Tuesday, October 12, 2010

Factors (2)

A little more from Adam Smith on the factors of production:

But the whole price of any commodity must still finally resolve itself into some one or other, or all three of those parts; as whatever part of it remains after paying the rent of the land, and the price of the whole labour employed in raising, manufacturing, and bringing it to market, must necessarily be profit to somebody.

So there are three factors by definition. I find that interesting.

Regarding the cost of interest, Smith writes:

Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

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...

Smith's use of the word "derivative" does not, of course, refer to modern derivatives, but simply to the fact that the money to pay interest originates in and must be pulled from one or more of his three factor incomes -- profit, wages, and rent.

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