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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

Marx argued that the rate of profit tends to fall over time. Consider a firm with constant capital c, variable capital v and surplus value s, where the rate of profit is s/(c+v). If the rate of surplus value s/v stays constant at 100% and the firm's c/v ratio (organic composition of capital) rises from 4 to 9, what happens to the rate of profit?

The rate of profit falls from 20% to 10%. With surplus value equal to variable capital, the profit rate is 1 divided by (c/v + 1), which is 1/5 at a ratio of 4 and 1/10 at a ratio of 9, showing Marx's falling-profit tendency.

  1. AIt rises from 20% to 10%
  2. BIt falls from 20% to 10%Correct
  3. CIt falls from 50% to 25%
  4. DIt falls from 25% to 10%
  5. It remains unchanged at 20%

Explanation

With s = v, profit rate = v/(c+v) = 1/(c/v + 1). When c/v = 4 the rate is 1/5 = 20%. When c/v = 9 the rate is 1/10 = 10%. So the rate falls from 20% to 10%, illustrating Marx's tendency of the rate of profit to fall as mechanisation raises the organic composition of capital.

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