Fritz Machlup on Fowler’s The Depreciation of Capital (1935)

Fritz Machlup’s journal book review praises R. F. Fowler for grounding depreciation analysis in capital theory rather than treating it merely as an accounting convention or a disputed allowance in public-utility regulation. Moving from conceptual distinctions through investment timing to valuation and financial policy, Machlup presents Fowler’s achievement while identifying omissions and mechanisms still requiring explanation.

Mr. Fowler has at his command a profound grasp of capital theory, which enables him to analyse the depreciation problem in a thoroughgoing manner.

The theoretical foundation matters because superficially similar depreciation calculations answer different questions. Depreciation of existing investments is not an element of short-run cost estimates; depreciation in financial valuation differs from the accumulation of replacement funds; and losses in efficiency differ from losses in remaining life expectancy. Machlup also defends Fowler’s abstraction against the presumed realism of practical accounting: original equipment cost is known, but useful life, scrap value, future prices, and interest rates remain estimates. Explicit theoretical assumptions expose uncertainties already embedded in practice.

The review next distinguishes physical deterioration from changes in demand, technique, and interest rates. Wear and tear occurs under stationary as well as dynamic conditions, but foreseeable economic changes can be treated on the same principles as depreciation narrowly understood. Machlup adds a substantive criticism: Fowler omits changes in complementary costs, which Machlup regards as the most important cause of the contemporary collapse in capital values.

The relation between the rate of capital disinvestment and the rate of capital investment (or reinvestment) is the central problem of Mr. Fowler's analysis.

This formulation shifts attention from isolated assets to the coordination of capital replacement over time. Fowler’s engagement with Pigou’s changing conception of capital maintenance—from maintaining value to maintaining physical capital—is pertinent but not comprehensive. His terminology also creates difficulties: counting replacement funds as savings makes a stationary economy exhibit constant savings rather than none. Machlup uses this difficulty to distinguish capital held at a moment, investment undertaken during an interval, and the duration for which capital is committed. Against Knight’s doubts, he insists that capital’s time-structure is indispensable when future income and disinvestment are considered together.

Fowler’s stationary-state analysis gives those distinctions operational significance. The transition to equality between disinvestment and reinvestment depends on construction periods relative to equipment durability, as well as on having enough durable goods to sustain the required replacement rhythm. These constraints determine the new saving needed to reach equilibrium without wasting invested capital.

Machlup particularly values Fowler’s treatment of durability, interest, and the average investment period. A technical improvement extending equipment life at unchanged cost requires compensating adjustments elsewhere in production; Fowler recognizes the adjustment but insufficiently explains its mechanism. Conversely, lower interest rates can lengthen investment periods without chiefly increasing the lifespan of individual instruments.

To make more durable goods is one thing, to make goods more durable is another.

The distinction separates an expansion in the quantity of durable equipment from a change in its durability. It exemplifies the review’s central conceptual demand: neither physical properties nor accounting categories alone adequately describe the temporal organization of capital.

The final discussion connects theory to utility valuation and corporate finance. Machlup endorses Fowler’s criticism of Allyn A. Young’s opposition to deducting accrued depreciation. Under stationary renewal, equipment is on average half worn out and represents half the investment amount. Machlup draws attention to the resulting contrast between a firm purchasing all its equipment initially and one expanding gradually through replacement funds. The comparison bears on dividends, surplus, financial organization, and the difference between yields during growth and after replacement equilibrium.

The review closes with depreciation methods. Fowler’s comparison of sinking-fund and straight-line systems gains force from distinguishing stationary and dynamic conditions, although Machlup would welcome further treatment of industrial fluctuations. His favorable verdict rests on the book’s capacity to make depreciation a problem of capital valuation, replacement, and timing—with practical consequences that conventional accounting debates had obscured.