Adam Smith · Complete work
Book I, Chapter VI, 2
Book I, Chapter VI, 2 of 152. Read it here for reference, or continue through the entire work without leaving the reader.
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In the price of flour or meal, we must add to the price of the corn, the profits of the miller, and the wages of his servants; in the price of bread, the profits of the baker, and the wages of his servants; and in the price of both, the labour of transporting the corn from the house of the farmer to that of the miller, and from that of the miller to that of the baker, together with the profits of those who advance the wages of that labour.
The price of flax resolves itself into the same three parts as that of corn. In the price of linen we must add to this price the wages of the flax-dresser, of the spinner, of the weaver, of the bleacher, etc. together with the profits of their respective employers.
As any particular commodity comes to be more manufactured, that part of the price which resolves itself into wages and profit, comes to be greater in proportion to that which resolves itself into rent. In the progress of the manufacture, not only the number of profits increase, but every subsequent profit is greater than the foregoing; because the capital from which it is derived must always be greater. The capital which employs the weavers, for example, must be greater than that which employs the spinners; because it not only replaces that capital with its profits, but pays, besides, the wages of the weavers: and the profits must always bear some proportion to the capital.
In the most improved societies, however, there are always a few commodities of which the price resolves itself into two parts only: the wages of labour, and the profits of stock; and a still smaller number, in which it consists altogether in the wages of labour. In the price of sea-fish, for example, one part pays the labour of the fisherman, and the other the profits of the capital employed in the fishery. Rent very seldom makes any part of it, though it does sometimes, as I shall shew hereafter. It is otherwise, at least through the greater part of Europe, in river fisheries. A salmon fishery pays a rent; and rent, though it cannot well be called the rent of land, makes a part of the price of a salmon, as well as wares and profit. In some parts of Scotland, a few poor people make a trade of gathering, along the sea-shore, those little variegated stones commonly known by the name of Scotch pebbles. The price which is paid to them by the stone-cutter, is altogether the wages of their labour; neither rent nor profit makes any part of it.
But the whole price of any commodity must still finally resolve itself into some one or other or all of those three 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.
As the price or exchangeable value of every particular commodity, taken separately, resolves itself into some one or other, or all of those three parts; so that of all the commodities which compose the whole annual produce of the labour of every country, taken complexly, must resolve itself into the same three parts, and be parcelled out among different inhabitants of the country, either as the wages of their labour, the profits of their stock, or the rent of their land. The whole of what is annually either collected or produced by the labour of every society, or, what comes to the same thing, the whole price of it, is in this manner originally distributed among some of its different members. 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.
Whoever derives his revenue from a fund which is his own, must draw it either from his labour, from his stock, or from his land. The revenue derived from labour 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 or the use of money. 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. 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. The revenue which proceeds altogether from land, is called rent, and belongs to the landlord. The revenue of the farmer is derived partly from his labour, and partly from his stock. To him, land is only the instrument which enables him to earn the wages of this labour, and to make the profits of this stock. All taxes, and all the revenue which is founded upon them, all salaries, pensions, and annuities of every kind, are ultimately derived from some one or other of those three original sources of revenue, and are paid either immediately or mediately from the wages of labour, the profits of stock, or the rent of land.
When those three different sorts of revenue belong to different persons, they are readily distinguished; but when they belong to the same, they are sometimes confounded with one another, at least in common language.
A gentleman who farms a part of his own estate, after paying the expense of cultivation, should gain both the rent of the landlord and the profit of the farmer. He is apt to denominate, however, his whole gain, profit, and thus confounds rent with profit, at least in common language. The greater part of our North American and West Indian planters are in this situation. They farm, the greater part of them, their own estates: and accordingly we seldom hear of the rent of a plantation, but frequently of its profit.
Common farmers seldom employ any overseer to direct the general operations of the farm. They generally, too, work a good deal with their own hands, as ploughmen, harrowers, etc. What remains of the crop, after paying the rent, therefore, should not only replace to them their stock employed in cultivation, together with its ordinary profits, but pay them the wages which are due to them, both as labourers and overseers. Whatever remains, however, after paying the rent and keeping up the stock, is called profit. But wages evidently make a part of it. The farmer, by saving these wages, must necessarily gain them. Wages, therefore, are in this case confounded with profit.
