science

Rate of profit

Rate of profit is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Rate of profit rather than just read about it. In short: In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment.

Key takeaways

Rate of profit belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Rate of profit to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Rate of profit from memory before moving on to harder problems.

Reference excerpt

In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Scholarship has shown that the profit rate has fallen since 1945, especially after the Great Recession. Entrepreneurship drives a need to maintain (a) the rate of profit and (b) "meeting a finite payoff period on capital investment."

Factors The rate of profit depends on the definition of capital invested, and taxable income. In today's complicated tax environment, with tax avoidance strategies, variable tariffs, and international tax shelters, much of a company's after-tax income can be much lower or much higher than it appears.

A prisoner's dilemma

If 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).

Marxian economics 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). This formula can be further deconstructed into smaller constituent parts. As noted, Marxian economic theory predicted the falling rate of profit.

Worked examples

Example 1 — a first encounter with Rate of profit

Start with the simplest possible case. Write down what Rate of profit claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Rate of profit before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Rate of profit ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Rate of profit

In research: Rate of profit appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Rate of profit in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Rate of profit is common in secondary-school and first-year university syllabi. It links to neighbouring topics Marxian economics, Marxist theory, Profit, so understanding it makes those chapters shorter.
In everyday life: Look for Rate of profit outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Rate of profit in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Rate of profit means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Rate of profit out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Rate of profit in simple terms?

Why does Rate of profit matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Rate of profit?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Rate of profit.