The tendency of the rate of profit to fall (TRPF) is a theory in the crisis theory of

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...

, according to which the

rate of profit In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Historical cost ''vs.'' mark ...

—the ratio of the profit to the amount of invested

capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...

—decreases over time. This hypothesis gained additional prominence from its discussion by

Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...

in Chapter 13 of ''

Capital, Volume III ''Capital. A Critique of Political Economy. Volume III: The Process of Capitalist Production as a Whole'' (german: Das Kapital. Kritik der politischen Ökonomie Dritter Band. Buch III: Der Gesammtprocess Der Kapitalistischen Produktion), is the ...

,'' but economists as diverse as Adam Smith,

John Stuart Mill John Stuart Mill (20 May 1806 – 7 May 1873) was an English philosopher, political economist, Member of Parliament (MP) and civil servant. One of the most influential thinkers in the history of classical liberalism, he contributed widely to ...

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...

and Stanley Jevons referred 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 theory of the TRPF "has been regarded, by most 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 most important and highly debated issues of all of economics" because it raises "the fundamental question of whether, as capitalism grows, this very process of growth will undermine its conditions of existence and thereby engender periodic or secular crises."

Causal explanations

Karl Marx

In Marx's critique of political economy, the value of a commodity is the amount of labour that is socially necessary to produce that commodity. Marx argued that technological innovation enabled more efficient

means of production The means of production is a term which describes land, labor and capital that can be used to produce products (such as goods or services); however, the term can also refer to anything that is used to produce products. It can also be used as a ...

. In the short run, physical productivity would increase as a result, allowing the early adopting capitalists to produce greater use values (i.e., physical output). However, in the long run, if demand remains the same and the more productive methods are adopted across the entire economy, the amount of labour required (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. 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 progress has a long-term "labor-saving bias", and that the overall long-term effect 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.

Countertendencies

Marx regarded the TRPF as a general tendency in the development of the capitalist mode of production. Marx maintained, 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 normally raise the rate of profit. In his draft manuscript edited by

Friedrich Engels Friedrich Engels ( ,"Engels"
'' rate of exploitation of workers). * Reduction of wages below the value of labor power (the immiseration thesis). * Cheapening the elements of constant capital by various means. * The growth of a relative surplus population (the

reserve army of labor Reserve army of labour is a concept in Karl Marx's critique of political economy. It refers to the unemployed and underemployed in capitalist society. It is synonymous with "industrial reserve army" or "relative surplus population", except that ...

) which remained unemployed. * Foreign trade reducing the cost of industrial inputs and consumer goods. * The increase in the use of share capital by joint-stock companies, which devolves part of the costs of using capital in production on others. 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. *

Other Explanations

Growth of Capital Stock

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.

Other Influences

There could also be several other factors involved in profitability which Marx and others did not discuss in detail, including: * Reductions in the turnover time of industrial capital generally (and especially fixed capital investment). * Accelerated depreciation and faster throughput. * The level of price inflation for different types of goods and services. * Taxes, levies, subsidies and credit policies of governments, interest and rent costs. * Capital investment into areas of (previously) non-capitalist production, where a lower organic composition of capital prevailed. * Military wars or military spending causing capital assets to be inoperative or destroyed, or spurring war production (see permanent arms economy). * Demographic factors. * Advances in technology and technological revolutions which rapidly reduce input costs. * Particularly in the era of

globalization Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...

, the national and international freight rate (shipping, trucking, railfreight, airfreight). * Substituted natural resource inputs, or marginal increased cost of non-substituted natural resource inputs. * Consolidation of mature industries into an oligarchy of survivors. Mature industries do not attract new capital because of low returns. Mature companies with large amounts of capital invested and brand recognition can also try to block new competitors in their markets. See also secular stagnation theory. * The use of credit instruments to reduce capital costs for new production. The scholarly controversy about the TRPF among Marxists and non-Marxists has continued for a hundred years. There exist nowadays several thousands of academic publications on the TRPF worldwide. However, no book is available which provides an exposition of all the different arguments that have been made. Professor Michael C. Howar

stated that "The connection between profit and economic theory is an intimate one. (...) However, a generally accepted theory of profit has not emerged at any stage in the history of economics... theoretical controversies remain intense."

