Defining Rent, Wages, and Profit

An important feature of Smith’s Political Economy (and the science of SORAnomics which we created from it) is the classification of all revenue into either rent, wages, and profit. However, I found that this classification is difficult nowadays when other kinds of revenue have been introduced, such as interest income, different kinds of taxes, royalties, revenue from membership fees, etc. Smith did not give a clear system of classifying revenues. He just said that some kinds of revenue can be confounded with others and gave examples of them.

 

It’s necessary to define the essence of those three revenues to make classification easier. This in turn will better determine which class of people is affected by certain kinds of revenue. Below are the most basic definitions or essence of each kind of revenue to aid in classifying other revenues.

 

Rent = Regular Arbitrary Revenue

Rent is a revenue that can be gained arbitrarily or just because a person can do so. This arbitrariness arises from lack of choice by the other person.

A landlord can charge rent for his land because he or his forefathers were able to own or conquer that land. You have no choice but to pay rent if you want to use his land. This lack of choice is in turn caused by the fact that humans have no choice but to live on land instead of the water or air. The same idea is true with taxes — the government or ruling party can charge taxes because they were able to gain power in the country — you have no choice but to pay taxes, because you must live under some form of civilized society.

 

Wages = Regular Revenue to Live

Wages are the revenue needed to maintain oneself and whatever else is important to one’s life (such as one’s family). Having high wages therefore means having more ability to live life, as compared to a low wage person who is limited in life. Labor or work is the main activity required to live. You need to work to find something to eat which in turn is needed to stay alive.

A slave does not earn wages because his life does not belong to himself. Instead his ability to live is determined by his master just like a machine, and we do not say that a machine’s gasoline is part of its revenue.

 

Profit = Irregular Revenue from the Lack Experienced By Other People

Profits are the revenue arising from the lack experienced by other people, whether as lack of knowledge or cognition or lack of goods or commodities. We define commodities as anything that can be traded, whether physical or non-physical such as information. In fact, information can be commoditized in our system.

A shortage of anything in demand will naturally cause high prices and high profits for its seller. For example, corn merchants have high profits during famines. This nature of profits is why the interests of those-who-live-by-profits (capitalists and merchants) are often opposite that of society. It can aggravate the natural lack of morals in business arising from the nature of numbers, adding a sort of negative morality.

If a con-man sold you an ordinary rock for $1,000 saying it came from Mars, and you actually bought it, then he would have gained revenue from your lack of knowledge or proper information. Likewise a person can sell you valuable information for a high price, which would then be deemed as his profits, and not as wages nor rent, since it was a one-off deal. If his supply of information were regular, along with his customers, then his revenue gets the same nature as wages, with his customers acting as his employers.

Sometimes, profits can be confounded with wages. For example, a salesman might earn a fixed wage plus a 5% commission for anything he sells. In his case, his commission is a profit:

Workers generally overwork themselves when liberally paid by the piece and ruin their health in a few years.. The same thing happens in other trades where the workers are paid by the piece wherever wages are higher than ordinary. (Book 1, Chapter 4)

 

To Smith, ordinary profits, or the lowest possible profits, are the best for society. With this definition, ordinary profits would mean that the revenue arose from a low level of lack in society, instead of a great lack. This reduced lack can only be brought about by many suppliers competing at the same time in an effort to reduce the lack. However, it can be prevented by having one monopolistic supplier which might not really address the lack because doing so would reduce its own revenue.

‘Interest’ is a revenue classified under profits and is the revenue from lending your commodities to others.

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