The Tendency for the Rate of Profit to Fall (TRPF) Explained

The "Law/Trend of the Tendency of the Rate of Profit to Fall" (TRPF) is perhaps one of the most important concepts that we find in Marxist economics, originating from Karl Marx himself —{just like} Das Kapital. It denotes a theory that, in capitalist economies, the rate of profit — or the ratio of profit to total capital invested — tends to fall over time. This fall is viewed as the result of the logic of capitalist production, which, in turn, relies on competition, technological change and the search for surplus value. In the long run, this directional propensity if not counterbalanced breeds economic crises, stagnation and in due course capitalist system collapse.

The TRPF is widely regarded as one of the key and controversial elements of Marx's analysis of capitalism, and economists from both the Marxist tradition and outside it have long debated its meaning. Here we describe the TRPF: what it is, its theory background, how it works, what biological implications it has (or may have), and some critiques.

Theorectical Basis of TRPF

This TRPF originates in Marx's value and surplus value theory. In capitalist societies, the root motivation for producing goods and services is surplus value: the difference between what you can sell producing a good or service — which reflects its contribution to society as measured in wages collected by labor employed to produce it — and cost of labor.

Where profit is the surplus value created by labor and total capital consists of constant capital (the investment in machinery, raw materials etc.) + variable capital (the wages paid to workers. Marx illustrates that capitalists continually seek to increase surplus value by maximizing the volume of labor performed, usually through mechanization and automation.

How the Rate of Profit Tendency to Fall Works

Overgrowing the Organic Composition of Capital

A major reason behind the TRPF is the increas in the "organic composition of capital". The organic composition of capital: constant gold (machines, technology and raw materials) vs. variable gold (wages paid to labor). Capitalists, after all, must invest in technological processes to more productively and efficiently drive production via machinery that minimizes variable labor while simultaneously increasing constant capital.

Marx thus goes on to explain that this transition results in the falling rate of profit. The reasoning is that constant capital may be invested in labor-saving machines and other technologies, but, unlike labor itself, it cannot directly produce surplus value. Because surplus value arises from labor, and because constant capital does not contribute to profit rate (it is itself passive), an increase in the weight of constant capital reduces overall profitability system-wide.

Technological advances and automation

Increasing the organic composition of capital requires technological innovation and automation. The relentless competitive pressures that capitalist are subjected to requires innovation driven by the search for ways to lower cost and raise productivity. But then the development of automation and technology, by approaching downwards the number of labour necessary in production to a bare minimum needed for survival, tends simultaneously to lower the more hours that can only be added to surplus above a minimal level. Put differently, in each of these cases technological progress increases the overall value of output but reduces labor time and thus surplus value and profit.

The Decline of the Rate of Profit and Its Countervailing Tendencies**:

It should be noted that Marx's theory of the TRPF is not deterministic but a tendency and will NOT happen if there are counteracting factors Whereby some of these counteracting factors are:

– Rising Labor Exploitation: In response to falling the profit rate, capitalists may try and rise the exploitation level of workers — i.e. raise the surplus value obtained from labor via longer working hours, lower wages or decrease health care cost.

-Cheapening of Constant Capital: A further possible reaction is the reduction in price level of constant capital. In addition, Technological innovation might lower the cost of machinery and materials other capital goods, thus compensating over time for the increase in organic composition of capital.

Capital Export: Because we live in a global economy and capitalists can always make a living selling their labor elsewhere in the world to cheaper labor markets, they are constantly exporting capital to these places where wages are lower or supply chain mechanisms offer greater advantages.

Monetary and Financial Expansion Capitalists might also turo toward borrowing, inflationary or financial speculation as a way to get profits up, at least in the short run by buying more credit-expenditting pumping prices capacity.

Although, under normal circumstances, this mechanism and others such as those mentioned above should function in the opposite direction (i.e. preventing crises from occurring), Marx believed that when considered over time, all these counteracting mechanisms are overwhelmed by the tendency of the rate of profit to fall; with potentially disastrous consequences for capitalism—all other things being equal.

Choices and Consequences of the Tendency of the Rate of Profit to Fall

Financial Crises and Recessions:

Marx, the rate of profit tends to fall so that periodic crises of overproduction occur. When profits fall, capitalists will not want to reinvest them in production, and therefore investment in the new production capacity stops. Meanwhile wages stagnate or fall, so workers cannot buy up all of the goods produced. This causes supply and demand imbalances, recessions, unemployment, and financial crises.

By the Marxian definition, these crises are inherent to capitalist economies and almost invariably transition into restructuring phases: inefficient firms collapse, and surviving firms consolidate. This is why the end result of this process is an accumulation of capital into fewer and fewer hands, leading to even more extreme contradictions in capitalism itself.

Capitalist Contradictions:

In addition, Marx analyses the internal contradictions of capitalism through its TRPF. In fact, because this is something capitalists must fight against—such efforts do tend to drive down the profit rate—they too often attempt to do so in a manner that exacerbates the contradictions of capitalistic production. Technological shocks that make labor less important also increase the unemployment risk, thus increasing inequality. Likewise, the practice of financial speculation, as well as the dependence on credit can lead to inflated bubbles which ultimately pop in a painful manner that sends tremors through the economy.

Marx believed that these contradictions would, in the end, become unsustainable and spell the end of capitalism as the system becomes unable to resolve its ever-deepening crises.

Critiques and Debates

There has been a lot of discussion, particularly as to the empirical validity of TRPF. Opponents of Marx’s theory, particularly followers of the mainstream economics tradition, contend that the fall in the rate of profit is neither automatic nor widespread. Key criticisms include the following:

Five: A Falling Rate of Profit? —Critics have noted the rate of profit in capitalist economies does not tend to decline in the long-run. It was one, let us note, where profits have increased even with rising organic composition of capital in some periods. Upward pressures on profitability, for example, cyclical upturns of robust economic growth, technological development and worldwide incorporation tend to compensate the profit-growth worrying.

Technological Innovation and New Markets: Other economists point out that technological innovation is an engine of economic growth, producing new markets with untapped profit potential that provides a counter-balance to the falling rate of profit. However, capitalist economies usually find a way to create surplus value even against decelerating growth—through service development or through new financial products.

Globalization: The spread of capitalism into global markets, especially since WWII, is another cause claimed to counteract the falling rate of profit. By outsourcing production to the third world in search of cheaper labor and raw materials, capitalists are able to cut costs and continue making profits.

Conclusion

The TRPF (Tendency of the Rate of Profit to Fall) is one of the deepest and most controversial elements of Marx's critique of capitalism. It offers an explanatory foundation for the cyclical crises, stagnation, and structural inequality that are endemic to capitalist economies. First, that the TRPF argues that the basic contradictions of capitalism—from its opposition between labor and capital to its tendency to overproduce—are not just external considerations but central to the system itself. Debates over the eventual demise of capitalism and its fate continue to draw from TRPF — a concept that has been a touchstone of Marxist economic theory since it was first formulated though ideas drawn from research based on that model have faced significant criticism and been adapted through the years.