Dispute over existence

Okishio's theorem

The Japanese economist

Nobuo Okishio was a Japanese Marxian economist and emeritus professor of Kobe University. In 1979, he was elected President of the Japan Association of Economics and Econometrics, which is now called Japanese Economic Association. Okishio studied mathematica ...

notably argued in 1961, "if the newly introduced technique satisfies the cost criterion .e. if it reduces unit costs, given current pricesand the rate of real wage remains constant", then the rate of profit must ''increase''. Assuming constant real wages, technical change would lower the production cost per unit, thereby raising the innovator's rate of profit. The price of output would fall, and this would cause the other capitalists' costs to fall also. The new (equilibrium) rate of profit would therefore have to rise. By implication, the rate of profit could in that case only fall if real wages rose in response to higher productivity, squeezing profits. This theory is sometimes called ''neo-Ricardian'', because David Ricardo also claimed that a fall in the average rate of profit could ordinarily be brought about only by rising wages (one other scenario could be, that foreign competition would drive down the local market prices for outputs, causing falling profits).

Criticism

John E. Roemer criticized the absence of fixed capital in Okishio's model, and therefore modified Okishio's model, to include the effect of fixed capital. He concluded though that:It is also possible to construct an alternative Okishio-type model, in which the rising cost of land rents (or property rents) lowers the industrial rate of profit.

Competition

, interpreting Adam Smith's falling rate of profit theory to be that increased competition drives down the average rate of profit, argued that competition could only level out differences in profit rates on investments in production, but not lower the general profit rate (the grand-average profit rate) as a whole. Apart from a few exceptional cases, Ricardo claimed, the average rate of profit could only fall if wages rose. In ''

Capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...

'',

criticized Ricardo's idea. Marx argued that, instead, the tendency of the rate of profit to fall is "an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labor".Karl Marx, ''

'', Penguin 1981, p. 319. Marx never denied that profits could contingently fall for all kinds of reasons, but he thought there was also a ''structural'' reason for the TRPF, regardless of current market fluctuations.

Productivity

By raising productivity, labor-saving technologies can ''increase'' the average industrial rate of profit rather than lowering it, insofar as fewer workers can produce vastly more output at a lower cost, enabling more sales in less time.

Ladislaus von Bortkiewicz Ladislaus Josephovich Bortkiewicz (Russian Владислав Иосифович Борткевич, German ''Ladislaus von Bortkiewicz'' or ''Ladislaus von Bortkewitsch'') (7 August 1868 – 15 July 1931) was a Russian economist and statist ...

stated: "Marx’s own proof of his law of the falling rate of profit errs principally in disregarding the mathematical relationship between the productivity of labour and the rate of

surplus value In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cos ...

." Jürgen Habermas argued in 1973–74 that the TRPF might have existed in 19th century liberal capitalism, but no longer existed in late capitalism, because of the expansion of "reflexive labor" ("labor applied to itself with the aim of increasing the productivity of labor"). Michael Heinrich has also argued that Marx did not adequately demonstrate that the rate of profit would fall when increases in productivity are taken into account.Michael Heinrich, "Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx’s Studies in the 1870s", ''Monthly Review'', Volume 64, Issue 11, April 2013.

Contingency

How exactly the average industrial rate of profit will evolve, is either uncertain and unpredictable, or it is historically contingent; it all depends on the specific configuration of costs, sales and

profit margins Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Pr ...

obtainable in fluctuating markets with given technologies. This "indeterminacy" criticism revolves around the idea that technological change could have many different and contradictory effects. It could reduce costs, or it could increase unemployment; it could be labor saving, or it could be capital saving. Therefore, so the argument goes, it is impossible to infer definitely a theoretical principle that a falling rate of profit must always and inevitably result from an increase in productivity. Perhaps the law of the tendency of the rate of profit to fall might be true in an abstract model, based on certain assumptions, but in reality no substantive, long-run empirical predictions can be made In addition, profitability itself can be influenced by an enormous array of different factors, going far beyond those which Marx specified So there are tendencies and counter-tendencies operating simultaneously, and no particular empirical result necessarily and always follows from them

Labor theory of value

Steve Keen argues that if you assume the labor theory of value is wrong, then this obviates the bulk of the critique. Keen suggests that the TRPF was based on the idea that only labor can create new value (following the labor theory of value), and that there was a tendency over time for ratio of capital to labor (in value terms) to rise. However, if surplus can be produced by all production inputs, then he believes there is no reason why an increase in the ratio of capital to labor inputs should cause the overall rate of surplus to decline.

