Sunday, 9 December 2018

Interpreting US profits (13) - Calculating The Rate of Profit Incorrectly

Interpreting US profits (13) - Calculating The Rate of Profit Incorrectly

In paragraph 3 of his blog post, Michael says, 

“AK measures the US rate of profit based on corporate sector profits only and using the historic cost of net fixed assets as the denominator. AK considers this measure as the closest to Marx’s formula, namely that the rate of profit should be based on the advanced capital already bought (thus historic costs) and not on the current cost of replacing that capital. Marx approaches value theory temporally; thus the price of denominator in the rate of profit formula is at t1 and should not be changed to the price at t2. To do the latter is simultaneism, leading to a distortion of Marx’s value theory. This seems correct to me.” 

In the first ten posts in this series, I set out what is wrong with all of this. 

If the total value of the advanced fixed capital (whether measured on the basis of historic cost or current reproduction cost) is used as the denominator for calculating the rate of profit, then this rate of profit, on Marx's definition is the annual rate of profit. It is calculated only on the basis of the productive-capital advanced for one turnover period, not for the year. So, if the circulating capital turns over 50 times a year, it is not the total amount spent on raw materials, and wages that forms the other part of the denominator, but only 1/50th of that amount, i.e. the amount turned over during a single turnover period. In presenting the data for Kliman's rate of profit, for the US corporate sector, Michael does not even tell us whether this calculation includes the advanced circulating capital, or only the advanced fixed capital. The implication from what he says is that it is the latter.  Nor does he tell us whether, if the circulating capital is included, whether its valuation is based upon its historic cost, or its current reproduction cost, or why there should be any difference in calculating the value of one as opposed to the other. 

In fact, as I have demonstrated, Marx in Capital III, Chapter 6, and in Theories of Surplus Value, Chapters 22 and 23, makes his calculation of the annual rate of profit on the basis of the current reproduction cost of the commodities that comprise the advanced productive-capital, whether those commodities comprise circulating capital or fixed capital. But, the substantive point here is that if the presentation of the annual rate of profit, here, does not include the advanced circulating capital, and changes in it, arising from falls in the value of materials, and of labour-power, it cannot in any way be an accurate measure of the annual rate of profit! 

Marx's law of a falling rate of profit is premised upon improved technology being introduced, which raises social productivity, and so results in a given quantity of labour processing increasing masses of materials. But, as Marx sets out, this same process, results, via that higher productivity, and technological development in a) the unit value of materials falling, b) the value of fixed capital falling, c) the value of labour-power falling, d) the rate and mass of surplus value rising, e) the rate of turnover of capital rising, f) a moral depreciation of the fixed capital stock, all of which work to raise the annual rate of profit. 

If you calculate an annual rate of profit that does not include, in the denominator, the value of the processed material, whose value is reduced by this continual rise in productivity, still less if you do not reflect, thereby, the fact that, in an economy increasingly dominated by service industry, that the actual mass of material processed continually falls as a proportion of total output, not only is that not any kind of accurate rate of profit, but it would be very unusual if such a measure did not result in a picture of a falling rate of profit, because it only reflects, in the denominator, the increase in the mass of the advanced fixed capital. 

But, if you calculate the value of that growing mass of fixed capital on the basis of the historic cost of that fixed capital, thereby eliminating the role of the technology in reducing the value of that fixed capital, and the moral depreciation of the fixed capital stock it brings with it, even less chance is there that such a measure would present an accurate portrayal of the rate of profit, and even less chance could there be that it would not result in a continual fall in the rate of profit! Furthermore, if the denominator does not include variable-capital, then again, the effect of technology in raising productivity, and reducing the value of labour-power, thereby raising the rate of surplus value, is again missing from such a calculation. Finally, if the effect of technology in raising the level of productivity, and thereby shortening the production time and circulation time for commodities is not reflected in the figure for the advanced circulating capital, then this major factor in determining the annual rate of profit is cut out of the calculation. 

The main way in which technology acts to raise the annual rate of profit, besides bringing about a large moral depreciation of the fixed capital stock, and reduction in the value of the circulating capital, is this increase in the rate of turnover. This latter effect has no impact on the fixed capital, its turnover, unlike the circulating capital is determined by its durability. Calculating an annual rate of profit, that only includes the fixed capital, and omits the circulating capital, thereby distorts the movement in the annual rate of profit. If the effect of technology in devaluing fixed capital is cut out, by using historic prices, rather than current reproduction costs, and if the fall in the value of materials is cut out, because circulating capital is not included in the denominator, then it is almost inevitable that the resultant calculation of the rate of profit will show it progressively falling! 

