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"Marx was interested in projecting the stage where capital accumulation would cease. But he did not believe in diminishing returns. He introduced a different hypothesis. Given broadly, a rate of accumulation higher than the population growth rate would lead to an increasing ratio of fixed capital to circulating capital. This is because of the progressive substitution of machinery in place of labour. Both the capital-output ratio and the capital-labour ratio would keep moving up. Naturally, as products would not go up in proportion to capital, whose composition would also keep changing, the rate of profit had to fall through time. That was the famous stage where the workers would take over capital, and a socialist society would emerge. Without profits, capitalism would collapse. The US economy has been the observatory for economists to test the hypotheses of Ricardo and Marx. There are no diminishing returns from land in the US. It is a country with vast abundant land. The Ricardian hypothesis was never valid in the US. But what about the Marxian hypothesis?
Here also, by and large, increasing capital intensity at the macro level is accompanied by proportionate increases in productivity in net product. This is due to the logic of Solow, who showed that increasing capital intensity would only mean a rise in per capita income and growth of capital at the higher per capita income would settle down to equality with population growth.
But there is another reason which Schumpeter suggested. Innovations go on improving the net product of labour and, consequently, the profit rate would never fall. Innovations would always keep the profit rate from falling. This was a brilliant theory and has generally been vindicated especially in the US."
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