Accelerated Investment and the Average Rate of Profit: A Note

Abstract

In his review of Mr. Angus Maddison's Economic Growth in West1 Professor J. L. Stein draws attention to fallacious argument on p. 52 of that book, where it is claimed that lowering average age of capital stock raise average aggregate rate of profit even if return on individual assets is unchanged by giving a bigger weight to capital at stage when it is yielding higher returns. Unfortunately Stein himself commits fallacy in maintaining contrary view that the average return per unit of capital . . . mllust decline (my italics) when rise in rate of investment reduces average age of equipment. The purpose of this Note is to correct this error and to draw attention to difficulties of making any interesting general statements at all about effect of accelerated investment on rate of profit. Stein's mistake is to infer conclusion in last sentence of following passage from statements which precede it: Suppose that machine produces one unit of output per unit of time, but that amount of labour required to man each machine is related to its age. Newer machines require smaller labour input than do older machines ... The real wage will be -productivity of labour using oldest machine . .. Labour costs per unit of capital on newest machine are equal to wage multiplied by ratio of labour to capital. The production of more of newest machine at given time does not affect its technologically-determined ratio of labour to capital. Nevertheless, wage is raised as marginal worker is re-assigned to newer machine. Hence labour costs per unit of capital rise. Given technologically-determined output per machine of latest vintage, return per unit of capital on machine of latest vintage must decline. The return per unit of capital on machine of oldest vintage remains at zero, even though there has been reduction in age of oldest machine. Hence average return per unit of capital also must decline.2