PRODUCT INNOVATION AND THE RATE OF PROFIT

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Abstract

Marx stated that the rate of profit tends to fall because of technical change. Okishio pointed out that Marx ignored the profitability criterion for the introduction of new technologies. He proved that the introduction of new technology, which yields a higher profit rate measured in terms of old equilibrium prices, raises the rate of profit under new equilibrium prices when the real wage basket is kept constant (the Okishio Theorem). In his argument, however, technical innovation was restricted to that of new production methods - i.e. process innovation - while the introduction of new products, namely product innovation, was not analyzed. For product innovation to be relevant in the history of technology, it is very important to know the eventual effects of this type of innovation on the rate of profit. In this paper, first we present the Okishio Theorem in its simplest form and summarize the controversies concerning this theorem. Next, we consider if the theorem holds when taking product innovation into account.

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