Returns (economics)

Returns (economics)

Returns, in economics and political economy, are the distributions or payments awarded to the various suppliers of the factors of production.

Wages

Wages are the return to labor—the return to an individual's involvement (mental or physical) in the creation or realization of goods or services. Wages are realized by an individual supplier of labor even if thesupplier is the self. A person gathering mushrooms in a national forest for the purpose of personal consumption is realizing wages in the form of mushrooms. A payer of wages is paying for a service performed by one or more individuals and sees wages as a cost.

Rent

In classical economics rent was the return to an "owner" of land. In latereconomic theory this term is expanded as economic rent to include other forms ofunearned income typically realized from barriers to entry. Land ownership is considered to bea barrier to entry because land owners make no contribution to the production process. They simplyprevent others from using that which would otherwise be useful.

"Rent is that portion of the produce of the earth, which is paid to thelandlord for the use of the original and indestructible powers of thesoil. It is often, however, confounded with the interest and profit ofcapital, and, in popular language, the term is applied to whatever isannually paid by a farmer to his landlord." (Ricardo [ [http://www.econlib.org/library/Ricardo/ricP.html "ricP: Ch.2, On Rent,ref3 in paragraph 2.2"] ] )

Interest

The classical economists referred to the fee paid for the use of money or stock as "interest" but declared this to be a derivative income. The distinction between interest and profit is murky:

"Whoever derives his revenue from a fund which is his own, must draw it either from his labor, from his stock, or from his land. The revenue derived from labor is called wages. That derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest (f)or the use of money (or stock). It is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money (or stock). Part of that profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit. The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue, unless perhaps the borrower is a spendthrift, who contracts a second debt in order to pay the interest of the first." (Smith [ [http://www.econlib.org/LIBRARY/Smith/smWN.html "smWN: B.I, Ch.6, Of the Component Parts of the Price of Commodities in paragraph I.6.18"] ] )

Smith uses the word profit in two different ways here. Is the owner of the money/tractor in his capacity as owner realizing profit or interest? It is certain that the proprietor of the money/tractor is realizing profit as opposed to interest. See "Smith on Profits and Interest" below.

Profit

In Classical Economics profit is the return to the proprietor(s) of capital stocks (machinery, tools, structures). If I lease a backhoe from a tool rental company the amount I pay to the backhoe owner it is "interest" (i.e. the return to loaned stock/money).

Profit is the difference between the wages that would have been required excavating by hand, and the smaller amount of wages required using the machine. And from this profit "interest" is paid.

Smith on Profits and Interest

The diminution of the capital stock of the society, or of the funds destined for the maintenance of industry, however, as it lowers the wages of labor, so it raises the profits of stock, and consequently the interest of money. By the wages of labor being lowered, the owners of what stock remains in the society can bring their goods at less expense to market than before, and less stock being employed in supplying the market than before, they can sell them dearer.*70 Their goods cost them less, and they get more for them. Their profits, therefore, being augmented at both ends, can well afford a large interest. The great fortunes so suddenly and so easily acquired in Bengal and the other British settlements in the East Indies, may satisfy us that, as the wages of labor are very low, so the profits of stock are very high in those ruined countries. The interest of money is proportionally so. In Bengal, money is frequently lent to the farmers at forty, fifty, and sixty per cent. and the succeeding crop is mortgaged for the payment. As the profits which can afford such an interest must eat up almost the whole rent of the landlord, so such enormous usury must in its turn eat up the greater part of those profits. Before the fall of the Roman republic, a usury of the same kind seems to have been common in the provinces, under the ruinous administration of their proconsuls. The virtuous Brutus lent money in Cyprus at eight-and-forty*71 per cent. as we learn from the letters of Cicero.*72 [ [http://www.econlib.org/LIBRARY/Smith/smWN.html "smWN: B.I, Ch.9, Of the Profits of Stock in paragraph I.9.13"] ]

Neoclassical Economics

In Neoclassical economics profit is total investment performance and includes economic rent.

Total investment return

The total investment return, also called investment performance, includes direct incomes (dividends, interests...) and capital gains (less capital losses) due to changes in the asset market value.

References

ee also

* Internal rate of return
* Marginal return
* Return on investment
* Returns and risk


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