Reviewed by: Doris M. Cook University of Arkansas, Fayetteville
First published in the Netherlands in 1961, this volume was reprinted in 1986 as part of a series of Studies in Industrial Economics. The principal aim of the series is “to stimulate study and research in this part of economics and to further an interchange of ideas and results on an international basis.” [p. v.].
This volume on depreciation, edited by J.L. Meig, Professor of Industrial Economics, State University of Groningen, The Netherlands, consists of four separate papers on various aspects of depreciation. Professor Meij states in his introduction: “There are but few fields in managerial economics where the gap between theory and practice is so wide as in that of depreciation of durable assets” [p. 1.]. It is the purpose of this book to fill a part of that gap.
The first chapter, “Depreciation and Obsolescence as Fac-tors in Costing,” was written by W. Arthur Lewis, University of Manchester, England. His main objective is to define deprecia-tion for the purpose of calculating costs. This chapter contains a very well written, theoretical discussion of the measurement of depreciation as related to such topics as valuation of assets, calculating net profit, price policy, surplus capacity cost, and full capacity cost. The theory is well formulated and explained, with several illustrations.
The second chapter, “Depreciation and the Maintenance of Real Capital,” was written by Edgar O. Edwards, Rice Univer-sity, Houston, Texas. Again, this chapter includes a theoretical discussion of the importance of depreciation policies in capital maintenance under stationary conditions and under dynamic conditions. The principal methods of depreciation are classified by the author as subjective-depreciation, market-depreciation, and internal-rate depreciation. The depreciation techniques used in practice, straight-line, declining balance, sum-of-the-years’-digits, compound interest, and various production unit techniques, are regarded as means of approximating either internal rate or market depreciation.
Professor Edwards rejects the idea that depreciation should supply sufficient funds to finance the ultimate replace-ment of an asset. “The assumption attacked is that firms hold depreciation funds in the form of cash until the machine being depreciated is actually replaced” [p. 113]. The author suggests that such funds are more likely to be invested in assets which rise in price as the price-level increases. Hence, it is the use of the funds, as determined by management, which enables the firm to maintain its real capital. The ideas presented by Professor Edwards are well developed.
The third chapter, “Depreciation Problems and Taxation,” was written by David Walker, University College of East Africa, Uganda. At the time he was a lecturer in Economics at the University of Manchester, U.K. Although Professor Walker based his discussion primarily on the tax-system of the United Kingdom with which he was most familiar, he also included discussion of related problems in the United States, Sweden, France, and Belguim. This chapter, more than the others, achieves the objective of providing an “international basis” of ideas.
This chapter, also, has more historical significance than the other chapters because the author includes discussion of the difficulty of getting depreciation recognized as a deductible expense for tax purposes. He states: “It was not til 1878 — more than a generation after the introduction of the U.K. Income Tax in more or less its present form — that any relief for capital expenditures was given. Since that time there have been depreciation allowances for plant and machinery” [p. 156]. Another historical reference is made to depreciation in the United States tax system on page 160. Problems of depreciation as related to taxation discussed by the author include: (1) the effect on investment, (2) accelerated depreciation in the U.K., United States and Sweden, and (3) replacement cost as a basis for depreciation in France and Belgium. The discussion is easy to understand and is written on a more practical basis than that in the other chapters.
The last chapter, “The Theory of Depreciation and Entre-preneurial Behaviour,” was written by four professors in The Netherlands. This chapter summarizes the results of a study made concerning the replacement investments in 50 Dutch enterprises. The chapter also includes a case-study of the Dutch Merchant Marine made to test the reinvestment theory presented in the chapter. Although these two practical studies are well analyzed, other parts of the chapter are not easy to follow because of the use of equations and mathematical models.
The introduction to the series states that “the level of treatment is that appropriate to an audience of graduate academic standard” [p. v.]. I agree that this book is appropriate for graduate students. Some aspects of the discussion might be useful as background material for doctoral dissertations or might suggest additional studies which could be made. The introduction also states that “the volumes are not addressed to academic scholars only but also to those engaged in management” [p. v.]. In my opinion most of the discussion in this book is not written in language which would be readily applicable to business management. The most useful for this purpose would be the third chapter relating to taxation.
