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Marx developed the theory of capitalism to explain the system’s long-term dynamic trend, and it can be summarized in three propositions. First, capitalists have a tendency to accumulate the majority of the surplus value that they generate (Hodgson, 2015). Second, the accrual of capital is directly proportional to the constant and variable capital ratios. Third, an increase in capital composition over time decreases the rate of profit (Hodgson, 2015). The falling rate of profit theory is based on the third proposition. Marx argued that the profit rate would tend to decrease over time due to changes in technology despite the existence of short-run contrary influences. According to him, this was the most significant law of modern political economy. The capitalist system is at one point destined to either fall into a crisis or stagnate. He, however, did not project the rate of profit to decline in a persistent and uninterrupted style because certain forces interrupt the decline at certain points. This theory has been described by many economists as the foundation of revolutionary Marxism. In modern economies, individual capitalistic firms operate under a similar system of socioeconomic policies. Therefore, there is a tendency for the rate of profit to attain equilibrium between organizations. The phenomenon is more pronounced in situations where competition between firms is stiff (Hodgson, 2015). In that regard, capitalist competition results in the creation of a common rate of profit. This tendency has also been observed in monopolies that operate under the capitalist system because of the competition and independence that exists between firms.
The competition that exists under capitalism forces the market players to lower the cost of production in order to win more customers. In that sense, capital can be considered as a self-expanding value (Hodgson, 2015). Industries that have slower means of production are phased out by those that have faster means. In that regard, the introduction of machinery enhances labor productivity and increases surplus labor time. Capitalists who use new techniques of production can sell their goods above their individual value, thus making higher profits. Competition between firms results in the centralization and concentration of capital (Hodgson, 2015). Capitalists can collectively drive down rates of profit in order to course-correct with regard to capital expansion and centralization. Moreover, they could instigate it to bring changes to industries such as manufacturing. Human labor is the only source of profit according to Marxian theory (Hodgson, 2015). Therefore, as more capitalists replace people with machinery, there is a decline in the average labor time that is needed for the production of goods. As a result, profits fall because the ratio of surplus-value to investment drops across the entire system. In general, capitalists will always find new ways of increasing profits over time. Rarely do they collectively drive down profits because course-correction interventions in a capitalist system do not occur on a regular basis?
References
Ayres, R. U. (2020). On capitalism and inequality: progress and poverty revisited. Springer.
DeMartino, G. F., & McCloskey, D. N. (2016). The Oxford handbook of professional economic ethics. Oxford University Press.
Hausman, D., McPherson, M., & Satz, D. (2017). Economic analysis, moral philosophy, and public policy (3rd ed.). Cambridge University Press.
Hodgson, G. M. (2015). Conceptualizing Capitalism: Institutions, evolution, future. The University of Chicago Press.
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