Moreover, as I showed, the data provided for GDP and National Income do not include the value of means of production consumed in the production of means of production. National Income data is what it suggests, it is the total of revenues received, as wages, rents, profits, interest and taxes. As Marx sets out in Capital II, III, and Theories of Surplus Value, its equivalent in the GDP figure is itself only the value of the consumption fund. It excludes, the value of Department I (c). In my discussion of this with Brian Green, he showed that he totally failed to understand this concept, introducing the totally irrelevant question of the wear and tear of the fixed capital, whereas what is involved is not the wear and tear, but all of the mass of means of production, raw materials and so on, used in the production of means of production, which as Marx demonstrates forms a revenue for no one, and so is not included in the National Income data, and because net net is not sold, but is reproduced in kind by Department I capitals from their own production, does not appear as any part of the Gross Output figure. I will deal with Green's errors, in a later post. 

Taking the historic cost of the fixed capital, and then deducting an amount for "depreciation" is also inadequate, because the figures provided by the authorities for depreciation are themselves based upon the historic prices of those assets. They generally reflect the capital allowances that the state provides for companies as tax allowances for fixed capital to be set off against profits. They are more like a value for annual wear and tear than a value of actual depreciation. In other words, if a piece of fixed capital has an expected lifespan of ten years, the “depreciation” figure will be 10% of the initial cost of the asset, dependent upon whether it is to be written down by such a  - “straight-line” method of depreciation, or an alternative method. But, this definition of depreciation is really what Marx defines as wear and tear. For Marx depreciation is the opposite of appreciation. In other words, a piece of capital is depreciated if its value is reduced, as a result of less labour-time being required for its reproduction, just as it appreciates if its value rises, because more labour-time is require for its reproduction. And, such capital also depreciates because its use value declines for reasons separate from its participation in the productive process. A piece of cloth deteriorates if it is stored too long, and that is more so the case with perishable goods such as foodstuffs. A machine depreciates if it stands idle, and rusts, and the same is true with labour-power

Calculating asset values on the basis of historic prices, and “depreciation” fails to calculate the actual current value of those assets, because it fails to take account precisely of the effect of changes in technology, and social productivity. A machine that cost £1,000 with a lifespan of 10 years, might be depreciated by £100 a year, so that after year 5 its value appears in the books as £500, but if, after 5 years, the actual value of the same machine falls in the market to £300, the firm would not be able to sell its machine for £500. It would only obtain the £300 value of a new machine, less an additional amount to cover its own deterioration during that period. Similarly, if a new machine is introduced that is several times as productive as the initial machine, it will cause it to suffer a moral depreciation way in excess of what it loses each year for wear and tear. 

The same problem was seen in 2008 in relation to financial assets. The banks and financial institutions value the assets on their balance sheet according to their book value, i.e. their "historic price".  At a time when asset prices appreciate rapidly this poses no problem. However, in 2008, when those financial institutions came to liquidate those assets, they found that these books values were in no way representative of the rapidly depreciated market value of those assets. 

A further problem in relation to calculating the rate of profit for the entire economy on the basis of historic prices, and the official data for GDP is that official statistics use so called hedonic pricing, in calculating the value of output, and measurement of inflation. The use of hedonic pricing was heavily criticised by Misean economists in the 1990's and 2000's, such as in the work of Kurt Richebacher

The hedonic pricing method takes into account changes in the quality of commodities. For example, according to Moore's Law, the power of computer chips doubles every 18 months. If we take the initial price of a chip as being say £10, then in 18 months time, a new chip might have a price also of £10, but is equal to the use value of 2 old chips. The hedonic pricing method says, if we equate the old chip to the new chip, it would be the same as if twice as many chips were produced, which would mean a value of £20, i.e. 2 chips. The fact that this now costs only £10, is accounted for as a fall in inflation. This is one reason the Miseans opposed it, because they felt that it understated the actual level of inflation in the economy, during the period: an understatement that was used to justify, a more lax monetary policy. 

In effect, what hedonic pricing does is to use the historic price of commodities as a baseline, and so understates the value of current production relative to it. This is the opposite of Marx's approach, which says, that the price of the current chip is £10, and it is equal to 2 old chips, which are thereby morally depreciated to be worth only £5 each. The use of historic pricing for the valuation of fixed capital, thereby massively overstates the actual value of that fixed capital in a period of rapidly improving technology, and rapidly rising productivity, which brings about a large moral depreciation of the fixed capital stock. Combined with the use of official data, which uses hedonic pricing as its basis for calculating the value of current output, again in a period of rapidly changing technology, which thereby undervalues that output in relation to the capital used for its production, a consequent understatement of the rate of profit is inevitable. 

Finally, Michael refers to simultaneism, but as I demonstrated that simultaneism is inseparable from Marx's method, and from the materialist dialectic

This series will now continue in the new year, due to other commitments.

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