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{{Short description|Hypothesis in Marxist economics}}
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The '''tendency of the rate of profit to fall''' ('''TRPF''') is a theory in the  [[crisis theory]] of [[political economy]], according to which the [[rate of profit]]—the ratio of the profit to the amount of invested [[Capital (economics)|capital]]—decreases over time. This hypothesis gained additional prominence from its discussion by [[Karl Marx]] in Chapter 13 of ''[[Capital, Volume III]],''<ref>It is also referred to by Marx as the "''law'' of the tendency of the rate of profit to fall" (LTRPF). As explained in the article, there are disputes about whether there is such a law or not. Other terms used include "the falling rate of profit" (FROP), the "falling tendency of the rate of profit" (FTRP), "decline of the rate of profit" (DROP), and the "tendential fall of the rate of profit" (TFRP). The average rate of profit on production capital is usually written as ''r'' = S/(C+V).</ref> but economists as diverse as [[Adam Smith]],<ref>[[Adam Smith]], ''The Wealth of Nations'', Chapter 9. See also [[Philip Mirowski]], "Adam Smith, Empiricism, and the Rate of Profit in Eighteenth-Century England." ''History of Political Economy'', Vol. 14, No. 2, Summer 1982, pp. 178–198.</ref> [[John Stuart Mill]],<ref>[[John Stuart Mill]], ''Principles of Political Economy'' (1848), Book 4, Chapter 4. Bela A. Balassa, "Karl Marx and John Stuart Mill."  ''Weltwirtschaftliches Archiv'', Bd. 83 (1959), pp. 147–165.</ref> [[David Ricardo]]<ref>[[David Ricardo]], ''Principles of Political Economy and Taxation'', Chapter 6. Maurice Dobb, "The Sraffa system and critique of the neoclassical theory of distribution." In : E.K. Hunt & Jesse G. Schwartz, ''A Critique of Economic Theory''. Penguin, 1972, p. 211–213.</ref> and [[William Stanley Jevons]]<ref>[[W. Stanley Jevons]] (1871), ''The Theory of Political Economy''. Harmondsworth, Penguin Books, 1970, pp. 243–244.</ref> 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.<ref>[[Tony Aspromourgos|Aspromourgos, Tony]], "Profits", in: James D. Wright (ed.), ''International Encyclopedia of the Social & Behavioural Sciences''. Amsterdam: Elsevier, 2015, 2nd edition, Vol. 19, pp. 111–116.</ref> Some scholars, such as [[David Harvey]], argue against the TRPF as a quantitative phenomenon, arguing it is an internal logic driving the movement of capital itself.<ref>{{Cite book |last=Harvey |first=David |title=Limits to Capital |publisher=Verso |year=1982 |isbn=9781788731034 |pages=176-190}}</ref>

[[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".<ref>Geoffrey M. Hodgson, ''After Marx and Sraffa. Essays in political economy''. New York: St Martin's Press, 1991, p.28.</ref> 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."<ref>Stephen Cullenberg, ''The Falling Rate of Profit: Recasting the Marxian Debate''. London: Pluto Press, 1994, p.1.</ref>

== Causal explanations ==

=== Karl Marx ===
In Marx's [[critique of political economy]], the value of a commodity is the medium amount of labour that is socially necessary to produce that commodity. Marx argued that technological innovation enabled more efficient [[means of production]]. In the short run, physical [[productivity]] would increase as a result, allowing the early adopting capitalists to produce greater [[Use value|use values]] (i.e., physical output). 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.{{Quote box
| quote = In the “unhindered” advance of capitalist production lurks a threat to capitalism that is much graver than crises. It is 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.
| author = [[Rosa Luxemburg]]
| source = in her 1899 pamphlet [[Social Reform or Revolution?]]
| align = right
| width = 25%
}}

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.<ref>[[Karl Marx]], ''Capital'', vol. 3, edited by [[Friedrich Engels]]. New York: International Publishers, 1967 (orig. ed. 1894). Chapter 2, "The Rate of Profit", and chapter 13, "The Law as Such". [[John Weeks (economist)|John Weeks]], ''Capital and exploitation'', chapter 8. Princeton University Press, 1980).</ref>

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.<ref>[[Ernest Mandel]], "Economics", in: [[David McLellan (political scientist)|David McLellan]] (ed.), ''Marx – the First 100 Years''. Fontana, 1983.</ref>

==== Countertendencies ====
Marx regarded the TRPF as a general tendency in the development of the capitalist mode of production. Marx maintained 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]], Marx cited six of them:<ref>[[Karl Marx]], ''[[Capital, Volume III]]'', Penguin ed. 1981, p. 339f.</ref>

