Rate of profit

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In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Scholarship has shown that the profit rate has fallen since 1945, especially after the Great Recession.[1][2]

Entrepreneurship drives a need to maintain (a) the rate of profit and (b) "meeting a finite payoff period on capital investment."[3]

Factors

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The rate of profit depends on the definition of capital invested,[1][4] and taxable income.[5]

In today's complicated tax environment, with tax avoidance strategies, variable tariffs, and international tax shelters, much of a company's after-tax income can be much lower or much higher than it appears.[5]

A prisoner's dilemma

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Main article: Prisoner's dilemma

If firms achieve higher sales per worker the more they invest per worker, they will try to increase investments per worker, as long as this raises their rate of profit. If some capitalists do this, all capitalists must do it, because those who do not will fall behind in competition.

This, however, means that replacement cost of capital per worker invested, now calculated at the replacement cost necessary to keep up with the competition, tends to be increased by firms more so than sales per worker before. This squeeze, that investments per worker tend to be driven up by competition more so than before sales per worker have been increased, causes the tendency of the rate of profit to fall.[1][2][6] Thus, capitalists are caught in a prisoner's dilemma or rationality trap.[7]

This "new" rate of profit (r'), which tends to fall, would be measured as

r' = (surplus-value)/(capital to be invested for the next period of production in order to remain competitive).

Marxian economics

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In Marxian political economy, the rate of profit (r) would be measured as

r = (surplus value)/(capital invested).

where surplus value corresponds to unpaid labor in the production process or to profits, interest, and rent (property income). This formula can be further deconstructed into smaller constituent parts.[1][2] As noted, Marxian economic theory predicted the falling rate of profit.[1][7][2][4][6]

See also

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References

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  1. ^ a b c d e Moseley, Fred (1991). The Falling Rate of Profit in the Postwar United States Economy. Palgrave McMillan UK. pp. 1–2, 10–16. ISBN 9781349123537. Retrieved 4 September 2025.
  2. ^ a b c d Jones, Peter (2021). The Falling Rate of Profit and the Great Recession of 2007-2009: A New Approach to Applying Marx’s Value Theory and Its Implications for Socialist Strategy. Brill. pp. 2–21. ISBN 9789004398320. Retrieved 4 September 2025.
  3. ^ Kregel, J.A. (2017). Rate of Profit, Distribution and Growth: Two Views (ebook). Retrieved 4 September 2025.
  4. ^ a b Badiei, Sina (2024). Normative Economics in the History of Economic Thought: Marx, Mises, Friedman and Popper (enook). Taylor & Francis. p. 59. ISBN 9781040048054. Retrieved 4 September 2025.
  5. ^ a b Bebbington, Tony (2013). The Rise and Fall of Neoliberalism: The Collapse of an Economic Order?. ISBN 9781848139015. Retrieved 4 September 2025.
  6. ^ a b Gillman, Joseph Moses (1958). The Falling Rate of Profit: Marx's Law and Its Significance to Twentieth-century Capitalism. Cameron Associates. pp. 89, 99. Retrieved 4 September 2025.
  7. ^ a b Smith, Tony (1990). The Logic of Marx's Capital: Replies to Hegelian Criticisms (ebook). State University of New York Press. p. 246. ISBN 9781438420424. Retrieved 4 September 2025.