output for £16,000. £3,000 is taken as profit, £2,000 is placed in the fund for replacement of fixed capital, leaving £11,000 to reproduce the £13,000 of circulating capital required. So, at this point, an additional £2,000 of capital would have to be injected.

Now consider the situation where instead of such a normal depreciation, there is a moral deprecation of the capital. We will assume that it is the material that suffers a 20% depreciation in its value, due to a rise in productivity, in its production. The situation in respect of the annual rate of profit would then be:

Advanced capital of £100,000 (building) + £8,000 material + £3,000 wages = £111,000. The surplus value remains £3,000 so the annual rate of profit rises to 2.70%.

The rate of profit/profit margin would be:

Laid out capital of £8,000 materials + £3,000 wages + £2,000 wear and tear = £13,000. Surplus value remains £3,000 giving a rate of profit of 23.08%. The value of output falls to £16,000.

However, suppose that all of the surplus value is accumulated as additional capital. If the capital suffers a moral depreciation, any quantity of surplus value will now buy more of it. This indeed is what is reflected in the rise in the rate of profit from 20% to 23.08%. If previously, £10,000 bought 10,000 units of material, these 10,000 units now have a value of only £8,000, and this is passed on into the value of the end product, C – M – C. The £8,000 value realised in the end product value, now reproduces these 10,000 units of material.

If 200 workers are employed to process these materials, then the profit of £3,000 would have enabled an additional 2,000 units of material to be processed, and an additional 40 workers to be employed to process them. But, with the lower value of materials, the £3,000 of profit will now enable an additional 2,300 units of material to be processed, and an additional 46 workers to be employed to process them. 

So, in both cases, the capitals involved suffer a capital loss of £2,000 due to the depreciation of their capital. However, in the case of the capital where its capital suffers a normal depreciation, there is no variation in its rate of profit, which remains 20%, whereas in the case of the capital which suffers a moral depreciation of its capital, due a fall in the value of its materials, this capital loss is offset by a rise in its rate of profit from 20% to 23.07%, because its profit is now able to buy a greater quantity of material and labour-power.

7 comments:

Norman Pilon said...

Excellent analysis and lesson, Boffy. 'Moral depreciation' hadn't been anything on my radar until reading the "discussion" dated December 8th 2011, over at Michael Roberts' blog, beneath the post titled, "Andrew Kliman and The Failure of Capitalist Production." Your effort is much appreciated. Thank you for this.

Boffy said...

Norman,

Thanks for the comment. I posted a further comment on MR's blog the other day illustrating this point about the reduction in value, post facto, of constant capital replaced in kind, which thereby affects the rate of profit. The example, given by Marx in TOSV Ch. 16, involves coal used in steam engines by a coal miner. For some reason the comment having appeared in the moderation queue then disappeared!

Here is the example.

“But supposing that the coal or the corn or whatever other product of the earth, the product produced by agricultural capital, itself enters in kind into the formation of the constant capital. Let us assume for instance that it makes up half of the constant capital. In this case it is clear that whatever the price of the coal or the corn a constant capital of definite size, in other words, one which is set in motion by a definite number of workers, always requires a definite portion of the total product in kind for its replacement—since the composition of agricultural capital has, according to the assumption, remained unchanged in its proportionate amounts of accumulated and living labour.” (p 454)

If we take a coal mine, and, in line with the examples given so far, we assume that it employs the equivalent of 16.66 workers, these workers, because of the technical composition of capital, require £50 of constant capital, which is made up of definite physical quantities of the use values, the commodities that comprise the means of production used by those workers. There is nothing fixed or magical about the value £50; it is simply the value of that specific physical mass of use values that the workers require, determined by the technical composition, which is itself a function of technological development.

In other words, the 16.66 workers require a given number of picks, shovels and so on, and to the extent they require steam engines, to wind the pit wheel, to pump water from the mine, and so on, they require a certain quantity of coal to power the steam engines.
Suppose, Marx says, that they require £25 of other components of constant capital, plus £25 of coal, which currently amounts to 15.625 tons.

