Imperfect Competition and the Theory of the Falling Rate of Profit

Abstract

According to the Okishio theorem, profit-maximizing firms will not introduce new techniques which, when adopted by all firms, reduce the rate of profit. This paper presents a simple model which shows that this conclusion need not hold under imperfect competition. The model excludes working-class pressures for increased real wages - the supply of labor is infinitely elastic at a given money wage rate - and it is assumed that firms aim to maximize profits. It is shown that, if the economy starts from an initial position with a low organic composition, then the rate of profit will fall. Asymptotically, the profit rate approaches a long-run equilibrium value, but the model may explain some of the observed decline in profitability during the early stages of industrialization.