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In economics, the profit rate refers to the relative profitability of an investment project or of a capitalist enterprise or for the capitalist economy as a whole. It is similar to the idea of the rate of return on investment. Face-to-face trading interactions among on the New York Stock Exchange trading floor In the social sciences, economics is the study of human choice behavior and how it effects the production, distribution, and consumption of scarce resources. ...
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In economics the rate of return on investment refers to the benefits to an investor (the profit) relative to the cost of the initial investment. ...
In Marxian political economy, the rate of profit (r) would be measured as Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ...
Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ...
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- r = (surplus-value)/(capital invested).
where surplus-value corresponds to unpaid labor in the production process or to profits, interest, and rent (property income). In politics, a capital (also called capital city or political capital — although the latter phrase has an alternative meaning based on an alternative sense of capital) is the principal city or town associated with its government. ...
The production of surplus value, from Karl Marxs Capital in Lithographs, by Hugo Gellert, 1934 Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is claimed to be unpaid surplus labour performed by the worker for the capitalist, serving...
Historical cost vs. market value
The rate of profit thus depends on the value measured of capital invested.
Two concepts to measure the value of capital exist, capital at historical cost and capital at market value.
In accounting terminology, historical cost describes the original cost of an asset at the time of purchase or payment as opposed to its market value (saleable value, replacement value or value in present or alternative use). In accounting terminology, historical cost describes the original cost of an asset at the time of purchase or payment as opposed to its market value (saleable value, replacement value or value in present or alternative use). ...
To compute the rate of profit correctly replacement cost of capital assets must be used instead of historical cost because capitalists cannot buy replacement of machinery etc. at their historical cost but must pay the current market value. In the case of inflation, for example, with generally rising prices, historical cost would not take account of rising prices of equipment. The rate of profit would be overestimated using lower historical cost for computing the value of capital invested.
On the other side, due to technical progress, products tend to become cheaper. This in itself should raise rates of profit, because replacement cost declines.
A prisoner's dilemma If, however, 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. Thus, capitalists are caught in a prisoner's dilemma or rationality trap. Tendency of the rate of profit to fall (TRPF) is a theorem in economics and political economy. ...
Will the two prisoners cooperate to minimize total loss of liberty or will one of them, trusting the other to cooperate, betray him so as to go free? In game theory, the prisoners dilemma is a type of non-zero-sum game in which two players can cooperate with...
This "new" rate of profit (r'), which tends to fall, would be measured as
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- r' = (surplus-value)/(capital to be invested for the next period of production in order to remain competitive).
In politics, a capital (also called capital city or political capital — although the latter phrase has an alternative meaning based on an alternative sense of capital) is the principal city or town associated with its government. ...
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