Depreciation Theory and Capital Gains

Abstract

The purpose of this note is to discuss briefly certain aspects of Ladelle's theory of depreciation in light of its recent evaluation by Wright.' I shall limit the discussion to the general nature of Ladelle's theory. Two approaches to the problem of depreciation have been taken: the accounting approach and the economic approach.2 The former is one of cost allocation; the latter considers original cost as irrelevant. I argue that neither of these approaches has served to structure the depreciation problem because a general theory of depreciation simply cannot be formulated without a theory of Ladelle's theory of depreciation is extraordinary precisely because it is inherently an uncertainty theory of profit. 3 If expectations are met (assuming for simplicity that the purchase price of an asset equals its present discounted value), it is a matter of indifference whether we describe Ladelle's theory of depreciation as one of cost allocation or as one of asset valuation. The cost allocated to each period will be exactly equal to the expected and actual decline in the value of the asset. However, if expectations are not met, the cost (depreciation) allocated to each period under Ladelle's theory will not equal the actual decline in the asset's value during the period. Thus, original cost is relevant to the calculation of depreciation but valuations made in subsequent time periods are not. For this reason I argue