An independent manufacturer, who has stock enough both to purchase materials, and to maintain himself till he can carry his work to market, should gain both the wages of a journeyman who works under a master, and the profit which that master makes by the sale of that journeyman’s work. His whole gains, however, are commonly called profit, and wages are, in this case, too, confounded with profit.
A gardener who cultivates his own garden with his own hands, unites in his own person the three different characters, of landlord, farmer, and labourer. His produce, therefore, should pay him the rent of the first, the profit of the second, and the wages of the third. The whole, however, is commonly considered as the earnings of his labour. Both rent and profit are, in this case, confounded with wages.
As in a civilized country there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing largely to that of the far greater part of them, so the annual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than what was employed in raising, preparing, and bringing that produce to market. If the society were annually to employ all the labour which it can annually purchase, as the quantity of labour would increase greatly every year, so the produce of every succeeding year would be of vastly greater value than that of the foregoing. But there is no country in which the whole annual produce is employed in maintaining the industrious. The idle everywhere consume a great part of it; and, according to the different proportions in which it is annually divided between those two different orders of people, its ordinary or average value must either annually increase or diminish, or continue the same from one year to another.
Musean translation
Mouseia’s complete machine-assisted Musean translation, made directly from the complete English text of all five books for fidelity, the author’s force and cadence, and modern clarity.
In the price of flour or meal, besides the price of corn we must count the miller's profit and the wages of his workers; in the price of bread, the baker's profit and the wages of his workers. In the price of both, we must also count the labor of carrying the corn from the farmer's house to the miller's, and from the miller's to the baker's, together with the profits of those who advance the wages for that labor.
The price of flax resolves into the same three parts as the price of corn. For linen, we must add to the price of flax the wages of the flax dresser, spinner, weaver, bleacher, etc., and the profits of their respective employers.
As a commodity passes through more stages of manufacture, the share of its price that goes to wages and profit grows relative to the share that goes to rent. As manufacture proceeds, not only do profits multiply, but each succeeding profit is greater than the last, because the capital yielding it must be greater. The capital employing weavers, for example, must be greater than that employing spinners, for it must replace the spinners' capital with its profits and pay the weavers' wages besides; and profits must always bear some relation to capital.
Even in the most developed societies, however, a few commodities have prices consisting of only two parts, wages of labor and profits of stock, and still fewer have prices consisting entirely of wages. In the price of sea fish, for instance, one part pays for the fisherman's labor and another for the profit on capital employed in fishing. Rent rarely enters the price, though sometimes it does, as I shall show later. River fisheries are different, at least across most of Europe. A salmon fishery pays rent, and rent, though it can hardly be called rent of land, enters the price of a salmon along with wages and profit. In some parts of Scotland a few poor people make their living gathering the small, many-colored stones known as Scotch pebbles along the seashore. The price a stonecutter pays them is entirely the wages of their labor; neither rent nor profit enters it.
But the whole price of any commodity must ultimately resolve into one, another, or all three of those parts. Whatever remains after paying rent for the land and the price of all labor spent raising, manufacturing, and bringing it to market must necessarily be someone's profit.
Just as the price or exchangeable value of each commodity, considered separately, resolves into one, another, or all three of these parts, so must the value of all the commodities that make up a country's entire annual product of labor, considered together. It must be distributed among the country's inhabitants as wages for their labor, profits on their stock, or rent for their land. Everything gathered or produced annually by a society's labor—or, equivalently, its entire price—is originally distributed in this way among some of its members. Wages, profit, and rent are the three original sources of all revenue as well as all exchangeable value. Every other kind of revenue ultimately derives from one of them.
