"Revisiting Adam Smith's Theory of the Falling Rate of Profit" (Ricardo and Marx do a drive by)

Following up on yesterday's "The Challenge of a Low Return Environment" we look at one possible reason that savers/investors cannot "expect" the returns of former times.
Regarding the driveby, links below the jump.

From the University of Macedonia via Academia.edu:

Lefteris Tsoulfidis and Dimitris Paitaridis

Department of Economics University of Macedonia

Thessaloniki, Greece

ABSTRACT

Smith’s theory of the falling rate of profit has been usually 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. In our 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.

 
1. Introduction 

In this paper we shall endeavour to present the salient features of Smith’s argument of the falling rate of profit. Surprising as it might be Smith’s analysis is much more complex than usually thought and presented even by major economists. The reasons for the misinterpretations have to do with Smith’s style of writing which is not focused enough to particular issues that he deals with and he often switches the analysis to different subjects to return latter to the ones he started out. At the same time, Ricardo’s interpretation, which attributed to Smith the intensity of competition as the cause of the falling rate of profit, was very influential.

The intensification of competition explanation of the falling rate of profit fitted conveniently to Ricardo’s analysis for he could establish much easier his own theory of the falling rate of profit based on the given subsistence wage and the interplay of the population law and the diminishing returns to land. Marx sited with Ricardo’s interpretation of Smith and they both criticized the alleged Smith’s logical deficiencies as competition in and of itself may lead to a tendential equalization of profit rate between industries and not a fall in the economy-wide average rate of profit.This is ironic, because as we will show, Smith’s analysis bears many similarities to Marx’s, since for both of them the division of labour and the subsequent mechanization of production lead to the increase in the capital-output ratio and labour productivity which in combination with an approximately constant profit share give rise to a tendential fall in the rate of profit and the consequent intensification of competition. Thus for both Smith and Marx the intensification of competition is the result of the falling rate of profit rather than its cause...MUCH MORE

A couple of our posts on Ricardo:
Investing Tips from the World's Richest Economist
HOW THE RICHEST ECONOMIST IN HISTORY GOT THAT WAY
The latter lifts directly from Sraffa's masterful biography of Ricardo of which Nobel econ Laureate George Stigler wrote:

"Ricardo was a fortunate man... And now, 130 years after his death, he is as fortunate as ever: he has been befriended by Sraffa."

And on Marx:
Karl Marx Dabbles in the Market (and rationalizes his success)
Karl Marx on Market Manias

See also "Of Flying Cars and the Declining Rate of Profit"via our post "Marx and Engels Meet The Jetsons".