* More intense exploitation of labor (raising the [[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]]) 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.<ref>Marx regarded dividends as an ''ex post'' distribution from gross profit revenue (a fraction of surplus value), but he acknowledged that the specific pattern of distribution of portfolio capital between different types of placements could affect the overall average rate of return on capital investments. The overall yield on share capital is typically higher than the rate of interest, but lower than the gross profit rate on total enterprise capital (the latter rate which includes both distributed and undistributed profits, and tax). Hence, the ''larger'' the proportion of distributed profits (dividends) to shareholders in total gross profit, the ''lower'' the general profit rate on capital will be – "if" share capital is considered as a separate component in the total capital assets invested, rather than as a duplication of real capital assets in the form of notional "paper" assets, or "if" the average rate of profit is calculated as the weighted mean of rates of return on different types of business investment. Obviously, the more profit is distributed to shareholders, the less is available for reinvestment in the business, ''unless'' shareholders opt to reinvest their profits in the same business. In modern times, though, a very large chunk in the total distribution of stocks is held for ''less'' than one accounting year, or, at most, for around one and a half years (this is called "the increase in portfolio (or equity) turnovers", or "the decrease in average stock holding periods"). The investors are, in this case, primarily concerned with comparative risks, and with the net capital gain they can get from short-term positive changes in stock prices, as weighed against broker's fees and likely dividend yields (often the share parcels traded are large, which lowers the transaction costs per share). See: Marx, ''[[Capital, Volume III]]'', Penguin 1981, pp. 347–348; [[Ernest Mandel]], "Joint-stock company", in: [[Tom Bottomore]] (ed.), ''A Dictionary of Marxist Thought'', 2nd edition. Oxford: Basil Blackwell, 1991, pp. 270–273; David Hunkar, "Average Stock Holding Period on NYSE 1929 To 2016". ''Topforeignstocks.com'', 1 October 2017. [https://topforeignstocks.com/2017/10/01/average-stock-holding-period-on-nyse-1929-to-2016/]</ref>

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.<ref>[[Karl Marx]], ''[[Capital, Volume III]]'', Penguin ed. 1981, p. 356.</ref> In the end, ''none'' of the conceivable counteracting factors could stem the tendency toward falling profits from production.

*

=== Capital stock growth ===
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.<ref>Michael Heinrich, "Begründungsprobleme. Zur Debatte über das Marxsche “Gesetz vom tendenziellen Fall der Profitrate", in ''Marx-Engels-Jahrbuch 2006'', Berlin: Akademie Verlag 2006, p. 50. Lefteris Tsoulfidis & Dimitris Paitaridis, "Revisiting Adam Smith's theory of the falling rate of profit". ''International Journal of Social Economics'', Vol. 39 issue 5, 2012, pp. 304–313.</ref>

=== Other influences ===
There could also be several other factors involved in profitability which Marx and others did not discuss in detail,<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975.</ref> including:

