Depreciated Depreciation Methods? Alternatives to Sraffa's Take on Fixed Capital

40 Pages Posted: 23 Sep 2016 Last revised: 21 Apr 2017

See all articles by Jan Keil

Jan Keil

Humboldt Universität zu Berlin

Date Written: August 7, 2016

Abstract

This article discusses the treatment of fixed capital in Classical theory of price. Sraffa uses non-linear depreciation of “physical” capital that equalizes all annual profit rates individually, but violates the proportionality of monetary machine value reduction and physical use-up on an annual basis. One alternative is to apply simple linear depreciation that has equal annual fixed capital costs. The key for consistency is that the internal rate of return on fixed capital investments throughout the fixed asset lifetime must be equated with the normal profit rate. A second alternative is to use “monetary” capital, where the “correct” amortization charges depend on the ability of the accumulated depreciation fund to earn interest. Among these valid alternative methods are the original proposals of Marx and Torrens, which were dismissed falsely and prematurely by Neo-Ricardian economists. These alternatives are shown here to imply fundamentally different prices of production. For all methods, the formulas for deriving amortization charges and fixed capital prices of all vintages are derived. The article also illustrates how the system of Sraffian price equations can be modified to incorporate these methods.

Keywords: Classical Economics, Prices of Production, Sraffa, Marx, Fixed Capital, Depreciation

JEL Classification: B51, D24, D40, D50

Suggested Citation

Keil, Jan, Depreciated Depreciation Methods? Alternatives to Sraffa's Take on Fixed Capital (August 7, 2016). Review of Political Economy, 2016, Issue 4, Pages 566-589. Available at SSRN: https://ssrn.com/abstract=2842464

Jan Keil (Contact Author)

Humboldt Universität zu Berlin ( email )

Berlin
Germany

HOME PAGE: http://www.jankeil.com

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