“And however the market-value of a ton or a quarter may change, 16⅔ men require a constant capital of £25 plus 15 5/8 quarters or tons, for the nature of the constant capital remains the same, and so does the proportionate number of workers required to set it in motion.” (p 454)

Suppose then that the market value of coal rises, to £3 per ton. The 16.66 workers wages come to £50. But, the constant capital required would be £25 + 15.625 tons x £3 = £25 + £46.875 = £71.875. The total capital outlay rises to £121.875.

“The correlation of values within the agricultural capital would have changed while organic composition remained the same.” (p 455)

This might appear wrong, because obviously, if previously variable-capital was £50, and constant capital was £50, the organic composition 1:1, whereas now it is 50:71.875. However, in Capital I, Marx remarks that when he is talking about the organic composition of capital, he means the composition as determined by the technical composition. What he means, here, therefore, is that there has been a change only in the value composition of the capital, not in its organic composition as determined by the technical composition, which has stayed the same.

If production is to continue on the same scale, just as previously the same number of workers had to be employed, and the value of variable capital rose, now the same amount of coal must be used, and the higher value of coal means the value of constant capital rises. It doesn't matter what the historic cost of that coal was, because it must be physically replaced, on a like for like basis, out of current production, at its current value.

Norman Pilon said...

Good morning, Boffy.

Yes, agreed -- I think (and I say "I think" because I'm not yet quite awake yet and won't be until late in the day (I've never been a morning person). I'm replying now because I might not get a chance before I get distracted with other things.)

& BTW: you are way ahead of me on this (and just about everything else, and indeed most probably everything else, hands down), and I can only 'assimilate' things at my own and for me unfortunate and frustratingly slow pace.

I only started reading Marx, in snippets and snatches, several years ago. And although I often "get" the gist of the analysis and can do a reasonably good job of expressing it in "my own words," the precise terminology sometimes still tends to get away from me, and because the meaning of words and expressions do matter in a technical sense when the discussion is, so to speak, specialized, I misunderstand or am misunderstood by the Marxist cognoscenti. But I'm making an effort and the 'conversation' is becoming increasingly accessible to me, and thanks to people like you who are willing to take the time to explain and clarify.

As for 'moral depreciation,'for me,for the moment, the nub of Marx's observation is succinctly summarized in this quote:

"But in addition to the material wear and tear, a machine also undergoes what one might call a moral depreciation. It loses exchange-value, either because machines of the same sort are being produced more cheaply than it was, or because better machines are entering into competition with it. In both cases, however young and full of life the machine may be, its value is no longer determined by the necessary labour-time actually objectified in it, but by the labour-time necessary to produce either it or the better machine. It has therefore been devalued to a greater or less extent. (p. 528)" -- Marx

So taking it one small step at a time, the effect of 'moral depreciation' is an affect of SNLT as it relates specifically to 'constant capital' or its various elements. It is an effect or result, in other words, of the changing productivity inherent to the application of technologies and techniques being (constantly) introduced in the process of production by contending firms or market participants (albeit, yes, other factors, like greater or smaller crop yields, can have a similar effect). But as you point out, it's not just machines as such that are subject to 'moral depreciation,' but all elements that can be included under the rubric of 'constant capital' in contrast to its 'variable' counterpart.


Aye! I must run (and also try to get some more reading done on this 'issue.')

P.S. Pertaining to comments 'having appeared in the moderation queue then disappeared,' I'm almost certain it's a WordPress issue. I, too, submit comments that disappear, and I know that sometimes people who submit at my blog run into the same problem, and it's nothing to do with me. There is a 'glitch' in the WordPress software. Consequently, I always write my comments in Word and then 'copy and paste,' so as not to have to re-write the comment for re-submission.

Boffy said...

Norman,

There is also another illustration that I have referred to elsewhere of this principle that for Marx it is the current reproduction cost of the commodities that comprise the productive-capital, which is the basis of the calculation of the rate of profit, and not the historic cost. I don't have time to relate it in full at the moment, but it is from TOSV III.