* Reductions in the turnover time of industrial capital generally (and especially [[fixed capital investment]]).<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975, chapter 7.</ref>
* Accelerated depreciation and faster throughput.<ref>[[Ernest Mandel]], ´´Late Capitalism´´. London: NLB, 1975, chapter 7.</ref>
* The level of price inflation for different types of goods and services.<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975, chapter 13.</ref>
* Taxes, levies, subsidies and credit policies of governments, interest and rent costs.<ref>Karl Marx, ''[[Grundrisse]]'', Penguin 1973, p. 751.</ref>
* Capital investment into areas of (previously) non-capitalist production, where a lower [[organic composition of capital]] prevailed.<ref>Marx, ''[[Capital, Volume III]]'', Penguin 1981, p. 320. [[Fritz Sternberg]], ''Der imperialismus''. Berlin: Malik-Verlag, 1926; [[Ernest Mandel]], "Agricultural Revolution and Industrial Revolution", in: A.R. Desai (ed.), ''Essays on Modernization of Underdeveloped Societies'', Vol. 1, 1971 (Bombay: Thacker & Co.). Reprint as: "Agricultural Revolution and Industrial Revolution", ''International Socialist Review'', vol. 34, No. 2 (February 1973), 6–13.</ref>
* Military wars or military spending causing capital assets to be inoperative or destroyed, or spurring war production (see [[permanent arms economy]]).<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975, chapter 9.</ref>
* Demographic factors.<ref>[http://newschool.edu/gf/econ/bulletin-board/Spring07_cottrell.pdf]{{dead link|date=November 2017|bot=InternetArchiveBot|fix-attempted=yes}} Allin Cottrell and [[Paul Cockshott]], "Demography and the falling rate of profit". Wake Forest University & Department of Computing Science, University of Glasgow, February 2007.[https://www.academia.edu/1064338/Demography_and_the_falling_rate_of_profit]</ref>
* Advances in technology and technological revolutions which rapidly reduce input costs.<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975, chapter 6.</ref>
* Particularly in the era of [[globalization]], the national and international [[freight rate]] (shipping, trucking, railfreight, airfreight).
* Substituted natural resource inputs, or marginal increased cost of non-substituted natural resource inputs.<ref>[[Ernest Mandel]], ''Late Capitalism''. London: NLB, 1975, p. 542, 577.</ref>
* Consolidation of mature industries into an oligarchy of survivors.<ref>[[Josef Steindl]], ''Maturity and Stagnation in American Capitalism''. New York: Monthly Review Press, 1952.</ref> Mature industries do not attract new capital because of low returns.<ref>{{cite book|last=Harris|first=Seymour E.|url=https://archive.org/details/in.ernet.dli.2015.212033|title=Postwar Economic Problems|publisher=McGraw-Hill Book Co.|year=1943|location=New York, London|pages=67–70|postscript=<Chapter IV Secular Stagnation by Alvin Sweeny.>}}</ref> Mature companies with large amounts of capital invested and brand recognition can also try to block new competitors in their markets.<ref>{{cite book|last=Ayres|first=Robert U.|url=https://books.google.com/books?id=maHS2Ta_nIUC&q=robert+ayres|title=Turning Point: The end of the Growth Paradigm|publisher=Earthscans Publications|year=1998|isbn=9781853834394|location=London|pages=4}}</ref> 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.<ref>[[Ernest Mandel]], "Economics", in: [[David McLellan (political scientist)|David McLellan]] (ed.), ''Marx – the First 100 Years''. Fontana, 1983; M.C. Howard and J.E. King, ''A history of Marxian economics'' (2 vols). Princeton University Press, 1989.</ref> There exist nowadays several thousands of academic publications on the TRPF worldwide, both for and against. No available book provides an exposition of all the different arguments that have been made. Professor Michael C. Howard [https://uwaterloo.ca/economics/people-profiles/michael-c-howard] 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."<ref>Michael Howard, ''Profits in economic theory''. New York: St. Martin’s Press, 1983, p. 3.</ref>

== Mathematical explanation ==

Marx defines the [[rate of profit]] <math> p^\prime </math> as: <ref>[[Karl Marx]], ''Capital'', vol. 3, edited by [[Friedrich Engels]] </ref>

<math> p^\prime = \frac{s}{v + c} </math>

Where <math> s </math> is [[surplus value]], <math> v </math> is [[Constant and variable capital#Variable capital|variable capital]], and <math> c </math> is [[Constant and variable capital#Constant capital|constant capital]].

Since [[rate of exploitation]] can be written as <math> e = s/v </math> , and the [[organic composition of capital]] is <math> OCC = c/v </math>, then evaluating <math> p^\prime </math> in terms of <math> e </math> and <math> OCC </math> yields:

<math> p^\prime = \frac{e}{1 + OCC} </math>

Therefore, a rising organic composition of capital leads to a declining rate of profit, [[ceteris paribus|''cet. par'']].

Keep in mind that a rising organic composition of capital <math> OCC </math> is often, in whole or part, offset by a rise in the rate of exploitation (or rate of surplus value) <math> e </math> , leading to misgivings and counter-arguments (see Michael Heinrich 2013). <ref> Heinrich, Michael (1 April 2013). "Crisis Theory, the Law of the Tendency of the Profit Rate to Fall, and Marx's Studies in the 1870s </ref>

== Disputes ==
{{Marxian economics|expanded=Topics}}
=== Okishio's theorem ===
{{Main|Okishio's theorem}}
Japanese economist [[Nobuo Okishio]] argued in 1961, "if the newly introduced technique satisfies the cost criterion [i.e. if it reduces unit costs, given current prices] and the rate of real wage remains constant", then the rate of profit would ''increase''.<ref>[[Nobuo Okishio]], "Technical Change and the Rate of Profit", ''Kobe University Economic Review'', 7, 1961, p. 92. Shalom Groll & Ze'ev Orzech, "From Marx to the Okishio theorem: a genealogy". ''History of Political Economy'', Vol. 21, Issue 2, 1989, pp. 253–272.[http://pombo.free.fr/groll1989.pdf]</ref>

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, fall if real wages rose in response to higher productivity, squeezing profits.

