The tendency of the rate of profit to fall (TRPF) is a theory in the crisis theory of political economy, according to which the rate of profit—the ratio of the profit to the amount of invested capital—decreases over time. This hypothesis gained additional prominence from its discussion by Karl Marx in Chapter 13 of Capital, Volume III,It is also referred to by Marx as the "law of the tendency of the rate of profit to fall" (LTRPF). As explained in the article, there are disputes about whether there is such a law or not. Other terms used include "the falling rate of profit" (FROP), the "falling tendency of the rate of profit" (FTRP), "decline of the rate of profit" (DROP), and the "tendential fall of the rate of profit" (TFRP). The average rate of profit on production capital is usually written as r = S/(C+V). but economists as diverse as Adam Smith,Adam Smith, The Wealth of Nations, Chapter 9. See also Philip Mirowski, "Adam Smith, Empiricism, and the Rate of Profit in Eighteenth-Century England." History of Political Economy, Vol. 14, No. 2, Summer 1982, pp. 178–198. John Stuart Mill,John Stuart Mill, Principles of Political Economy (1848), Book 4, Chapter 4. Bela A. Balassa, "Karl Marx and John Stuart Mill." Weltwirtschaftliches Archiv, Bd. 83 (1959), pp. 147–165. David RicardoDavid Ricardo, Principles of Political Economy and Taxation, Chapter 6. Maurice Dobb, "The Sraffa system and critique of the neoclassical theory of distribution." In : E.K. Hunt & Jesse G. Schwartz, A Critique of Economic Theory. Penguin, 1972, p. 211–213. and William Stanley JevonsW. Stanley Jevons (1871), The Theory of Political Economy. Harmondsworth, Penguin Books, 1970, pp. 243–244. referred explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, although they differed on the reasons why the TRPF should necessarily occur.Aspromourgos, Tony, "Profits", in: James D. Wright (ed.), International Encyclopedia of the Social & Behavioural Sciences. Amsterdam: Elsevier, 2015, 2nd edition, Vol. 19, pp. 111–116. Some scholars, such as David Harvey, argue against the TRPF as a quantitative phenomenon, arguing it is an internal logic driving the movement of capital itself.

Geoffrey Hodgson stated that the theory of the TRPF "has been regarded, by most Marxists, as the backbone of revolutionary Marxism. According to this view, its refutation or removal would lead to reformism in theory and practice".Geoffrey M. Hodgson, After Marx and Sraffa. Essays in political economy. New York: St Martin's Press, 1991, p.28. Stephen Cullenberg stated that the TRPF "remains one of the most important and highly debated issues of all of economics" because it raises "the fundamental question of whether, as capitalism grows, this very process of growth will undermine its conditions of existence and thereby engender periodic or secular crises."Stephen Cullenberg, The Falling Rate of Profit: Recasting the Marxian Debate. London: Pluto Press, 1994, p.1.

Causal explanations

Karl Marx In Marx's critique of political economy, the value of a commodity is the median amount of labour that is socially necessary to produce that commodity. Marx argued that technological innovation enabled more efficient means of production. In the short run, physical productivity would increase as a result, allowing the early adopting capitalists to produce greater use values (i.e., physical output). In the long run, if demand remains the same and the more productive methods are adopted across the entire economy, the amount of labour required (as a ratio to capital, i.e. the organic composition of capital) would decrease. Now, assuming value is tied to the amount of labor necessary, the value of the physical output would decrease relative to the value of production capital invested. In response, the average rate of industrial profit would therefore tend to decline in the longer term.

It declined in the long run, Marx argued, paradoxically not because productivity decreased, but instead because it increased, with the aid of a bigger investment in equipment and materials.Karl Marx, Capital, vol. 3, edited by Friedrich Engels. New York: International Publishers, 1967 (orig. ed. 1894). Chapter 2, "The Rate of Profit", and chapter 13, "The Law as Such". John Weeks, Capital and exploitation, chapter 8. Princeton University Press, 1980).

The central idea that Marx had was that overall technological progress has a long-term "labor-saving bias", and that the overall long-term effect of saving labor time in producing commodities with the aid of more and more machinery had to be a falling rate of profit on production capital, quite regardless of market fluctuations or financial constructions.Ernest Mandel, "Economics", in: David McLellan (ed.), Marx – the First 100 Years. Fontana, 1983.

Countertendencies Marx regarded the TRPF as a general tendency in the development of the capitalist mode of production. Marx maintained that it was only a tendency, and that there are also "counteracting factors" operating which had to be studied as well. The counteracting factors were factors that would normally raise the rate of profit. In his draft manuscript edited by Friedrich Engels, Marx cited six of them:Karl Marx, Capital, Volume III, Penguin ed. 1981, p. 339f.

