Question

Discuss Keynes’s view of why the profit rate may fall, both over the business/trade cycle and the long run. What did Smith, Ricardo, Marx and Clark offer as theories of a falling profit rate? Identify any commonalities between Keynes and any of the Classicals. In what ways is the recession functional for Keynes, laying the basis for another upturn? Answer the same question for Marx.

Answer 1

It is argued that capitalist production could never be an everlasting form of production, since in longrun, the profit principle would itself suffer a breakdown. Hence the total profit rate may fall, both over the trade cycle and the longrun.

Smith argues that the falling tendency resulted from increased competition which accompanied the growth of capital. Intensifying competition itself would drive down the average profit rate.

Ricardo argued that competition could only level out differences in profit rates on investments, but not lower the general profit rate as a whole. Apart from a few exceptional cases, Ricardo claimed, the average rate of profit could only fall if wages rose.

Marx argued that, the tendency of the rate of profit to fall is " an expression peculiar to the capitalist mode of productionof the progressive development of the social productivity of labour.