Rate of profit
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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.
In Marxian political economy, the rate of profit (r) would be measured as
- r = (surplus-value)/(capital invested).
where surplus-value corresponds to unpaid labor in the production process or to profits, interest, and rent (property income).
[edit] 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).
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.
[edit] 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.
This "new" rate of profit (r'), which tends to fall, would be measured as
- r' = (surplus-value)/(capital to be invested for the next period of production in order to remain competitive).
