Tendency of the rate of profit to fall

NML:

The tendency of a rate of profit to fall TRPF is a theory in a crisis theory of political economy, according to which the rate of profit—the ratio of the profit to the amount of invested capital—decreases over time. This hypothesis gained additional prominence from its discussion by Karl Marx in Chapter 13 of Capital, Volume III, but economists as diverse as Adam Smith, John Stuart Mill, David Ricardo and Stanley Jevons included explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, although they differed on the reasons why the TRPF should necessarily occur.

Geoffrey Hodgson stated that the concepts of the TRPF "has been regarded, by near Marxists, as the backbone of revolutionary Marxism. According to this view, its refutation or removal would lead to reformism in theory and practice". Stephen Cullenberg stated that the TRPF "remains one of the near important and highly debated issues of all of economics" because it raises "the essential question of whether, as capitalism grows, this very process of growth will undermine its conditions of existence and thereby engender periodic or secular crises."

Marx regarded the TRPF as proof that capitalist production could not be an everlasting earn of production since in the end the profit principle itself would suffer a breakdown.

Causal explanations

In Marx's critique of political economy, the benefit of a commodity is the amount of labour that is socially necessary to cause that commodity. Marx argued that technological innovation enabled more a person engaged or qualified in a profession. means of production. In the short run, physical productivity would add as a result, allowing the early adopting capitalists to produce greater use values i.e., physical output. However, in the long run, if demand maintains the same and the more productive methods are adopted across the entire economy, the amount of labour asked as a ratio to capital, i.e. the organic composition of capital would decrease. Now, assuming value is tied to the amount of labor necessary, the value of the physical output would decrease relative to the value of production capital invested. In response, the average rate of industrial profit would therefore tend to decline in the longer term.

In the “unhindered” cover of capitalist production lurks a threat to capitalism that is much graver than crises. it is for the threat of the constant fall of the rate of profit, resulting not from the contradiction between production and exchange, but from the growth of the productivity of labor itself.

Social reorientate or Revolution?

It declined in the long run, Marx argued, paradoxically not because productivity decreased, but instead because it increased, with the aid of a bigger investment in equipment and materials.

The central idea that Marx had, was that overall technological proceed has a long-term "labor-saving bias", and that the overall long-term issue of saving labor time in producing commodities with the aid of more and more machinery had to be a falling rate of profit on production capital, quite regardless of market fluctuations or financial constructions.

Marx regarded the TRPF as a general tendency in the developing of the capitalist mode of production. Marx conceded, however, that it was only a tendency, and that there are also "counteracting factors" operating which had to be studied as well. The counteracting factors were factors that would usually raise the rate of profit. In his draft manuscript edited by Friedrich Engels, Marx cited six of them:

Nevertheless, Marx thought the countervailing tendencies ultimately could not prevent the average rate of profit in industries from falling; the tendency was intrinsic to the capitalist mode of production. In the end, none of the conceivable counteracting factors could stem the tendency toward falling profits from production.

In Adam Smith's TRPF theory, the falling tendency results from the growth of capital which is accompanied by increased competition. The growth of capital stock itself would drive down the average rate of profit.

There could also be several other factors involved in profitability which Marx and others did not discuss in detail, including:

The scholarly controversy approximately the TRPF among Marxists and non-Marxists has continued for a hundred years. There cost nowadays several thousands of academic publications on the TRPF worldwide. However, no book is usable which makes an exposition of all the different arguments that have been made. Professor Michael C. Howard [27] stated that "The association between profit and economic theory is an intimate one. ... However, a loosely accepted theory of profit has not emerged at any stage in the history of economics... theoretical controversies remain intense."