Whoever derives revenue from resources of their own must draw it from labor, stock, or land. Revenue from labor is called wages; revenue from stock, when received by the person who manages or employs it, is profit; when received by someone who does not employ the stock but lends it to another, it is interest, or the use of money. This is what the borrower pays the lender for the opportunity to make a profit through the use of the money. Part of that profit naturally belongs to the borrower, who takes the risk and trouble of employing it, and part to the lender, who makes the profit possible. Interest on money is always derivative revenue: unless the borrower is a spendthrift who incurs a second debt to pay interest on the first, interest not paid from profits earned with the money must be paid from some other source of revenue. Revenue coming entirely from land is called rent and belongs to the landlord. A farmer's revenue comes partly from labor and partly from stock. For the farmer, land is merely the instrument that enables wages to be earned from that labor and profits to be made on that stock. All taxes and the revenues based on them, and all salaries, pensions, and annuities of every kind, ultimately derive from one or another of these three original sources of revenue. They are paid directly or indirectly from wages of labor, profits of stock, or rent of land.
When these three kinds of revenue belong to different people they are readily distinguished. When they belong to the same person, common speech at least sometimes confuses them.
A gentleman who farms part of his own estate should, after paying the costs of cultivation, receive both the landlord's rent and the farmer's profit. Yet he is apt to call all his earnings profit, thus confusing rent with profit, at least in ordinary speech. Most of our North American and West Indian planters are in this position: most farm their own estates. Accordingly, we rarely hear of a plantation's rent, but often of its profit.
Ordinary farmers rarely hire an overseer to manage the farm as a whole. They generally do a good deal of work with their own hands as plowmen, harrowers, etc. What remains of the crop after paying rent should therefore do more than replace the stock they invested in cultivation and provide its ordinary profits: it should also pay them wages for working as laborers and overseers. Yet whatever remains after rent has been paid and stock maintained is called profit. Clearly wages are part of it. By saving the wages they would otherwise pay, the farmers necessarily earn them. Here, then, wages are confused with profit.
An independent manufacturer with enough stock to buy materials and support himself until his work can be taken to market should earn both the wages of a journeyman employed by a master and the profit that master would make from selling the journeyman's work. Yet his entire earnings are usually called profit; here too wages are confused with profit.
A gardener who cultivates his own garden with his own hands combines in one person the three roles of landlord, farmer, and laborer. His produce should therefore pay him rent in the first role, profit in the second, and wages in the third. Yet the whole is commonly treated as earnings from his labor. In this case both rent and profit are confused with wages.
In a civilized country few commodities derive their exchangeable value from labor alone; rent and profit contribute greatly to the value of most. Its annual product of labor will therefore always be able to purchase or command far more labor than was employed to raise, prepare, and bring that product to market. If society annually employed all the labor its annual product could purchase, the quantity of labor would grow greatly each year, and the product of each succeeding year would be worth vastly more than the preceding year's. But no country employs its whole annual product to support the industrious. The idle everywhere consume a large share of it; and according to the proportions in which it is divided each year between these two groups, its ordinary or average value must rise, fall, or remain unchanged from year to year.
Plain English translation
Mouseia’s complete Plain English edition, made independently and directly from the complete English text of all five books.
The price of flour or meal includes the price of grain, plus the miller's profit and the wages of his workers. The price of bread also includes the baker's profit and the wages of his workers. Both prices include the labor of moving grain from the farmer's home to the miller's and from the miller's to the baker's, along with the profits of the people who advance the wages for that labor.
The price of flax has the same three parts as the price of grain. Linen's price also includes the wages of the people who dress the flax, spin it, weave it, and bleach it, and so on, along with the profits of each of their employers.
The more processing a product undergoes, the larger the share of its price that goes to wages and profit, compared with the share that goes to rent. As manufacturing progresses, there are not only more profits to pay, but each successive profit is larger than the last. That is because the stock on which it is earned must always be larger. For example, the stock that employs weavers must be greater than the stock that employs spinners. It must repay that earlier stock and its profits and must also pay the weavers' wages. Profits must always be in some proportion to the stock employed.