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 to Okishio's Theorem ====
[[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:{{Quotation|"... there is no hope for producing a falling rate of profit theory in a competitive, equilibrium environment with a constant real wage... this does not mean... that there cannot exist a theory of a falling rate of profit in capitalist economies. One must, however, relax some of the assumptions of the stark models discussed here, to achieve such a falling rate of profit theory."<ref>John E. Roemer, ''Analytical Foundations of Marxian Economic Theory''. Cambridge: Cambridge University Press, 1981, p. 132.</ref>}}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.<ref>Bill Gibson & Hadi Esfahani, "Nonproduced means of production: neo-Ricardians vs. Fundamentalists". ''Review of Radical Political Economics'', vol. 15, issue 2, summer 1983, pp. 83–105.</ref>

=== Michael Heinrich ===
{{Excerpt|Michael Heinrich|Tendency of the rate of profit to fall and crisis theory}}

=== Competition ===
[[David Ricardo]], 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.<ref>Francisco Verdera, "Adam Smith on the falling rate of profit: a reappraisal." ''Scottish Journal of Political Economy'', Vol. 39, No. 1, February 1992; cf. Karl Marx, ''[[Grundrisse]]'', Penguin 1973, p. 751.</ref> Apart from a few exceptional cases, Ricardo claimed, the average rate of profit could only fall if wages rose.<ref>Heinrich, p. 51. See David Ricardo, ''On the Principles of Political Economy and Taxation''. In: Piero Sraffa (ed.), ''The Works and Correspondence of David Ricardo''. Vol. I. Cambridge, 1951, pp. 289–300.</ref>

In ''[[Capital: Critique of Political Economy|Capital]]'', [[Karl Marx]] 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 (Marxist theory)|capitalist mode of production]] of the progressive development of the social productivity of labor".<ref name="Karl Marx 1981, p. 3192">Karl Marx, ''[[Capital, Volume III]]'', Penguin 1981, p. 319.</ref> Marx never denied that profits could contingently fall for all kinds of reasons,<ref name="Karl Marx 1981, p. 3192" /> 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 more output at a lower cost, enabling more sales in less time.<ref>[[Ronald L. Meek]], "The Falling Rate of Profit", in R. L. Meek, ''Economics and Ideology and Other Essays'' (London: Chapman and Hall, 1967).</ref> [[Ladislaus von Bortkiewicz]] 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]]."<ref>[[Ladislaus Bortkiewicz]], "Value and Price in the Marxian System". ''International Economic Papers'', no 2, 1952. London: MacMillan, 1952, p. 73.</ref> [[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").<ref>Julius Sensat, ''Habermas and Marxism: an appraisal''. London: Sage, 1979, p. 61, 125f. See: [[Jürgen Habermas]], ''Legitimation Crisis''. Cambridge: Polity Press, 1976, p. 56 and Jürgen Habermas & Boris Frankel, "Habermas talking: an interview", ''Theory and society'', I, 1974, pp. 37–58, at p. 50.</ref> [[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.<ref name="heinrich_monthly_review2">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.</ref>

=== 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. 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.<ref>Steve Keen, [https://keenomics.s3.amazonaws.com/debtdeflation_media/papers/Jhet_use.PDF "Use-Value, Exchange Value, and the Demise of Marx's Labor Theory of Value"], Journal of the History of Economic Thought, Volume 15, Issue 1, Spring 1993, pages 107–121</ref>

