The need for microfoundations: methodology

For the most part, discussion of the Marxian falling rate of profit (FRP) theory is marked by lack of attention to microeconomic detail. Precisely, how do the anarchic actions of atomistic capitals give rise to a falling rate of profit? Marx's discussion of this issue in Capital, Volume III, was formulated in a microeconomic way, as we pointed out in the last chapter. Briefly, the profit-maximizing urge of capitalists directs them to replace workers with machinery, which raises the organic composition of capital, which lowers (or produces a tendency to lower) the profit rate. Whether or not this argument is correct, it must be admitted that it is microeconomic in this sense: It claims to deduce a macroeconomic phenomenon, itself quite beyond the ability of any individual capitalist to realize, from the anarchic (competitive) behavior of atomized economic units. This type of economic reasoning, of deducing aggregate economic effects from the behavior of individual economic units, was employed by economists of all ideological bents in the nineteenth century. It is, indeed, one of the hallmarks of why Marxism is scientific socialism. The outcome of socialism (and of capitalist crisis) was argued, by Marx and Engels, not to be a utopian solution (and crisis fortuitous), but the predictable outcome of social forces that eventually were reducible to the actions of individuals and classes of individuals.