Revisiting Adam Smith's theory of the falling rate of profit

Purpose – This paper aims to present the salient features of Smith's argument of the falling rate of profit. This theory has usually been 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. Design/methodology/approach – This paper reviews the major interpretation of the argument from Ricardo and Marx as well as from major historians of economic thought, and then attempts to reconstruct Smith's argument, which is scattered throughout the Wealth of Nations . The authors present some indirect empirical evidence based on the evolution of interest rates on annuities lending support to Smith's insights of the falling rate of profit. Findings – In the author's 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. Originality/value – This paper presents a review of existing literature and an interpretation of Adam Smith's original model of the falling rate of profit.