Tendency of The Rate of Profit To Fall - Criticisms

Criticisms

Marx’s interpretation has been the source of intense controversy, and has been criticized in different main ways:

• Firstly, it is argued that, by raising productivity, labour-saving technologies increase the average industrial rate of profit.
• Secondly, how exactly the average rate of industrial profit will evolve is uncertain and unpredictable.
• Thirdly, the labor theory of value has largely been rejected since the advent of Marginalism due to its incongruity with observed economic behavior. As Marx's economic critiques are systematically dependent on his version of the labor theory of value, rejection of this premise obviates the bulk of the critique. Marginal utility theory predicts that a high rate of profit as compared to other goods attracts further investment, but each additional unit of production will generally tend to be of less utility (and therefore less value) to the market, causing the overall rate of profit to fall absent any technological innovation increasing productivity. The commodity in question will lose its appeal to investors, who will then invest in other, newer lines of production offering higher returns.

The Japanese economist Nobuo Okishio (see Okishio's theorem) famously argued, "if the newly introduced technique satisfies the cost criterion and the rate of real wage remains constant", then the rate of profit must increase (Okishio, 1961, p. 92). Assuming constant real wages, technical change would lower the production cost per unit, thereby raising the innovator's rate of profit. The price of output would fall, and this would cause the other capitalists' costs to fall also. The new (equilibrium) rate of profit would therefore have to rise. By implication, the rate of profit could in that case fall, only if real wages rose in response to higher productivity, squeezing profits. (This theory is sometimes called neo-Ricardian, because David Ricardo also claimed that a fall in the rate of profit can only be brought about by rising wages.)

Intuitively, Okishio's argument makes sense—after all, why would capitalists invest in more efficient production on a larger scale, unless they thought their profits would increase? Orthodox Marxists have typically responded to this argument in the following basic ways (there are, of course, numerous other arguments, involving more or less complex mathematical models):

1. Capitalists operating in a competitive environment may not have any choice about investing in new technologies, to keep or expand their market share, even if doing so raises the pressure for all of them to spend an ever larger share of their income on newest technology, thereby reducing the available surplus to finance expansion of employment.
2. It may be that in the heyday of a technological breakthrough, profits do indeed initially increase, but as the new technologies are widely applied by all enterprises, the overall end result is that average rate of return on capital falls for all of them. (This, however neglecting #4, is exactly what Okishio's equilibrium model seeks to refute.)
3. A slight reduction in profit rates on capital invested due to more expensive productive equipment may not seem such a problem to business anyhow, if it is compensated by an increase in profit volume (profit margins) through increased sales and market shares. The yield on capital might decline somewhat in percentage terms, while total net income from capital employed increases.
4. Arguments such as Okishio's are based on a fundamental misunderstanding of the TRPF and of basic aspects of Marxian economics such as a confusion of rate of profit with surplus value and wage as an expense from the capitalist with wage as a non exploited value added to production. Marx himself acknowledged that productivity increases even as the rate of profit decreases, and that these two tendencies necessarily go hand in hand. However, the decrease in production cost per unit brought about by investment in constant capital translates not to an increase in the rate of profit, but rather to an increase in surplus value: it increases the surplus labor time relative to variable capital. But meanwhile, the constant capital has expanded relative to variable capital (as a result of the capitalist's investment in productivity), meaning that surplus value, even though it has expanded relative to variable capital, shrinks relative to total capital. Since the rate of profit is defined as ( being surplus value and being total capital, i.e., constant capital plus variable capital), the rate of profit therefore tends to fall.

Responses 1 and 2 can be interpreted as a prisoner's dilemma in which the capitalists are caught.

Okishio argues in terms of a comparative static analysis. His starting point is an equilibrium growth path of an economy with a given technique. In a given branch of industry, a technical improvement is introduced (in a way similar to what Marx described) and then the new equilibrium growth path is established under the assumption that the new better technique is generally adopted by the capitalists of that branch. The result is that even under Marx's assumptions about technical progress, the new equilibrium growth path goes along with a higher rate of profit. However, if one drops the assumption that a capitalist economy moves from one equilibrium to another, Okishio's results no longer hold.

The "indeterminacy" criticism revolves around the idea that technological change could have many different and contradictory effects. It could reduce costs, or it could increase unemployment; it could be labour saving, or it could be capital saving. Therefore, the argument goes, it is impossible to infer definitely that a falling rate of profit must inevitably result from an increase in productivity. Perhaps the law of the tendency of the rate of profit to fall might be true in an abstract model, based on certain assumptions, but in reality no substantive empirical predictions can be made. In addition, profitability itself can be influenced by an enormous array of different factors, going far beyond those which Marx specified. So there are tendencies and counter-tendencies operating simultaneously, and no particular empirical result necessarily follows from them.