On the Notion of the Rate of Profit

Abstract

This paper aims at a clarification of the classical notion of the rate of profit with respect to the process of gravitation towards long period positions. It is demonstrated that some existing definitions of that rate, in particular ‘synchronic’ rates of profit which are based on a revaluation of either the costs of production or of the value of outputs, do not exhibit the relevant feature of a measure for the profitability of a production process as they fail to serve as an indicator for diverting liquid funds from less to more profitable employments. It is argued that all elements of profits or losses including those which result from the expected revaluation of capital or outputs respectively are to be taken into account. Hence the ‘diachronic’ rate of profit is the proper measure which guides the decisions of producers or capitalists to utilise one or another method of production or to withdraw capital from less profitable employments and invest into promising activities. That rate is uniform in any arbitrage equilibrium, and is not a distinguishing characteristic of long-run positions. The definition of the rate of profit is conditional on individual expectations of future prices and is therefore either not operable or is not general.