tendency to declining rate of profit
tendency to declining rate of profit(MARXISM) a long-term process identified by MARX as inherent in capitalism and linked to the appearance of recurrent, and deepening, economic crises. As more capital is invested in machinery, raw materials and other constant capital (see CONSTANT AND VARIABLE CAPITAL) in order to increase the competitiveness of individual capitalists, so others are forced to do the same. Thus the ORGANIC COMPOSITION OF CAPITAL in the capitalist economy as a whole increases with more value embodied in constant capital, and proportionately less in variable capital, labour power. According to the LABOUR THEORY OF VALUE, it is only labour power which creates new value in the production process and it is this from which surplus value is derived. Profit is derived from surplus value. Thus the argument is that with more capital as constant capital, which does not create new value, the rate of surplus value and hence of profit declines. As expanded accumulation (see ACCUMULATION (OR EXPANDED OR EXTENDED REPRODUCTION) OF CAPITAL) depends on the availability of surplus value for reinvestment, the declining rate of profit is associated with the emergence of crises and the conditions for the revolutionary overthrow of capitalism. It is important to emphasize that Marx is speaking of rates, and the absolute amount of profit may nevertheless rise, and in a capitalist economy as a whole, and not just isolated capitalist enterprises.
Here as elsewhere Marx sees a tendency, but there can be important factors counteracting it. These include increasing the rate of EXPLOITATION by decreasing wages and decreasing the value of constant capital. Marx suggested that the organic composition of capital rises faster than these counteracting tendencies although he does not show how.
Several arguments have been made against Marx's analysis. It depends upon acceptance of the labour theory of value. Empirically it has proved difficult to test Marx's arguments, and the rate of profit has been maintained via a variety of mechanisms, many not envisaged by Marx. Short-term falls in the rate of profit have generally been overcome even if this has involved severe social dislocation. Further, even if rates of profit do show cyclical tendencies to rise and fall, it has by no means been established that this is for reasons outlined by Marx, and most current analyses start from different conceptual bases than the Marxian, for example KEYNESIAN ECONOMICS or MONETARISM.