In the example, Marx talks about the effect of such depreciation on the calculation of the rate of profit. He calculates the rate of profit on the value of the capital following such depreciation, but he also illustrates this, by pointing out that, the older a piece of fixed capital, the more it will already have passed on its use value, and so its value to production, and consequently, this will have a countervailing effect on the calculation of the rate of profit.

In other words, suppose there is a machine with a value of £1,000 and a lifespan of 10 years. It transfers £100 per year in wear and tear to production. Marx calculates the rate of profit on the basis of what in accountancy is called straight line depreciation. So, assume the profit is £100 p.a., initially it is a rate of profit of 10%. But, in Year 2, the value of the capital has fallen to £900, as £100 has been lost due to wear and tear. The £100 of profit now represents 11.11%. In the following year, the capital value is £800, and so the rate of profit is 12.5%, and so on.

If there was moral depreciation in year 1, say of 50%, the capital would suffer a capital loss of £500. The rate of profit, would rise to 20%. However, suppose the new machine/moral depreciation does not occur until year 8, at which point the machine is already worth only £200, i.e. less than its morally depreciated value. £800 has already been withdrawn in wear and tear, and sits in a reserve fund, waiting to be used to replace the worn out machine. If, moral depreciation means that a replacement machine now costs only £500, the £800 in the reserve fund will now more than cover the cost, whilst allowing a release of £300 of capital.

This example, shows quite clearly that for Marx the calculation of the rate of profit is to be undertaken on the current reproduction cost of the productive-capital, and not on the basis of the historic cost of that capital.

Norman Pilon said...

Replying to your "14 April 2018 at 16:21"

Many thanks. Yes, I think I came across a similar illustration yesterday. Can't remember where. So indeed, there are a lot of moving parts to this. Calculating the rate of profit on the basis of historic cost is certainly misleading.

--N

Boffy said...

Norman,

Here is the example I mentioned. Its from TOSV, Chapter 23.

“The rate of profit would have risen, because the value of the fixed ||1116| capital would have declined by one tenth as a result of wear and tear during the first year.  Thus there can be no doubt that in the case of all capitals employing a great deal of fixed capital—provided the scale of production remains unchanged—the rate of profit must rise in proportion as the value of the machinery, the fixed capital, declines annually, because wear and tear has already been taken into account.  If the coal producer sells his coal at the same price throughout the ten years, then his rate of profit must be higher in the second year than it was in the first and so forth.  Or one would have to assume that the maintenance work, etc., stands in direct proportion to the depreciation, so that the total sum advanced annually under the heading of fixed capital remains the same.  This extra profit may be equalised also as a result of the fact that—apart from wear and tear—the value of fixed capital alls in the course of time, because it has to compete with new, more recently invented, better machinery.  On the other hand this rising rate of profit, which results naturally from wear and tear, makes it possible for the declining value of the fixed capital to compete with newer, better machinery, the full value of which has still to be taken into account.  Finally, the coal producer sold his coal more cheaply [at the end of the second year], on the basis of the following calculation: 50 on 100 means 50 per cent profit, 50 per cent on 95 comes to 47 1/2; if therefore he sold the same quantity of coal [not for 105 but] for 102 1/2—then he would have sold it more cheaply than the man whose machinery, for example, began to operate only in the current year.  Large installations of fixed capital presuppose possession of large amounts of capital.  And since these big owners of capital dominate the market, it appears that only for this reason their enterprises yield surplus profit (rent).  In the case of agriculture, this rent derives from working relatively fertile land, but here we are dealing with a case where relatively cheaper machinery is utilised.}”

(TOSV Chapter 23)

Norman Pilon said...

Boffy,

I've only just begun to read a piece by Patrick Murray, Avoiding Bad Abstractions: A Defense of Co-constitutive Value-Form Theory, which appears to be relevant to the discussion you were having with Andrew Kliman. I thought you might be interested, on the assumption, of course, that you may be unfamiliar with Murray's work.

What I'm also finding interesting about the piece so far is that it reads as a validation of my first independent attempt some time ago at reading and understanding Marx on the issue of the “value-form." But I haven’t yet finished Patrick’s piece, so who knows what surprises may await me.