[[Eugen Böhm von Bawerk]]<ref>[[Eugen von Böhm-Bawerk]], ''Karl Marx and the Close of his System''. London, T.F. Unwin, 1898 (various reprints).</ref> and his critic [[Ladislaus Bortkiewicz]]<ref>[[Ladislaus von Bortkiewicz]], "Wertrechnung und Preisrechnung im Marxschen System", in: 1906/7, ''[[Archiv für Sozialwissenschaft und Sozialpolitik]]'', [[:File:Bortkiewicz.1906.pdf|XXIII-1 (1906) pp. 1–50]], [[:File:Bortkiewicz.1907a.pdf|XXV-1 (1907) pp. 10–51]], [[:File:Bortkiewicz.1907b.pdf|XXV-2 (1907) pp. 445–488]]. This article was translated into English in 1952 as "Value and Price in the Marxian System", ''International Economic Papers'', no. 2, 1952.[http://classiques.uqac.ca/classiques/Bortkiewicz_ladislaus_von/value_and_price_marxian_system/value_price_marxian_system.pdf] A translation of Bortkiewicz’s follow-up article "On the Correction of Marx's Fundamental Theoretical Construction in the Third Volume of Capital" (Jahrbücher für Nationalökonomie und Statistik, July 1907) is provided in Paul Sweezy (ed.), ''Karl Marx and the Close of his System by Eugen von Bohm Bawerk'' (New York: Kelley, 1949), pp. 199–221.</ref> (himself influenced by [[Vladimir Karpovich Dmitriev]]<ref>Kenji Mori, "Charasoff and Dmitriev: An Analytical Characterisation of Origins of Linear Economics". Discussion Paper No. 249. Graduate school of economics and management, Tohoku University, January 2010.[http://www.econ.tohoku.ac.jp/e-dbase/dp/terg/terg249.pdf] Eduardo Crespo and Marcus Cardoso, "The evolution of the theory of value from Dmitriev and Bortkiewicz to Charasoff" (Rio the Janeiro: Federal University of Rio the Janeiro, 2000).</ref>) claimed that Marx's argument about the distribution of profits from newly produced surplus value is mathematically faulty.<ref>Bruce Philp, ''Reduction, Rationality and Game Theory in Marxian Economics''. Abingdon: Routledge, 2005, p. 42f.</ref> This gave rise to a lengthy academic controversy.<ref>Richard B. Day and Daniel F. Gaido, ''Responses to Marx's Capital from Rudolf Hilferding to Isaak Illich Rubin''. Leiden: Brill, October 2017.</ref><ref>{{cite journal|author=Josef Winternitz |author-link=:de:Josef Winternitz|date=Jun 1948|title=Value and Prices: A Solution of the So-Called Transformation Problem|journal=[[The Economic Journal]]|volume=58|pages=276–280|doi=10.2307/2225953|jstor=2225953|number=230}}</ref><ref>{{cite journal|author=[[Francis Seton]]|date=Jun 1957|title=The Transformation Problem|url=http://minibiblionet.free.fr/textes.page6S/1957.seton.pdf|url-status=dead|journal=[[Review of Economic Studies]]|volume=24|pages=149–160|doi=10.2307/2296064|jstor=2296064|archive-url=https://web.archive.org/web/20170809003406/http://minibiblionet.free.fr/textes.page6S/1957.seton.pdf|archive-date=2017-08-09|access-date=2017-06-14|number=3}}</ref><ref>Michio Morishima, ''Marx's Economics: A Dual Theory of Value and Growth''. Cambridge University Press, 1973.</ref><ref>Michio Morishima & George Catephores, ''Value, exploitation and growth''. London: McGraw-Hill, 1978.</ref><ref>{{cite book|author=Ian Steedman|url=https://archive.org/details/marxaftersraffa0000stee|title=Marx after Sraffa|publisher=Humanities Press|year=1977|isbn=978-0-902308-49-7|url-access=registration}}</ref> 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 [[David Ricardo]] – who himself inherited the problem from [[Adam Smith]], yet failed to solve it.<ref>Ronald L. Meek, ''Smith, Marx, & After''. London: Chapman & Hall, 1977, p. 98.</ref>

Marx was already aware of this theoretical problem when he wrote ''[[The Poverty of Philosophy]]'' (1847).<ref>Ronald L. Meek, ''Smith, Marx, & After''. London: Chapman & Hall, 1977, p. 99.</ref> It gets a mention again in the ''Grundrisse'' (1858).<ref>Karl Marx, ''Grundrisse''. Penguin, 1973, p. 560f.</ref> 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.<ref>Karl Marx, ''A Contribution to the Critique of Political Economy''. Moscow: Progress Publishers, 1971.</ref> In ''Theories of Surplus Value'' (1862–1863), he discusses the problem very clearly.<ref>Karl Marx, ''Theories of Surplus Value'', Part 3, chapter 20 (Moscow: Progress Publishers, 1971, p. 69-71.</ref> His first attempt at a solution occurs in a letter to Engels, dated 2 August 1862.<ref>Karl Marx & Frederick Engels, ''Letters on Capital''. London, New Park, 1983, pp. 74–78.</ref> In ''[[Capital, Volume I]]'' (1867)<ref>[[Karl Marx]], ''[[Capital, Volume I]]'', Penguin 1976, p. 421.</ref> he noted that "many intermediate terms" were still needed in his progressing narrative, to arrive at the answer.

