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

36 Pages Posted: 10 Jan 2010

See all articles by Georgios (George) C. Bitros

Georgios (George) C. Bitros

Athens University of Economics and Business - Department of Economics

Date Written: November 9, 2009

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.

Keywords: Capital longevity, replacement, depreciation, scrappage, maintenance, utilization, obsolescence

JEL Classification: E22, D24

Suggested Citation

Bitros, Georgios (George) C., The Theorem of Proportionality in Contemporary Capital Theory: An Assessment of its Applicability (November 9, 2009). Available at SSRN: https://ssrn.com/abstract=1533708 or http://dx.doi.org/10.2139/ssrn.1533708

Georgios (George) C. Bitros (Contact Author)

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
Athens, 10434
Greece
030 210 8203740 (Phone)
030 210 8070545 (Fax)

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