More intense exploitation of labor (raising the rate of exploitation of workers). Reduction of wages below the value of labor power (the immiseration thesis). Cheapening the elements of constant capital by various means. The growth of a relative surplus population (the reserve army of labor) which remained unemployed. Foreign trade reducing the cost of industrial inputs and consumer goods. The increase in the use of share capital by joint-stock companies, which devolves part of the costs of using capital in production on others.Marx regarded dividends as an ex post distribution from gross profit revenue (a fraction of surplus value), but he acknowledged that the specific pattern of distribution of portfolio capital between different types of placements could affect the overall average rate of return on capital investments. The overall yield on share capital is typically higher than the rate of interest, but lower than the gross profit rate on total enterprise capital (the latter rate which includes both distributed and undistributed profits, and tax). Hence, the larger the proportion of distributed profits (dividends) to shareholders in total gross profit, the lower the general profit rate on capital will be – "if" share capital is considered as a separate component in the total capital assets invested, rather than as a duplication of real capital assets in the form of notional "paper" assets, or "if" the average rate of profit is calculated as the weighted mean of rates of return on different types of business investment. Obviously, the more profit is distributed to shareholders, the less is available for reinvestment in the business, unless shareholders opt to reinvest their profits in the same business. In modern times, though, a very large chunk in the total distribution of stocks is held for less than one accounting year, or, at most, for around one and a half years (this is called "the increase in portfolio (or equity) turnovers", or "the decrease in average stock holding periods"). The investors are, in this case, primarily concerned with comparative risks, and with the net capital gain they can get from short-term positive changes in stock prices, as weighed against broker's fees and likely dividend yields (often the share parcels traded are large, which lowers the transaction costs per share). See: Marx, Capital, Volume III, Penguin 1981, pp. 347–348; Ernest Mandel, "Joint-stock company", in: Tom Bottomore (ed.), A Dictionary of Marxist Thought, 2nd edition. Oxford: Basil Blackwell, 1991, pp. 270–273; David Hunkar, "Average Stock Holding Period on NYSE 1929 To 2016". Topforeignstocks.com, 1 October 2017.

Nevertheless, Marx thought the countervailing tendencies ultimately could not prevent the average rate of profit in industries from falling; the tendency was intrinsic to the capitalist mode of production.Karl Marx, Capital, Volume III, Penguin ed. 1981, p. 356. In the end, none of the conceivable counteracting factors could stem the tendency toward falling profits from production.

Capital stock growth In Adam Smith's TRPF theory, the falling tendency results from the growth of capital which is accompanied by increased competition. The growth of capital stock itself would drive down the average rate of profit.Michael Heinrich, "Begründungsprobleme. Zur Debatte über das Marxsche “Gesetz vom tendenziellen Fall der Profitrate", in Marx-Engels-Jahrbuch 2006, Berlin: Akademie Verlag 2006, p. 50. Lefteris Tsoulfidis & Dimitris Paitaridis, "Revisiting Adam Smith's theory of the falling rate of profit". International Journal of Social Economics, Vol. 39 issue 5, 2012, pp. 304–313.

Other influences There could also be several other factors involved in profitability which Marx and others did not discuss in detail,Ernest Mandel, Late Capitalism. London: NLB, 1975. including:

Reductions in the turnover time of industrial capital generally (and especially fixed capital investment).Ernest Mandel, Late Capitalism. London: NLB, 1975, chapter 7. Accelerated depreciation and faster throughput.Ernest Mandel, ´´Late Capitalism´´. London: NLB, 1975, chapter 7. The level of price inflation for different types of goods and services.Ernest Mandel, Late Capitalism. London: NLB, 1975, chapter 13. Taxes, levies, subsidies and credit policies of governments, interest and rent costs.Karl Marx, Grundrisse, Penguin 1973, p. 751. Capital investment into areas of (previously) non-capitalist production, where a lower organic composition of capital prevailed.Marx, Capital, Volume III, Penguin 1981, p. 320. Fritz Sternberg, Der imperialismus. Berlin: Malik-Verlag, 1926; Ernest Mandel, "Agricultural Revolution and Industrial Revolution", in: A.R. Desai (ed.), Essays on Modernization of Underdeveloped Societies, Vol. 1, 1971 (Bombay: Thacker & Co.). Reprint as: "Agricultural Revolution and Industrial Revolution", International Socialist Review, vol. 34, No. 2 (February 1973), 6–13. Military wars or military spending causing capital assets to be inoperative or destroyed, or spurring war production (see permanent arms economy).Alex Callinicos, "Understanding the Permanent Arms Economy: an introduction to the political economy of Michael Kidron". International Socialism 188, October 2025. https://isj.org.uk/kidron-political-economy/Ernest Mandel, Late Capitalism. London: NLB, 1975, chapter 9. Demographic factors. Allin Cottrell and Paul Cockshott, "Demography and the falling rate of profit". Wake Forest University & Department of Computing Science, University of Glasgow, February 2007. Advances in technology and technological revolutions which rapidly reduce input costs.Ernest Mandel, Late Capitalism. London: NLB, 1975, chapter 6. Particularly in the era of globalization, the national and international freight rate (shipping, trucking, railfreight, airfreight). Substituted natural resource inputs, or marginal increased cost of non-substituted natural resource inputs.Ernest Mandel, Late Capitalism. London: NLB, 1975, p. 542, 577. Consolidation of mature industries into an oligarchy of survivors.Josef Steindl, Maturity and Stagnation in American Capitalism. New York: Monthly Review Press, 1952. Mature industries do not attract new capital because of low returns. Mature companies with large amounts of capital invested and brand recognition can also try to block new competitors in their markets. See also secular stagnation theory. The use of credit instruments to reduce capital costs for new production.