by The trouble with this idea of Marx is that, as formulated in volume 3 of Capital, Marx has insulated it against empirical refutation. As Michael Heinrich has argued here, it collapses into an anti-empirical and analytic tautology, which cannot be proven by empirical evidence. For Marx, it becomes a long-run tendency so that even if we had 1,000 years of capitalism and there was no long-run tendency of the rate of profit to fall visible in the data, Marx can evade criticism by claiming that countervailing tendencies are at work thwarting the long-run trend, or that the “long-run” is really 2,000 years or 10,000 years away.Thus it is in the same league as the highly tautological neoclassical law of demand which is insulated against empirical refutation or testing by the ceteris paribus assumption.As Heinrich also notes, as we analyse Marx’s argument in theoretical terms, it has severe problems: even on its own terms, in the mathematical formula for the rate of profit both the numerator and denominator can change, and the long-run tendency is not certain.What about empirical evidence?Unfortunately, when individual Marxists desperately try and invoke empirical evidence to prove their theology, we find their empirical evidence is hopelessly contradictory.
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Lord Keynes considers the following as important: analytically and empirically unproven, Marx, tendency of the rate of profit to fall
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Thus it is in the same league as the highly tautological neoclassical law of demand which is insulated against empirical refutation or testing by the ceteris paribus assumption.
As Heinrich also notes, as we analyse Marx’s argument in theoretical terms, it has severe problems: even on its own terms, in the mathematical formula for the rate of profit both the numerator and denominator can change, and the long-run tendency is not certain.
What about empirical evidence?
Unfortunately, when individual Marxists desperately try and invoke empirical evidence to prove their theology, we find their empirical evidence is hopelessly contradictory.
Their various data sets and graphs on the average rate of profit are comically discrepant and contradictory (often because they cannot even agree on the correct definition of the profit rate), as even a cursory examination of their writings on this issue in the links below shows:
Another blatant problem with the many graphs Marxists have constructed is probably that the rate of profit during the Second World War and in the immediate post-war years was unusually and abnormally high, given the massive interventions to stop wage rises, price inflation, and the massive demand for war material and other output during the war years, all of which would have tended to raise business profit rates.Husson, Michel. “La hausse tendancielle du taux de profit” [“The Tendency of the Rate of Profit to Rise”], January 2010
http://hussonet.free.fr/tprof9.pdfChris Harman, “Not all Marxism is Dogmatism: A Reply to Michel Husson,” International Socialism (2nd series) 125 (2010).
https://www.marxists.org/archive/harman/2010/xx/dogma.htm
So therefore a graph of profit rates from c. 1945 to 2016 – even if it did show a fall in the average rate of profit – does not prove that capitalism has a long-run tendency to a falling rate of profit, because such data would start out from a time when profit rates were abnormally high in the first place. In reality, we would need good, accurate and consistent data from the early 1800s to today in a large sample of capitalist countries to draw any legitimate conclusions about the long-run tendency of the rate of profit in capitalism.
And, of course, once we examine the reality of modern day capitalism, we discover that mark-up prices dominate most of the economy and here the rate of profit is often actively set by businesses as a mark-up on average unit costs of production.
There is, furthermore, no actual tendency to an economy-wide uniform rate of profit, not only because there are permanent, severe barriers to entry and free competition in many sectors of a real world capitalist economy, but also because the rate of profit mark-up in each industry and business will be determined by many factors such as custom, convention, different desires and needs for various profit rates, different levels of competition, and what mark-up the market will bear, etc., and these factors will themselves vary in different times and places (Lee 1994: 325–326). This activist creation of the profit rate by businesses and the severe barriers to entry and free competition in modern capitalism strongly imply that the long-run rate of profit is likely to be a random walk, and not subject to necessary, long-run tendencies, either up or down.
Further Reading
“Matias Vernengo on Marx’s Labour Theory of Value,” April 3, 2015.
“Sraffian Long-Run Equilibrium Prices of Production and Post Keynesianism,” April 11, 2015.
BIBLIOGRAPHY
Lee, F. S. 1994. “From Post-Keynesian to Historical Price Theory, Part I: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.