In this post, we define rent, wages, and profit according to Adam Smith's descriptions in The Wealth of Nations. This is done so that we can classify every type of revenue under those headings for the sake of a more accurate taxation and modelling.

Defining Rent, Wages, and Profits

by Juan

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 so that, in theory, we can put the entire economic system under the management of an impartial Artificial Intelligence (AI) which will not have vested interests nor be greedy as the current managers of capitalist systems. The AI would be able to classify each person and then micromanage economic policies in real time to prevent that person or any class of persons from being economically neglected. This would fix the distribution of wealth so that there would no longer be extreme poverty or even conflicts.

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. We do not say that a machine's gasoline is part of its revenue.

Profits = 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 that is 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 -- because society does not want lack, but merchants and capitalists do. If the world were filled with iPhone manufacturers, there would be no lack of iPhones and their prices would drop. Thus, it is the shallow interest of the iPhone inventor to prevent the spread of knowledge of how to make it, through a monopolistic system called intellectual property.

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. 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 nominal profits, are the best for society. With this definition, ordinary profits would mean that there is little lack in society. This state could only happen if there were many suppliers competing in an effort to reduce the lack. Since human desires are dynamic (you never want to eat just one food for a year, or just buy one shirt annually), lack is always created in the mind, which Smith calls absolute demand, a concept not present in modern Economics. This demand, and not money, is the true engine for rent, wages, and profit.

'Interest' is a revenue classified under profits and is the revenue from letting others use your money. If you use your money yourself, then the revenue is called profit.

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