The Falling-Rate-of Profit Theory of Crisis: A Rational Reconstruction by Way of Obituary

This paper traces the development of the falling-rate-of profit theory of crisis from its original and traditional version to its modern variant and finally to A. Shaikh's recent defense based on the distinction between circulating and fixed capital. At each stage the major arguments in favor of and against the falling-rate-of-profit thesis are reviewed and criticized. On balance, the conclu sions are almost universally negative: It cannot be shown in general that a rise in the organic composition of capital leads to a fall in the rate of profit; neither can it be shown that a fall in the general rate of profit necessarily induces a crisis of overproduction. Finally, Okishio's theorem is employed to show that profit- maximizing capitalists, under competitive conditions, would never adopt a tech mque which would lower the general rate of profit at a given level of wages. Thus, a fallmg-rate-of-profit crisis is not a theoretical necessity; indeed, it is not even a possibility under conditions of competitive capitalism. Shaikh's thesis is then dis cussed and it is seen that a falling rate of profit is a possibility when the assump tions of perfect competition are relaxed. The paper is concluded with a comment regarding the conflict between "scientific" and "extrascientific" considerations in the course of the discussions of the falling rate of profit.