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The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Applicability

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  • Bitros, George C.

Abstract

This paper surveys and assesses the empirical literature that bears on the applicability of the theorem of proportionality, which asserts that depreciation is proportional to the outstanding capital stock. All available evidence shows that: a) the rates of depreciation and retirements vary from year to year in response to changes in conventional economic forces like utilization, maintenance and repair, the prices of new capital goods, etc., and b) while the approximation of the distribution of depreciation rates by a single parameter may be characterized by simplicity and ease of use, at the same time it thwarts the advances that can be achieved by returning to a general equilibrium model centered on the time structure of capital and the useful lives of its components. For this reason, it is concluded that, the sooner this theorem is replaced by an endogenous theory of depreciation and replacement, the better for economic theory and policy.

Suggested Citation

  • Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Applicability," MPRA Paper 17821, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17821
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    References listed on IDEAS

    as
    1. Biorn, E., 1992. "Concave Survival and Efficiency Curves for Capital and the Form of Age- Price Profiles," Memorandum 1992_006, Oslo University, Department of Economics.
    2. George C. Bitros, 2008. "The Optimal Lifetime Of Assets Under Uncertainty In The Rate Of Embodied Technical Change," Metroeconomica, Wiley Blackwell, vol. 59(2), pages 173-188, May.
    3. Bitros, George C, 1976. "A Statistical Theory of Expenditures in Capital Maintenance and Repair," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 917-936, October.
    4. Bitros, George C & Kelejian, Harry H, 1974. "On the Variability of the Replacement Investment Capital Stock Ratio: Some Evidence from Capital Scrappage," The Review of Economics and Statistics, MIT Press, vol. 56(3), pages 270-278, August.
    5. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations," MPRA Paper 17436, University Library of Munich, Germany.
    6. Barnhart, Scott W. & Miller, Edward M., 1990. "Problems in the estimation of equations containing perpetual inventory measured capital," Journal of Macroeconomics, Elsevier, vol. 12(4), pages 637-651.
    7. Erik BiÛrn, 1998. "Survival and efficiency curves for capital and the time-age-profile of vintage prices," Empirical Economics, Springer, vol. 23(4), pages 611-633.
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    More about this item

    Keywords

    Capital longevity; replacement; depreciation; scrappage; maintenance; utilization; obsolescence;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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    This paper has been announced in the following NEP Reports:

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