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. Although not accepted in 20th century mainstream economics, the existence of such a tendency was widely accepted in the 19th century. Economists as diverse as Adam Smith,John Stuart Mill,David Ricardo and Stanley Jevons referred explicitly to the TRPF as an empirical phenomenon. They differed in their explanation about why the TRPF might occur.

In his 1857 Grundrisse manuscript, Karl Marx called the tendency of the rate of profit to fall "the most important law of political economy" and sought to give a causal explanation for it, in terms of his theory of capital accumulation. 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 of the tendency. 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 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, 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 Das Kapital, 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 market fluctuations.

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