== Empirical research ==

=== Before 1970 ===
In the 1870s, Marx certainly wanted to test his theory of economic crises and profit-making econometrically,<ref>Zoltan Kenessey, "Why ''Das Kapital'' remained unfinished". In: William Barber (ed.), ''Themes in Pre-Classical, Classical and Marxian Economics''. Aldershot: Edward Elgar, 1991, pp. 119–133.</ref> but adequate macroeconomic statistical data and mathematical tools did not exist to do so.<ref>Marx, "Letter to Engels, 31 May 1873". ''Marx-Engels Werke'' Vol. 33, p. 821. English: [[Karl Marx]] & [[Friedrich Engels]], ''Letters on Capital''. London: New Park, 1983, p. 176 or ''Marx Engels Collected Works'', Vol. 44, p. 504.</ref> Such scientific resources began to exist only half a century later.<ref>Paul Studenski, ''The Income of Nations: Theory, Measurement and Analysis, Past and Present''. Washington Square: New York University Press, 1958.</ref>

In 1894, [[Friedrich Engels]] did mention the research of the émigré socialist Georg Christian Stiebeling, who compared profit, income, capital and output data in the U.S. census reports of 1870 and 1880, but Engels claimed that Stiebeling explained the results "in a completely false way" (Stiebeling's defence against Engels's criticism included two open letters submitted to the ''[[New Yorker Volkszeitung]]'' and ''[[Die Neue Zeit]]'').<ref>[[Karl Marx]], ''[[Capital, Volume III]]'', Penguin 1981, p. 110. G. C. Stiebeling, ''Das Werthgesetz und die Profitrate''. New York: John Heinrich, 1890. See the German Wikipedia article on Georg Christian Stiebeling. [http://library.fes.de/pdf-files/bibliothek/bestand/a79-03605.pdf] [http://library.fes.de/pdf-files/bibliothek/bestand/a79-03602.pdf]</ref> Stiebeling's analysis represented "almost certainly the first systematic use of statistical sources in Marxian value theory."<ref>M. C. Howard & J. E. King, ''A History of Marxian Economics'', Vol. 1. Princeton University Press, 1989, p. 29.</ref>

Although [[Eugen Varga]]<ref>[[Eugen Varga]], ''The Great Crisis and its Political Consequences''. London: Modern Books Limited, 1935</ref><ref>André Mommen, ''Stalin's Economist. The Economic Contributions of Jenö Varga''. London: Routledge, 2011, chapter 7; Jelle Versieren, "Eugen Varga and the Calamity of Stalinist Economics." ''Critique: Journal of Socialist Theory'', Volume 41 Issue 1, 31 May 2013.</ref> and the young [[Charles Bettelheim]]<ref>e.g. C. Bettelheim, ''L'economie Allemande sous le nazisme. Un aspect de la décadence du capitalisme'', Paris: P.U.F., 1946, p. 45.</ref><ref>C. Bettelheim, ''Bilan de l'économie française (1919–1946)''. Paris : P.U.F., 1947; C. Bettelheim, ''Revenu national, épargne et investissements chez Marx et chez Keynes''. Paris: Librairie du Recueil Sirey, 1948; C. Bettelheim, "Variation du taux de profit et accroissement de la productivité du travail." ''Économique Appliquée. Bulletin de l'Institut de Science Économique Appliquée'', N° 1–2, 1959.</ref> already studied the topic, and [[Josef Steindl]] began to tackle the problem in his 1952 book,<ref>Josef Steindl, ''Maturity and stagnation in American Capitalism''. New York: Monthly Review Press, 1952.</ref> the first major empirical analysis of long-term trends in profitability inspired by Marx was a 1957 study by Joseph Gillman.<ref>Joseph Gillman, ''The Falling Rate of Profit''. London, Dennis Dobson, 1957.</ref> This study, reviewed by [[Ronald L. Meek]] and H. D. Dickinson,<ref>Ronald L. Meek, "The Falling Rate of Profit: Marx's Law and its Significance to Twentieth-century Capitalism, by Joseph M. Gillman." ''The Economic Journal'', Vol. 69 No. 273, March 1959, pp. 132–134. H. D. Dickinson, "Falling rate of profit". ''New Left Review'' I/1, January–February 1960.[https://newleftreview.org/I/1/h-d-dickinson-falling-rate-of-profit] Cf. Howard C Petith; "Meek, Dickinson and Marx's falling rate of profit". Barcelona : Economics Department discussion paper, Universitat Autònoma de Barcelona, 1997.[https://ideas.repec.org/p/aub/autbar/389.97.html]</ref> was extensively criticized by Shane Mage in 1963.<ref>Shane Mage, ''The Law of the Falling Tendency of the Rate of Profit; Its Place in the Marxian Theoretical System and Relevance to the US Economy''. Phd Thesis, Columbia University, 1963.</ref> Mage's work provided the first sophisticated disaggregate analysis of official national accounts data performed by a Marxist scholar.

