Chapter X

CHAPTER X DEPRECIATION IN THE SOCIALIST SOCIETY IN ANY community whateoever the value of means of production will alter with time. A large demand for the products and services provided by a factor of production can cause its value to rise temporarily, but all in all its value will decrease in the course of time owing to de preciation (age, wear, etc.). Even when Nature is the-factor of production, its value and productive capacity will fall through use. Soil that is continually used for one and the same purpose becomes impoverished, a forest where too much is felled loses in value, and mines and oil-wells can become exhausted. Any business or community· wishing to follow "the economic principle" must take this depreciation into account. If it is not offset by a corresponding saving or appropriation, it will mean that the business or community in question is living on its capital. Let us, for the sake of simplicity, disregard "natural" factors of production and the rarer cases of appreciation of their value, and confine ourselves to depredation caused by (I) age and wear and tear, (2) new methods of production and the invention of new equipment that can produce at lower cost, or (3) decreased demand for the goods and services provided by a given kind of capital equipment.

Calling the corresponding writing-down of these capital items "depreciation", l the question arises of how the socialist society is to determine the size of its quota for depreciation. Here we come up against the usual difficulty that in such a community there exist neither markets nor market prices for either new or second-hand capital equipment. The technician can indicate a percentage for wear and tear, but if a quota for wear and tear is to be used in calculations, it must not be expressed only as a percentage, but as a price of value. Nor will the central authority be able to determine by reference to a framework of prices, whether inventions in the shape of new machinery ought to increase the depreciation allowance or not. This brings us back to the fact that the use of resources ought to be decided by economic and not by technical considerations of their utility (see p. 89). An illustration of the conflict between these two considera tions would be the following: in a capitalist society a machine with a life of twenty years is scrapped after, say, two years, because of a new lSee, interalia,W. M. Cole: Accounts, their Construction and Interpretation, Cambridge, Mass., 1915.

12 5 126 ECONOMIC CALCULATION IN THE SOCIAj;IST SOCIETY invention or an improvement in the method of production that accelerated or increased production beyond that of which the scrapped machine was capable. It can also be seen when the opposite happens and an old factory with old machinery forces a technically perfect factory to cease production or reorganize or adopt another method of writing-down its capital because the older one can be run at lower cost. A community that neglects to take depreciation quotas economically determined-into its calculations will not necessarily be retrograde, but it will· run the risk of depriving itself of the oppor tunity of benefiting from possible technical developments otherwise possible and thus of not achieving for its members that maximization of production for consumer needs, which it has set up as its goal. Again, there will be a danger of greater attention being paid to the technical side of a matter than to the economic, and this can also prevent it achieving its end.

The fixing of depreciation quotas by economic criteria presupposes the existence of a price for capital resources of all kinds, which on the "supply" side will express the scarcity of these capital resources, and on the "demand" side the use of them which the community values highest. In the socialist society it is difficult to obtain reliable data to express variations in demand for final products (see Chapter VI, p. 74) and ex definitionethere are no prices to express the scarcity of capital resources. Depreciation is discussed by Professor Hayek, one of the few to have done so, in his final paper in CollectivistEconomic Planning. He attaches great weight to the difficulties in calculating depreciation quotas in the socialist society. He discusses depreciation and the extent to which the problem of calculation can be solved by reference to marginal costs of production in the individual concern, and here there is no doubt that the question of depreciation is of the greatest importance. Generally speaking, ho\vever, it is not so certain that failure to calculate depreciation quotas need have grave consequences, provided the depreciation takes other forms, as it may.

Depreciation can be and is being calculated in the capitalist society in more or less rough and ready forms, either (1) by debiting the profit and-loss account with a depreciation quota corresponding to the loss' in value, Qr (2) by trying to maintain the machinery at its original value by repairing it, or, as this is difficult, (3) by a combination of writing-off and maintenance-expenditure. A rougher form is (4) that the concern does not attempt to repair the factory or machinery in question, but simply lets it decay and gets new capital equipment corresponding to the supposed decreased value; or, again, (5) it merely waits till the equipment in question is completely worn out, and then replaces it. This latter method of procedure is not unusual in public DEPREC'rA?::ION IN THE SOCIALIST SOCIETY 127 or semi-public concerns, where new purchases depend on political factors. Computations for such a concern, where purchases are 'made periodically or spasmodically, naturally gives a completely false picture of the situation during the intermediate periods and such a system would naturally be useless as a basis for anyone wanting to overcome the difficulties of calculation by recourse to "marginal costs". One can, however, well imagine that the socialist society may have recourse to this method of calculating depreciation, which really amounts to a complete periodic repurchase of machinery and repre sents a kind of forced depreciation. It is no ideal economic calculation, but it would over a longer period tend to maintain the machinery of production physically and technically.

This opinion (that neglect to calculate with depreciation quotas will scarcely be of decisive importance for the future of the socialist society) is also based on the fact that in the capitalist society de preciation is determined, except in the best conducted businesses, com paratively arbitrarily and differs widely not only with the actual wear and tear, age or modernity of the plant, but with the incidence of taxation, the phase of the trade cycle, and with the extent of the surplus or deficit in the, accounts, and with existing expectations as to the possibility of the appearance of more modern equipment and other factors of the same kind. The very difference in the views of the various Inland Revenue Authorities as to what can be written off shows that in the capitalist society depreciation is assessed rather arbitrarily. , Though it can be said that Professor Hayek attaches too much im portance to depreciation in the socialist community, Dr. Lerner for his part goes too far when, in refuting Professor Hayek's opinion (that "the hiring of the instrument involves a cost which appears as an objective item to be considered by the hirer") he says that: '~there is a catch in this. The objective cost of hiring the instru ment depends upon the estimated value of the future use that is sacrificed to the present when the instrument is hired, since this governs the hiring fee charged. The question is then the sociological one, whether the Socialist Trust is able to estimate the future value more accurately or less accurately than the com petitive owner of the hired instrument, and here we leave pure economic theory." 1 Dr. Lerner goes on to say: "It is not strictly accurate to say, as Dr. Hayek does, that the cost of using the instrument depends upon the price of the product itself, and thereby to suggest that the derivation of a supply price from the cost would involve circular reasoning.

ISee "Statics and Dynamics in Socialist Economics" in EconomicJournal, June, 1937, p. 269.

128 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY The cost depends not on the present price, but on the expected future price; and this must be true whatever the form of the economy." The correctness of Dr. Lerner's argument depends on whether the current product-price determines the hiring fee of the factor. Surely not, for the current value of· the product is only a co-determinant without dominance. There will always be many other factors in deter mining the hiring price. For example, lower prices of machinery will mean lower hiring prices. What is more important is that in the capitalist society the depreciation quota is determined on existing data. If, in such a society, the owner of a given type of equipment is offered a machine with a similar output capacity to that he already has, but which is considerably cheaper, he has no need of conjecture as to the value of the final product to know that the value of his own machine must be written-down. Nor does he base his action on expectation, but on knowledge, when he writes down the value of his capital equipment after having been undersold by a competitor who has got superior equipment, whether in the form of a cheaper machine, it more modernly equipped factory, or a better situated warehouse.

Another question is that the amount to be written-off can be deter mined by other factors and that the economically correct depreciation can be frustrated by the Revenue authorities. The most interesting thing in this connection, however, is whether and how the manager of the Socialist Trust is to be able to get similar data for determining his depreciation quota. Dr. Lerner does not go into that question; if he did he would find that the possibilities for economic depreciation in the socialist community are almost nil, by reason of the lack of market data, and this will mean reduced possibilities for attaining the optimum economic utilization of existing resources in relation to the ends stated.