Last March, I wrote an essay providing evidence of the inherent exploitation and undemocratic constructs in our economic model burdening working people.

This essay compliments that work and will show a fundamental reason why our economic model is structurally limited by attempts to reform it.

Our economic model is plagued with a history of periodic recessions and depressions.

That history is recorded by the National Bureau of Economic Research (NBER). Recessions and depressions are clinically presented as normal components of the “business cycle.” The NBER does not report the chronic instability and destruction of communities and working people’s lives by the “business cycle.”

Political democracy demands economic democracy. We have statutes, laws, regulations, and rules to protect the common good. Why not apply the same principles to the relations of production?

Many economists, psychologists, and journalists have attempted to rationalize the chronic crisis in our economic model. These fanciful assertions are thoroughly inadequate. As Leo Huberman chronicled in Man’s Worldly Goods, some experts actually attributed the chronic crises to radiation from the sun or the path of the planet Venus.

Despite rapid advances in technology and financial instruments, chronic crises remain inherent in our economic model.

Competition is a significant component that contributes to these crises despite the stifling dominance by a few giant corporations in most industries. That structure contains one essential component which plagues all businesses.

It is the tendency of the profit rate to fall.

The tendency of the profit rate to fall is the basis of why our economic model cannot be meaningfully reformed.

The owner of a business must convert the expenditures that initiate and maintain the business into a profit. Profits are what remains after a business pays all of its costs.

Simply, the profit rate shows how many cents of profits are retained from every dollar earned. It is more important than aggregate profits because it measures efficiency of a company in comparison with other businesses.

A decline in the profit rate forces businesses to close doors and decimate the lives of their employees across states and communities.

The following is a simplified explanation of why profit rates tend to fall:

The process begins by establishing a business. The owner must allocate resources for primary expenditures (CapEx) to acquire space, a plant, machinery, tools, hardware, software, technological advances, and raw materials. This includes legal registrations, licenses, permits, and financial services.

The business owner must then add another cost which are secondary expenditures.

Secondary expenditures (OpEx) consist of wages or salaries paid to the employees who do the mental or physical work with their labor power. This creates profits for the owner including extra profits. Extra profits are what remains for the owner once wages or salaries are paid to the employees.

It is imperative that the owner continually spend more resources in primary expenditures for the business. This is due to competition with other business owners.

Primary Expenditures Increase

For the owner, the cost of primary expenditures usually increases as costs for goods and services increase. These increases can be the result of monetary policy, growth of the economy (GDP), corporate price gouging, misplaced tariffs, or a scarcity of certain goods.

Some products may even see a temporary drop in prices due to technological advances.

However, the supply of goods and services that comprise primary expenditures invariably rises to the dismay of business owners.

Cost of living calculations also present data that strongly supports the assertion that primary expenditures for owners will never decrease in our economic model.

Primary expenditures are required to increase the amount of the product or service created by the employees.

The owner might consider borrowing funds from a financial institution to pay for primary expenditures. This can be problematic because financial institutions may decline to lend the money or advance at a glacial pace to finalize a loan.

The reason why the owner must continually increase spending on primary expenditures is directly related to the profit rate.

The profit rate is obtained by dividing the total primary and secondary expenditures by the extra profit. (Multiplying by 100 converts a decimal into a percentage).

Example: Suppose the employees created $100 worth of total profit and are paid $40 in wages. That means the extra profit is $60.

Add the primary expenditures to the secondary expenditures and divide by the extra profit. In this example, the profit rate is 60%.

Now to show the tendency of the profit rate to fall, increase the primary expenditure to $60. Suppose there was a sale on tools at Home Depot and the owner purchased $10 worth of tools by transferring funds from the secondary expenditures to the primary expenditures.

The profit rate is now 55%. This is a significant drop despite the profit amount remaining the........

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