Even in the most developed societies, though, a few goods have prices with only two parts: wages and profits on stock. An even smaller number have prices made up entirely of wages. Consider the price of fish caught at sea. One part pays for the fisherman's labor, and the other pays profit on the stock used in fishing. Rent is very seldom part of the price, though it sometimes is, as I will show later. River fishing is different, at least in most of Europe. A salmon fishery pays rent. Though this can hardly be called rent on land, rent is part of a salmon's price, along with wages and profit. In some parts of Scotland, a few poor people earn their living by gathering the small, multicolored stones along the seashore called Scotch pebbles. The price a stonecutter pays them consists entirely of their wages. Neither rent nor profit contributes to it.
Still, the whole price of any product must ultimately consist of one, two, or all three parts. Whatever is left after paying the rent on the land and the full cost of the labor used to produce, process, and bring it to market must be somebody's profit.
The price, or exchange value, of any single item consists of one, two, or all three of these parts. The same must therefore be true of the price of all the goods produced by a country's labor in a year, taken together. That price is distributed among the country's people as wages for their labor, profits on their stock, or rent on their land. Everything a society gathers or produces by its labor each year—or, equivalently, its total price—is first distributed among some of its members in this way. Wages, profit, and rent are the three original sources of all revenue and all exchange value. Every other kind of revenue ultimately comes from one of them.
A person who gets revenue from resources of his own must get it from his labor, his stock, or his land. Revenue from labor is called wages. Revenue from stock is called profit when it goes to the person who manages or uses that stock. When it goes instead to someone who lends out the stock rather than using it himself, it is called interest, or the use of money. The borrower pays the lender this amount in exchange for the chance to make a profit using the money. Part of that profit naturally goes to the borrower, who takes the risk and trouble of putting the money to work. Part goes to the lender, who gives the borrower the chance to make it. Interest is always revenue derived from another source. If it is not paid out of profits made by using the money, it must come from some other source of revenue. The exception may be a wasteful borrower who takes out a second loan to pay interest on the first. Revenue that comes entirely from land is called rent and goes to the landowner. A farmer's revenue comes partly from his labor and partly from his stock. For him, land is only a tool that lets him earn wages for his labor and profits on his stock. Taxes and all revenue based on them, along with all salaries, pensions, and annuities of every kind, ultimately come from one of these three original sources. They are paid directly or indirectly out of wages, profits on stock, or rent on land.
When these three kinds of revenue go to different people, it is easy to tell them apart. When one person gets more than one kind, people sometimes mix them up, at least in ordinary speech.
A gentleman who farms some of his own estate should, after paying the costs of cultivation, receive both a landowner's rent and a farmer's profit. But he is likely to call everything he earns profit. In ordinary speech, at least, he thus mixes up rent and profit. Most North American and West Indian planters are in this position. Most farm their own estates, so we rarely hear about a plantation's rent but often hear about its profit.
Ordinary farmers seldom employ a supervisor to manage the farm as a whole. They also usually do a good deal of work themselves, plowing, harrowing, and so on. What remains of the crop after paying rent should therefore repay the stock they put into cultivation and provide the usual profit on it. It should also pay them wages for their own work, both as laborers and as supervisors. But whatever remains after paying rent and replacing the stock is called profit. It clearly includes wages too. Farmers earn those wages by saving what they would have had to pay someone else. So in this case wages are mixed up with profit.
An independent manufacturer with enough stock to buy materials and support himself until he can take his product to market should earn both the wages a hired worker would receive under a master and the profit the master would make by selling that worker's product. But people commonly call all his earnings profit. Again, wages are mixed up with profit.
A gardener who works his own garden is at once a landowner, a farmer, and a laborer. What he produces should therefore pay him rent as the first, profit as the second, and wages as the third. Yet people usually count all of it as earnings from his labor. Here both rent and profit are mixed up with wages.
In a developed country, very few goods get their exchange value from labor alone. Rent and profit make a large contribution to the value of most goods. The goods produced by a country's labor each year will therefore always be enough to buy or command much more labor than was used to produce, prepare, and bring them to market. If society used all the labor those goods could buy each year, the amount of labor employed would grow greatly year after year. The value of each year's output would then be far greater than that of the year before. But no country uses everything it produces in a year to support hard-working people. Idle people everywhere consume a large share. Depending on the shares distributed each year to these two groups, the usual or average value of the annual output must rise, fall, or stay the same from year to year.