The Razor's Edge follows the spiritual and physical journey of Larry Darrell, a sensitive, intelligent young man who refuses to conform to the prevailing social norms of post-World War I America. Instead of marrying a rich, pretty Chicago girl, he goes to Paris searching for answers to questions about man, God and the meaning of life. This leads to stops in Germany, Spain and India, the latter destination finally answering some of his questions through the teachings of Eastern spiritual men. While Larry is traveling and searching for answers, his former fiancye, Isabel, marries someone because of money instead of love, and she must deal with the effects of the stock market crash. They meet up again in Paris, completely different people. Larry has found peace, while Isabel, a socialite more interested in money than love, eventually moves back to the U.S. to live a prosperous but spiritually shallow life. W. Somerset Maugham is the author and also a character in the novel, inspiring the conversations that drive the novel's narrative. Maugham's elitist friend Elliott, opportunistic French artist Suzanne Rouvier and tragic addict Sophie drop in and out of the story, each playing an important role in the process.

The novel opens with narrator and author W. Somerset Maugham admitting his apprehension at writing a story that doesn't have a clear ending and that takes place over a long interval. In the end, however, The Razor's Edge delivers a compelling narrative that follows American Larry Darrell's search for the answer to basic human questions about life and man in post-World War I America.

Maugham, who takes an active role in the novel, meets Isabel and her fiancy, Larry, at the house of Louisa Bradley, a rich widow who is having her house redecorated. It's a redecoration that everyone agrees is needed except for Larry, who tells the group, including Maugham's friend and Mrs. Bradely's brother, Elliott, an elitist snob with a generous heart, that the only thing that matters is Mrs. Bradley's opinion. It's the first sign that Larry is not like the others. Soon after, he and Isabel decide on a separation of two years, which Larry will use to search for answers to questions about life while living in Paris. They're questions that Larry started asking after a fellow pilot was killed in World War I, an incident that he does not like to talk about.

In Paris, Larry declines Elliott's invitations to join the social elite and spends his time reading books. After the two years are nearly up, Isabel and her mother come to Paris to confront Larry about his plans. Once again, he declines to join their world and asks Isabel to travel around Europe with him, despite their limited financial means. She declines, essentially choosing money over love.

After the breakup, Larry spends the next ten years traveling through Europe starting with a mining community in northern France, before working at a farm in Germany, visiting Spain and studying under a Yogi in India. In India, Larry finally finds answers to some of his questions about life. They're also answers that he failed to find at a monastery and in the Christian church. Also in India, he experiences a spiritual awakening while observing the sunrise over a mountain lake. Satisfied that he has learned enough, he returns to Paris.

In Paris, Larry meets up with Isabel, Maugham and Elliott. Isabel has married Gray Maturin, Larry's former best friend and the son of a wealthy Chicago broker. It's a marriage she admits is based on her desire to live the good life more than true love. After several years of material bliss, the couple loses nearly everything after the stock market crash of 1929 and moves into Elliott's Parisian apartment. After a chance meeting with Maugham, Larry rejoins his old friends, who are taken aback by his changed personality. He tells them he has found peace and no longer needs money or other material things. Apparently, Larry has also picked up the power to heal, curing Gray's migraine headaches after engaging him in meditation exercise.

While Isabel still has feelings for Larry, the general harmony is broken by the reappearance of Sophie MacDonald, an old friend from Chicago. She lost her husband and baby in car accident and ended up in Paris as a drunk and a drug addict, sleeping around with dangerous, random men. Shockingly, Larry asks her to marry him, a proposal driven by his need to help her. The proposal enrages Isabel, who purposely sabotages the marriage by tempting Sophie, who has been trying to kick her habits, with a bottle of vodka. She disappears and is later found murdered in Toulouse.

In between Sophie's relapse and her death, Elliott dies of old age in his house on the Riviera. It's a sad death. Having surrounded himself with rich people and expensive things, Elliott passes away alone, buried in a ridiculous old aristocratic costume. Maugham calls it a wasted life.

On the way back to London after Maugham's friend's death, he pays a visit to Isabel to confront her about Sophie. After first denying it, she admits to planting the vodka and tells Maugham she would do it again. Apparently, Isabel never got over her love of Larry, a love that caused her to commit a ruthless act of sabotage.

Following Sophie's burial, Maugham says goodbye to Larry for the final time. Larry tells him that he plans on giving up his monthly veteran's check and preaching his newfound spirituality in America. Afterward, Maugham admits losing touch with Isabel and Larry, but he imagines, in their own way, they each got what they wanted. Isabel, who moved to Dallas after Gray got a job in the oil business, probably lived the life of an upper-class socialite, hosting parties and living in a large, expensive house. Larry, whose only desire was knowledge and peace, is probably living a simple life back in the U.S., poor but happy.