=== After 1970 ===
There have been a number of non-Marxist empirical studies of the long-term trends in business profitability.<ref>For example, J. L. Walker, "Estimating companies’ rate of return on capital employed". ''Economic Trends'' (London: HMSO), November 1974; T.P. Hill, ''Profits and rates of return''. Paris: OECD, 1979; James H. Chan-Lee and Helen Sutch, "Profits and rates of return in OECD countries", ''OECD Economic and Statistics Department Working Paper'' N°20, 1985. [http://www.oecd.org/dataoecd/9/26/35485300.pdf]; Daniel M. Holland (ed.) ''Measuring profitability and capital costs : an international study''. Lexington, Mass. : Lexington Books, c1984.; Dennis C. Mueller, ''Profits in the Long Run''. Cambridge: Cambridge University Press, 1986; Dennis C. Mueller, (ed.) ''The Dynamics of Company Profits: An International Comparison''. Cambridge: Cambridge University Press, 1990; James Poterba, "The rate of return to corporate capital and factor shares: new estimates using revised national income accounts and capital stock data". ''Carnegie-Rochester Conference Series on Public Policy'', Vol. 48, June 1998, pp. 211–246; Elroy Dimson, Paul Marsh, and Mike Staunton, ''The Millennium Book, A century of Investment Returns''. London: London Business School and ABN AMRO, 2000; Elroy Dimson, Paul Marsh, and Mike Staunton, ''Triumph of the Optimists: 101 Years of Global Investment Returns''. Princeton, N.J.: Princeton University Press 2002; Paul Gomme et al., "The return to capital and the business cycle." ''Review of Economic Dynamics'', Vol. 14, Issue 2, April 2011, pp. 262–278; ''Credit Suisse Global Investment Returns Yearbook''. Zurich: Credit Suisse Research Institute, 2018.</ref>

Particularly in the late 1970s and early 1980s, there were concerns among non-Marxist economists that the profit rate could be really falling.<ref>M. Panic & R. E. Close, "Profitability of British manufacturing industry".  ''Lloyds Bank Review'' #109, July 1973, pp.  17–30; Martin Feldstein & Lawrence Summers, "Is the rate of profit falling?". ''Brookings Papers on Economic Activity'', 1, 1977; William Nordhaus, "The falling share of profits". ''Brookings papers on Economic Activity'', No. 1, 1974, pp. 169–217.{{cite web |title=Archived copy |url=http://www.brookings.edu/~/media/projects/bpea/1974%201/1974a_bpea_nordhaus_kaldor_greenspan_brainard.pdf |url-status=dead |archive-url=https://web.archive.org/web/20150924071844/http://www.brookings.edu/~/media/projects/bpea/1974%201/1974a_bpea_nordhaus_kaldor_greenspan_brainard.pdf |archive-date=2015-09-24 |access-date=2014-08-19}}. Jeffrey D. Sachs, "Wages, profits, and macroeconomic adjustment: a comparative study." [with comments by [[William Hoban Branson|William H. Branston]] and [[Robert J. Gordon]]] ''Brookings papers of economic activity'', No.2, 1979, pp. 269–319 [https://www.brookings.edu/bpea-articles/wages-profits-and-macroeconomic-adjustment-a-comparative-study/]; Thomas R. Michl, "Why is the Rate of Profit Still Falling?" New York: Jerome Levy Economics Institute, Working Paper no. 7, September 1988.[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=191174]</ref>

