Question

2. Explain the concept of the tendency of the rate of profit to fall according to Ricardo, and according to Marx.

Answer 1

1. In his Theory of Profit, Ricardo stated that as real wages increase, real profits decrease because the revenue from the sale of manufactured goods is split between profits and wages.

The rate of profit is the ratio of profits to capital employed. But since capital consists of working capital, it is equal to the wage bill. The profit depends upon wages, wages on price of the corn and price of the corn on the fertility of marginal land. Hence, profits and wages are inversely proportional to each other.

When there is improvement in agriculture, the productivity power of land increases and there is fall in the price of corn and as a result, subsistence wage also falls, but profits increase and there is more capital accumulation. This will increase the demand of labour and wage rate will rise, which will increase population and demand for corn and its price. Since the wages rise, the profit will decline and there will be less capital accumulation.

The process of growth will continue till the profits fall to zero or the whole of the total product less rent is used for the maintenance of labour at subsistence level.

Although Marx concluded that the relative share of profits will increase with the development of capitalistic economic system as a result of technical progress and capital accumulation, he, however, following Ricardo, took the view that with capital accumulation the rate of profit will be falling. It should therefore be carefully noted that in view of Marx, whereas relative share of profits increases, the rate of profit declines as the capitalist economy develops.

This looks like a contradiction but Marx proved their co-existence. Organic composition of capital is the ratio of constant capital (C) to the total capital (C + V). Now, the rate of profit is equal to the ratio of surplus value (S) to the total capital (C+V) employed, that is, rate of profit is equal to S/(C+V).

Let P stand for the rate of profit. Therefore –

Where, C/(C+V) is organic composition of capital.

From the above equation it follows that if the S/V (the rate of exploitation) remains constant, the, i.e., rate of profit will decline C/(C+V) if, i.e., organic composition of capital increases. Thus while holding that relative share of profits will increase, Marx also took the stand that the rate of profit will decline in the capitalist economy as a result of capital accumulation and consequent increase in the organic composition of capital. In the modern terminology we can say that Marx was of the view that as more capital is accumulated and capital-output ratio rises in the productive processes or, in other words, as more capital-intensive production techniques are employed, the rate of profit will fall.