Tendency of the rate of profit to fall

Declining rates of profit in the USA, Japan, and Germany since 1950

The tendency of the rate of profit to fall (TRPF) is an empirical observation in political economy concerning the overall rate of profit of an economy, which tends to decrease over time. This is subject to discussion in crisis theory. The discussions on the causes of this tendency can be found in Chapter 13 of Karl Marx's Capital, Volume III, but economists as diverse as Adam Smith, John Stuart Mill, David Ricardo 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. Marx regarded the TRPF as proof that capitalist production could not be an everlasting form of production since in the end the profit principle itself would suffer a breakdown.

This tendency is also a global phenomenon. In 2020, the US rate of profit continued its downward trend, leading to heightened crisis among the profit-seeking class (the bourgeoisie)

Source of TRPF

The cycle of capital m->c->m' is reliant on labor-power (which is the special commodity that makes all values, not all wealth) to increase the value of commodities. But money has to buy more than labor-power, it has to buy/pay to maintain the tools, machines, raw materials and so on used by labor-power. So the costs of capital production are divided into two halves: constant and variable capital. The capital spent on workers is the variable capital. The most common form of variable is wages. Though it can take other forms such as food or health insurance.

Capitalists have been highly successful in decreasing or keeping stagnant real wages for the last 2-3 generations<<citation needed>>. As capitalist society is successful at suppressing variable capital costs, variable capital's impact on profit (remember profit = m' - m) is minimal. Where the tendency of the rate of profit to decline comes into play is due to constant capital. Machines and tools add value to commodities, but this is only value previously added by some prior humans that built those machines/tools.

As capitalism drags on and develops technologically, more and more machines and tools are needed to produce commodities. The centralization of factories has made them increasingly reliant on autonomous technology for example. Thus the capital spending required for constant capital goes up.

Why don't capitalists just use less constant capital? The answer is competition. Constant capital allows more commodities to be produced using the same amount of labor-power. Let us suppose that in the early days of pencil making, a single person operating a pencil workshop alone could produce 20 pencils in a day. So 8 in isolation could produce 160. Whereas 8 working in a factory, using far more expensive machines and tools, could produce 20,000 per day. Because these new machines and tools have decreased the amount of labor required, the value of pencils, followed by their price, falls. Putting out of business anyone who cannot make a profit off of the new cheaper pencils.

As technology improves, more and more money must be spent on the latest and greatest industrial machines to avoid being beat out by a more up-to-date capitalist.

See also

• Crisis theory
• Financial crisis