Various efforts have been conducted since the 1970s to empirically examine the TRPF. Studies supporting it include those by Michael Roberts,<ref>Michael Roberts, "A world rate of profit". Paper presented to AHE/IPPE/WEA Conference, Paris July 2012 [http://gesd.free.fr/mrwrate.pdf]; Michael Roberts. "Revisiting a world rate of profit". Paper for the 2015 Conference of the Association of Heterodox Economists, Southampton Solent University, July 2015.[https://thenextrecession.files.wordpress.com/2015/12/revisiting-a-world-rate-of-profit-june-2015.pdf]</ref><ref>Roberts, Michael, [https://thenextrecession.files.wordpress.com/2015/09/uk-rate-of-profit-august-2015.pdf "UK profit rate and British economic history"], 2015, accessed 21/03/2018</ref> Themistoklis Kalogerakos,<ref>Themistoklis Kalogerakos, ''Technology, distribution, and long-run profit rate dynamics in the U.S. manufacturing sector, 1948–2011: evidence from a Vector Error Correction Model (VECM)''. Master's Thesis, Lund University, August 2014.[http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=4648167&fileOId=4648170]</ref> [[Li Minqi|Minqi Li]],<ref>Minqi Li, Feng Xiao, Andong Zhu, "Long waves, institutional changes and historical trends: a study of the long-term movement of the profit rate in the capitalist world economy", ''Journal of World System Research, Number 1, 2007.[http://gesd.free.fr/lietal.pdf].''</ref> John Bradford,<ref>John Hamilton Bradford, ''The Falling Rate of Profit Thesis Reassessed''. Masters thesis, University of Tennessee, Knoxville, 2007.[http://trace.tennessee.edu/cgi/viewcontent.cgi?article=1293&context=utk_gradthes]</ref> and Deepankar Basu (2012).<ref>Deepankar Basu &  Panayiotis Manolakos, [http://journals.sagepub.com/doi/abs/10.1177/0486613412447059 "Is there a tendency for the rate of profit to fall? Econometric evidence for the U.S., 1948–2007"], ''Review of Radical Political Economics'', Vol. 45, 2012, pp. 76–91.</ref> Studies contradicting the TRPF include those by Òscar Jordà,<ref>Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. "The rate of return on everything, 1870–2015." The Quarterly Journal of Economics 134, no. 3 (2019): 1225–1298.</ref> Marcelo Resende,<ref>Marcelo Resende, "Profit rate in the US, 1949–2007: a Markov switching assessment". ''Applied Economics Letters'', Volume 25, Issue 9, 2018.[http://www.ie.ufrj.br/images/pesquisa/publicacoes/discussao/2017/tdie0102017resende-v6.pdf]</ref> and Simcha Barkai.<ref>Barkai, Simcha. "Declining labor and capital shares." The Journal of Finance (2016).</ref> Other studies, such as those by Basu (2013),<ref>Basu, D., Vasudevan, R., "Technology, distribution and the rate of profit in the US economy: understanding the current crisis", ''Cambridge Journal of Economics'', 37,  2013, pp. 57–89.</ref> Elveren,<ref>Adem Y. Elveren & Sara Hsu, "Military Expenditures and Profit Rates: Evidence from OECD Countries", Working Paper 374, Political Economy Research Institute, 2015, p. 3 et seq.[http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_351-400/WP374.pdf]</ref> Thomas Weiß<ref>Thomas Weiß, The rate of return on capital in Germany – an empirical study. Paper presented at the 19th FMM Conference, "The Spectre of Stagnation? Europe in the World Economy", Berlin Steglitz, 22–24 October 2015.[https://www.boeckler.de/pdf/v_2015_10_24_weiss.pdf]</ref> and Ivan Trofimov,<ref>Ivan Trofimov, [https://mpra.ub.uni-muenchen.de/79529/1/MPRA_paper_79529.pdf "Profit rates in developed capitalist economies: a time series investigation"], Munich Personal RePEc Archive, 5/06/2017, accessed 19/03/2018</ref> 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.<ref>For example, Palle S. Andersen, "Profit shares, investment and output capacity." Bank of International Settlements, ''BIS Working Papers'' No. 12, July 1987; Luci Ellis and Kathryn Smith, "The global upward trend in the profit share" Working paper, Monetary and Economic Department, Bank of International Settlements, July 2007.</ref> The [[Office for National Statistics]] releases company profitability statistics every quarter, showing increasing profits.<ref>Angela Monaghan, "UK companies at their most profitable since 1998". ''The Guardian'', 14 November 2014.[https://www.theguardian.com/business/2014/nov/14/uk-companies-most-profitable-since-1998] The ONS quarterly data are titled "Profitability of UK companies".[https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/profitabilityofukcompanies/apriltojune2018]</ref> In the UK, [[Ernst & Young]] (EY) nowadays provide a ''Profit Warning Stress Index'' for quoted companies.<ref>[https://www.ey.com/UK/en/SearchResults?query=Profit+warnings&search_options=country_name EY Profit Warning Stress Index]</ref> [[The Share Centre]] publishes the ''Profit Watch UK Report''.<ref>''Profit Watch UK Report''[https://www.share.com/stock-markets-and-news/profit-watch-report].</ref> In the US, Yardeni Research provides a briefing on [[S&P 500]] [[profit margin]] trends, including comparisons with [[National Income and Product Accounts|NIPA]] data.<ref>''Yardeni stock market briefing on profit margins'' [https://www.yardeni.com/pub/sp500margin.pdf] [https://www.yardeni.com/pub/sp500marginnipa.pdf].</ref>

== See also ==
* [[Crisis theory]]
*[[Critique of political economy]]
* [[Financial crisis]]
* [[Internal rate of return]]
* [[Steady-state economy#Concept of the stationary state in classical economics|Steady-state economy: the stationary state in classical economics]]

== References ==
{{reflist}}



{{Marx/Engels}}
[[Category:Classical economics]]
[[Category:Marxian economics]]