The law was derived by Marx from the study of the effects of technical improvement. Marx states that technical improvement increases the amount and changes the form of the total capital, increasing the proportion of fixed as compared with floating capital, so that by this means the rate of profit is decreased; the latter arises, as is well-known, out of the surplus-value, the product of the floating capital divided by the total capital. He illustrates the matter thus. Some technical improvement occurs; new machines are made, which formerly did not exist. The capital employed in production has been hitherto, we will suppose, a total of 1,000, divided into 500 fixed and 500 floating, and employing 100 labourers: the surplus-value = 500, _i.e._ the rate of it is 100 per cent.; and hence the rate of profit is 500/1000 = 50 per cent. In consequence of the technical improvement, and of the construction of new machines, the 100 labourers who are maintained by the variable capital of 500, continue still to be employed in production; but, in order that this may be possible, it is necessary to use a larger fixed capital, which we may suppose 200 larger than before. Hence, as the result of the technical improvement, there will now be a total capital of 1,200, _i.e._ 700 fixed and 500 floating; and the rate of surplus-value remaining unchanged at 100 per cent., the rate of profit will be 500/1200 = about 41 per cent., _i.e._ will have decreased from 50 per cent. to 41 per cent. Hence the necessary decline in the rate of profit on the _hypothesis_ of technical improvement. But this _hypothesis_ is an actual everyday _fact_ in modern capitalist society. Hence, the _actual_ decline of the average rate of profits in modern capitalist society. But this law is more or less counteracted by other facts, which act in a contrary sense more or less transitorily. Thus the fall is only _a tendency_. In order that our study may be clear, it is above all necessary to distinguish the two groups of facts, or the two stages in the same capitalist society which Marx confused and embraced in a single somewhat obscure view.