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.

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