In setting out the Law, Marx wanted to demonstrate that the arguments that previous economists had put forward, which assumed that a falling rate of profit meant also a falling mass of profit, leading ultimately to a collapse of capitalism, were wrong. In Capital, and in Theories of Surplus Value, he devotes considerable time to demonstrating not only that the mass of profit can rise as the rate of profit falls, but that it MUST rise. He sets out to demonstrate that there is no reason, therefore, why this Law should lead to a collapse of capitalism.
“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”
Yet, ironically, it is on this basis of a continual fall in the rate of profit, that many of those who claim that the Law is the main or only basis of Marx's theory of crisis, rest their argument. It is in fact, on the same basis of the argument put forward by Ricardo, against which Marx was arguing, that those who believe the Law must lead to some ultimate collapse of capitalism, base themselves.
The law of falling profits, as really a Law about falling profit margins, within the context of a period of boom, exuberance and high rates of general annual profit, is an explanation of how this process leads to the build up of contradictions, which as Marx and Engels describe, are really contradictions based on the inability of the market to expand as fast as the production of use values, during such periods. The crisis of overproduction, is the means by which these contradictions are resolved, so that the boom continues, and it continues, precisely because underlying it, is the fact not of low and falling real rates of profit (the general annual rate of profit), but of high and often rising rates of profit!
The prolonged periods of economic weakness, inactivity and stagnation that are often considered the periods of capitalist crisis, are in fact, not usually the periods of acute overproduction. They are usually the opposite, the periods when capital does NOT over expand, does not over-accumulate and so does not over-produce. They are periods rather when realised money-capital rather than being accumulated in additional productive-capital, is hoarded, at periods used in speculation, and so on; they are periods when capital seeks to find solutions to the problems which caused the previous boom to end, as productivity slowed, due to the benefits of previous innovation being exhausted, and when the range of potential new use values into which capital could be expanded, became constricted.
The only basis on which the Law could represent a state of permanent stagnation, would be if the ability of capital, and its harnessing of science and technology to its needs, absolutely ran out of innovations by which new use values could be turned into commodities, providing capital with new lines of production into which, the released capital, and relative surplus population could be employed. At the moment, there is no indication of that being likely. In fact, the number of innovations seems to be increasing not decreasing.