Eugen Böhm von Bawerk Eugen is a masculine given name which may refer to: * Archduke Eugen of Austria (1863–1954), last Habsburg Grandmaster of the Teutonic Order from 1894 to 1923 * Prince Eugen, Duke of Närke (1865–1947), Swedish painter, art collector, and pat ...

and his critic Ladislaus Bortkiewicz (himself influenced by Vladimir Karpovich Dmitriev) claimed that Marx's argument about the distribution of profits from newly produced surplus value is mathematically faulty. This gave rise to a lengthy academic controversy. Critics claimed that Marx failed to reconcile the law of value with the reality of the distribution of capital and profits, a problem that had already preoccupied

– who himself inherited the problem from Adam Smith, yet failed to solve it. Marx was already aware of this theoretical problem when he wrote '' The Poverty of Philosophy'' (1847). It gets a mention again in the ''Grundrisse'' (1858). At the end of chapter 1 of his ''A Contribution to the Critique of Political Economy'' (1859), he referred to it, and announced his intention to solve it. In ''Theories of Surplus Value'' (1862–1863), he discusses the problem very clearly. His first attempt at a solution occurs in a letter to Engels, dated 2 August 1862. In '' Capital, Volume I'' (1867) he noted that "many intermediate terms" were still needed in his progressing narrative, to arrive at the answer. Engels suggested, that Marx had indeed solved the problem in the posthumously published ''

'', but critics alleged Marx never delivered a credible or definitive solution. Specifically, critics claimed that Marx failed to prove that average labour requirements are the real regulator of product-prices within capitalist production, since Marx failed to demonstrate what exactly the causal or quantitative connection was between the two. As a corollary, Marx's theory of the TRPF was undermined as well, since it was based on a necessary long-term evolution of value-proportions between the composition of production capital and the yield of production capital.

Empirical research

First empirical tests

In the 1870s, Marx certainly wanted to test his theory of economic crises and profit-making econometrically, but adequate macroeconomic statistical data and mathematical tools did not exist to do so. Such scientific resources began to exist only half a century later. In 1894,

Friedrich Engels Friedrich Engels ( ,"Engels"
'' New Yorker Volkszeitung ''New Yorker Volkszeitung'' was the longest-running German language daily labor newspaper in the United States of America, established in 1878 and suspending publication in October 1932. At the time of its demise during the Great Depression the ' ...

'' and '' Die Neue Zeit''). Stiebeling's analysis represented "almost certainly the first systematic use of statistical sources in Marxian value theory." Although Eugen Varga and the young

Charles Bettelheim Charles Bettelheim (20 November 1913 – 20 July 2006) was a French Marxian economist and historian, founder of the Center for the Study of Modes of Industrialization (CEMI : ''Centre pour l'Étude des Modes d'Industrialisation'') at thEHESS ec ...

; already studied the topic, and Josef Steindl began to tackle the problem in his 1952 book, the first major empirical analysis of long-term trends in profitability inspired by Marx was a 1957 study by Joseph Gillman. This study, reviewed by Ronald L. Meek and H. D. Dickinson, was extensively criticized by Shane Mage in 1963. Mage's work provided the first sophisticated disaggregate analysis of official national accounts data performed by a Marxist scholar.

Study in the late 1970s and onward

There have been a number of non-Marxist empirical studies of the long-term trends in business profitability. Particularly in the late 1970s and early 1980s, there were concerns among non-Marxist economists that the profit rate could be really falling. Various efforts have been conducted since the 1970s to empirically examine the TRPF. Studies supporting or arguing in favour of it include those by Michael Roberts, Themistoklis Kalogerakos, Marcelo Resende, Minqi Li, John Bradford, and Deenpankar Basu (2012). Studies critical or contradicting the TRPF include those by Òscar Jordà and Simcha Barkai. Other studies, such as those by Basu (2013), Elveren Thomas Weiß and Ivan Trofimov, report mixed results or argue that the answer is not yet certain due to conflicting findings and issues with appropriately measuring the TRPF. From time to time, the research units of banks and government departments produce studies of profitability in various sectors of industry. The

National Statistics Office The following is a list of national and international statistical services. Central national statistical services Nearly every country in the world has set a central public sector unit entirely devoted to the production, harmonisation and dissemin ...

of Britain now releases company profitability statistics every quarter, showing increasing profits. In the UK,

Ernst & Young Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewat ...

(EY) nowadays provide a ''Profit Warning Stress Index'' for quoted companies. The Share Centre publishes the ''Profit Watch UK Report''. In the US, Yardeni Research provides a briefing on

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...

profit margin trends, including comparisons with NIPA data.''Yardeni stock market briefing on profit margins'

References

{{Marx/Engels Classical economics Marxian economics