Rate of profit
Relationship between the surplus value produced and the total capital advanced by the capitalist.
Rate of Profit = surplus value / (fixed capital advanced + variable capital advanced)
P' = s / ( ca + va )
Falling trend in the rate of profit
In the development of competition, capital is pushed either to reduce hourly wages, increasing absolute surplus value, or to invest in new machines, to increase relative surplus value and thus the rate of surplus value. If this is the dominant case, as in rising capitalism, the trend will be towards permanent technological development. Then, the rate of profit tends to be reduced, increasing the organic composition of capital, that is, investment in fixed capital in relation to wages.
Following the formula, even if gross profit increases, the value created in each cycle will tend to grow less than the growth of investment. In order to maintain its absolute earnings -or increase them- capital will increase total production -the mass of product- and the units of product will become cheaper and cheaper. The result is a trend towards increasingly productive labor -with a higher rate of surplus value, that is, more exploited in relative terms- with increasingly concentrated capital and lower rates of profit.
In other words: to improve its profit, capital needs to invest in technologies that increase its productivity. In doing so it will increase the organic composition of its capital (it will increase the weight of what it advances in machinery over what it advances in wages). The inevitable result is that its rate of profit (the surplus value per unit of investment) will be lower. How will it compensate for this? By increasing the mass of product, by producing more product so that the absolute profit, the total surplus value obtained, will be greater. If there is a sufficient market for the new mass of cheaper products, it will even be accompanied by an increase in the number of workers and therefore in the total scale of the company.
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The development of capitalist production and accumulation conditions labor processes on an ever-increasing scale, and thus of constantly growing dimensions and correspondingly increasing capital advances for each particular establishment. Therefore, a growing concentration of capital (accompanied at the same time, although to a lesser extent, by a growing number of capitalists) is both one of its material conditions and one of the results produced by it. At the same time and in interaction with this, a progressive expropriation of the more or less direct producers is advancing. This means that the various individual capitalists command armies of workers of increasing magnitude (even if for them too variable capital decreases in relation to constant capital), that the mass of surplus value, and consequently of profit, which they appropriate for themselves, increases simultaneously with and in spite of the fall in the rate of profit. For the same causes that concentrate the masses of working armies under the command of various individual capitalists are precisely those that make the mass of fixed capital employed, as well as that of raw and auxiliary materials, increase in increasing proportion to the mass of living labor employed.
Karl Marx. Capital. Book III, Chapter XIII, 1867