Why Fixed Capital Cannot Transfer its Value to the Product

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Abstract

Almost all of the various economic theories consider that fixed capital, although it is defined as a final good, transfers its value to the product. This short note will show that this amounts to considering fixed capital also as an intermediate good. Going back first to the specific characteristics of intermediate goods and final goods, we will show that it is not logically possible to consider fixed capital both as a final good and an intermediate good, because this erroneous starting point leads to insurmountable contradictions. The postulate that fixed capital transfers its value to the product must therefore be abandoned.

Posted for comments on 14 Oct 2020, 2:20 pm.

Comments (4)

  • Daniel Hinze says:

    Flamant makes a simple yet radical proposal in this paper that warrants wider discussion. Having accepted the transfer of value from fixed capital to final good as self-evident, I expect that the majority of economists reading this paper might struggle with the idea. Effectively the argument is that the value of final goods that have been sold on the market at the end of the production process cannot be realized and counted a second time (or more). Of course, at the end of their useful life, fixed capital goods are disposed of, destroyed or recycled and their value can be considered to have disappeared – but this value has not been transferred.
    Capital owners demand a depreciation charge that is included in the price of the good – but one should not be interpret this price mechanism as the outward appearance of a transfer of value. What happens is not a transfer of value from fixed capital to final goods but a transfer of value from labour to capital – it’s not a ‘technical’ but a distributional issue. A simple but brilliant insight. Unfortunately, the conclusion doesn’t explore the many implications including on the ‘transformation problem’ of values into prices. Well worth a follow-on paper!

    • Christian Flamant says:

      Reply from the author: Daniel Hinze, the author of the first comment, seems to have well understood the demonstration in my article, and thus to agree with it. So there is not much that I can add. It is true that it has implications on the transformation problem, and in particular invalidates the treatment of fixed capital by Sraffa, in his book, “Production of commodities by means of commodities”. I also demonstrated that in a former article published in “Real World Economic Review”, no 72: “Commodities do not produce commodities: a critical review of Sraffa’s theory of production and prices”.

  • Richard E Planck says:

    I am currently struggling through Marx’s Das Kapital and find it be very enlightening. When distilled down to the basics, it attempts to decide how much of a firm’s income should be spent on capital and how much should be spent on labor so I essentially view it as a discussion of capital costs vs labor costs. But Marx, in my opinion, failed to see the bigger picture.
    Here is my problem…. As a retired engineer, I have never seen a factory owner go around his factory at closing time on Friday and stuff dollar bills into the crevices of his machinery. Thus I conclude that all monies spent for ‘capital’ were actually monies spent for the previous labor efforts of the entire chain of workers who constructed the capital. This line of thinking can be traced all the way back to the owner of the iron mine because the mine owner does not toss money into a now-empty hole in the ground.
    I do realize that any individual firm does need to keep track of ‘capital’ costs and ‘labor’ costs because it would be rather unprofitable to buy five metal lathes but hire only two machinists.
    I will end for now with a bit more of my heretical thinking. A capitalist, in my opinion, is any living ‘organism’ that constructs tools (capital) to make the acquisition of its goals easier. Thus the chimpanzee in Africa who uses a stick to more-efficiently harvest the termites for his lunch meets my fundamental definition of a ‘capitalist’.

    • Christian Flamant says:

      Reply from the author: This engineer’s view of the capitalist process is interesting, and Mr. Plank is right indeed in considering that fixed capital increases the productivity of labor. However I would not go so far as to agree that a chimpanzee could be considered as a “capitalist”, because the whole question of property (of the means of production) does not seem relevant in this case !

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