Tendency of the rate of profit to fall

The tendency of the rate of profit to fall (TRPF) is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Capital, Volume III. 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, yet they each differed as to the reasons why the TRPF should necessarily occur.'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'.'... 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.'“Cartels are fundamentally nothing else than a means resorted to by the capitalist mode of production for the purpose of holding back the fatal fall of the rate of profit in certain branches of production”.'A world monopoly in raw materials means that more surplus value can be pumped out of the world market'.(1) True profit rate: the real (but perhaps unknown or unstated) profitability of enterprises in terms of their true net gains, regardless of how they are reported.'The real question is whether the claim that the Marx’s law of profitability as the underlying cause of crises under capitalism can be empirically validated. That is what my work and the work of many others attempts to do. And I think we are achieving that.''In the area of valuation, it must be noted that the statistics currently collected on the prices of both residential and non-residential structures are still inadequate in many ways. Moreover, in many countries, historical data is almost non-existent. When one considers the role played by such prices in economic cycles, the absence of such data is almost shocking.'“To give this figure context, the total value of all the gold ever mined is approximately US$6 trillion, which pales in comparison to the total value of developed property by a factor of 36 to 1. The value of global real estate exceeds – by almost a third – the total value of all globally traded equities and securitised debt instruments put together, and this highlights the important role that real estate plays in economies worldwide.”“Economists universally believe in the law of diminishing returns. As capital accumulates, the incremental return on an additional unit of capital declines. The crucial question goes to what is technically referred to as the elasticity of substitution. With 1 percent more capital and the same amount of everything else, does the return to a unit of capital relative to a unit of labor decline by more or less than 1 percent? If, as Piketty assumes, it declines by less than 1 percent, the share of income going to capital rises. If, on the other hand, it declines by more than 1 percent, the share of capital falls. (…) Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital. It is plausible that as the capital stock grows, the increment of output produced declines slowly, but there can be no question that depreciation increases proportionally. And it is the return net of depreciation that is relevant for capital accumulation.” The tendency of the rate of profit to fall (TRPF) is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Capital, Volume III. 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, yet they each differed as to the reasons why the TRPF should necessarily occur. In his 1857 Grundrisse manuscript, Marx called the TRPF 'the most important law of political economy' and sought to give a causal explanation for it in terms of his theory of capital accumulation. In Capital, Volume III, Marx described the TRPF as 'the mystery around which the whole of political economy since Adam Smith revolves' and in a letter he called his own TRPF theory 'one of the greatest triumphs' over all previous economics. The tendency is already foreshadowed in chapter 25 of Capital, Volume I (on the 'general law of capital accumulation'), but in Part 3 of the draft manuscript of Marx's Capital, Volume III, edited posthumously for publication by Friedrich Engels, an extensive analysis is provided. 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'. 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. However, because Marx never published any finished manuscript on the TRPF himself, because the tendency is hard to prove or disprove theoretically and because it is hard to test and measure the rate of profit, Marx's TRPF theory has been a topic of global controversy for more than a century. In Adam Smith's TRPF theory, the falling tendency resulted from increased competition which accompanied the growth of capital. Intensifying competition itself would drive down the average profit rate. Criticizing Adam Smith, David Ricardo 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, 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 of the progressive development of the social productivity of labor'. 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 conjunctural market fluctuations. Marx argued that technological innovation enabled more efficient means of production. Physical productivity would increase as a result, i.e. a greater output (of use values, i.e., physical output) would be produced, per unit of capital invested. Simultaneously, however, technological innovations would replace people with machinery, and the organic composition of capital would increase. Assuming only labor can produce new additional value, this greater physical output would embody a gradually decreasing value and surplus value, 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. Rosa Luxemburg stated in her 1899 pamphlet Social Reform or Revolution? that: