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Revisiting Adam Smith's theory of the falling rate of profit

Author

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  • Lefteris Tsoulfidis
  • Dimitris Paitaridis

Abstract

Purpose - This paper aims to present the salient features of Smith's argument of the falling rate of profit. This theory has usually been interpreted as a result of the intensification of competition in the markets of goods and services of the factors of production. This aspect of Adam Smith had been initially posed by Ricardo and subsequently was widely adopted by the major economists of the past as well as from the majority of the modern historians of economic thought. Design/methodology/approach - This paper reviews the major interpretation of the argument from Ricardo and Marx as well as from major historians of economic thought, and then attempts to reconstruct Smith's argument, which is scattered throughout theWealth of Nations. The authors present some indirect empirical evidence based on the evolution of interest rates on annuities lending support to Smith's insights of the falling rate of profit. Findings - In the author's view, Smith's analysis of the falling tendency in the rate of profit is by far more complex than usually presented and that the intensification of competition is the result of the falling rate of profit rather than its cause which is the capitalization of the production process. Originality/value - This paper presents a review of existing literature and an interpretation of Adam Smith's original model of the falling rate of profit.

Suggested Citation

  • Lefteris Tsoulfidis & Dimitris Paitaridis, 2012. "Revisiting Adam Smith's theory of the falling rate of profit," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 39(5), pages 304-313, April.
    • Handle: RePEc:eme:ijsepp:v:39:y:2012:i:5:p:304-313
    DOI: 10.1108/03068291211214172
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    References listed on IDEAS

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    1. Blaug,Mark, 1997. "Economic Theory in Retrospect," Cambridge Books, Cambridge University Press, number 9780521577014.
    2. Verdera, Francisco, 1992. "Adam Smith on the Falling Rate of Profit: A Reappraisal," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(1), pages 100-110, February.
    3. Lefteris Tsoulfidis, 2009. "Competing Schools of Economic Thought," Springer Books, Springer, number 978-3-540-92693-1, September.
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    Cited by:

    1. Trofimov, Ivan D., 2017. "Profit rates in the developed capitalist economies: a time series investigation," MPRA Paper 79529, University Library of Munich, Germany.
    2. Ivan D. Trofimov, 2017. "Profit rates in the developed capitalist economies: a time series investigation," PSL Quarterly Review, Economia civile, vol. 70(281), pages 85-128.

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    More about this item

    Keywords

    Rate of profit; Competition; Adam Smith; Classical economists; Stationary state; Profit valuations; Competitive strategy;
    All these keywords.

    JEL classification:

    • B10 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - General
    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B14 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Socialist; Marxist
    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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