Flies in their eyes: Wikipedia is confused about who is confused

I agree with Bezemer and Hudson, who said Finance Is Not the Economy:

Our aim is to distinguish this financialized “wealth” sector — the balance sheet of assets and debts — from the “real” economy’s flow of credit, income, and expenses for current production and consumption.

Me too. As I see it: Real assets produce profit for the owner, and output for all. Financial assets produce interest for the owner, and cost for all.

This idea comes to me from Adam Smith, who identified rent, wages, and profit as the payments to the three factors that he called land, labor and stock. Smith said

In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter more or less, as component parts, into the price of the far greater part of commodities.

Adam Smith also said

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.

And specifically,

The interest of money is always a derivative revenue

which makes it pretty damn clear that finance is not the economy.


Bezemer and Hudson want to eliminate confusion by distinguishing the "real" from the "financial" economy, profit from interest. Our world is littered with evidence of that confusion. At Wikipedia, for example, we are told that "the distinction between interest and profit is murky". As evidence, they quote Adam Smith. But Smith was not confused about the difference between profit and interest. At Wikipedia, what Smith said has been modified in an attempt to insert the modern confusion into Smith's thoughts.

The confusion is not Smith's. It is modern. Economics confuses interest with profit and teaches this confusion as gospel. Keynes cleared this up a long time back:

I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together...

Keynes was brought up to agree with those "other" economists, but in the end came to agree with Adam Smith and with the Church and with Bezemer and Hudson and with Jacob Assa and with me: Interest is not the same as the return to active investment.


Let me do this again. Benefit of the doubt this time. The Wikipedia guy quotes Adam Smith from Book I Chapter 6:

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...

Wikipedia guy changes Smith's "or" to "(f)or", and twice changes Smith's "money" to "money (or stock)". I want to be clear whose changes these are: Not mine!

But having read that quote over until I no longer have energy enough to be outraged by the changes, I shall ignore the or-to-for change; and I even think I can live with the "money" to "money or stock" change. Here's Smith (unmodified) from EconLib:

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 ...

The "it" that appears three times in the last of those sentences is "stock". Not stock-market stock. Accumulation-of-stuff stock. Stuff you can use to produce output. Stuff includes money, I suppose. So then we have "money or stock". I can live with it.

Compare the last two sentences in the unmodified Smith quote:

• Revenue derived from stock by the person who employs it is called profit.
• Revenue derived from stock by the person who lends it out is called interest.

The difference between the two sentences is that the one person is engaged in "active investment" and the other is not. The person who "manages or employs it" is engaged in active investment. The person who "lends it to another" is not.

The difference that concerned Smith is whether or not the person is engaged in active investment and the production of output. That much is clear. Wikipedia guy, however, says "Smith uses the word profit in two different ways here."

Wiki guy explains his problem:

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.

Smith's focus is whether or not the person is producing output. Wiki guy's focus is whether or not the person actually owns the stuff. See the difference? Smith is focused on generating product. Wiki guy is focused on the personal accumulation of wealth.

Smith wrote during the birth of capitalism. Wiki guy, during capitalism's death phase.

Wiki guy's question again is: "Is the owner of the money/tractor in his capacity as owner realizing profit or interest?" I bolded what I think must be the key part of that question. Let me rephrase the question two ways and see if I can get to Wikiguy's problem:

• Is the owner of the money/tractor in his capacity as owner realizing profit or interest?
• Is the owner of the money/tractor in his capacity as the person who manages or employs it realizing profit or interest?

We all (Smith, me, and Wiki guy) agree that the proprietor, the person who manages or employs the stock, realizes "profit". So the question, Wiki guy's question, is: Which word applies to the owner who lends it to another? The answer, far as I can see, has to be "interest". Unless you want to disagree with Smith, of course. That does seem to be Wiki guy's plan.

(Come to think of it, when the manager of the stock is not the owner but "some principal clerk", Smith says the manager receives wages for his labor. Not profit.)

If it happens to be the owner who is managing or employing the stock, it's just profit. Wiki guy wants to split the profit into profit and interest, and reward the owner for his ownership. This is death-phase thinking, preparation for the next phase of the Cycle of Civilization, the phase that comes after capitalism.


The problem I have with Wiki guy is his focus on the owner. That focus interferes with understanding what Smith said. Wiki guy, like Keynes, was "brought up to believe that the attitude of" Adam Smith "to the rate of interest was inherently absurd". Wiki guy needs to get past it, as Keynes did.

Wiki guy must learn to distinguish financialized “wealth” from the “real” economy, as Bezemer and Hudson recommend.

The key, the real difference as Smith saw it, was that if you use your stock to produce something other than money, your income is called "profit". If your only product is money, your income is interest. The key difference for Smith is not who owns the thing, but whether it is used to produce something other than money: Whether it is used to create the wealth of nations, or just the income of lenders.

That's what Wiki guy doesn't get, when he talks about the reward to the owner "in his capacity as owner". He wants to take the owner's profit and split it into two parts: profit for the "managing or employment" of it, and interest for owning it. For lending it to himself, as it were. But that's not what Smith said.

Smith said "The interest of money is always a derivative revenue". He means the money to pay the interest has to come out of profit, or come out of wages, or come out of rent, "the three original sources" of "all exchangeable value". That's what Smith said.

Profit is the reward to productive investment. Interest is the reward to non-productive investment. "Productive" means producing something other than just money. What Smith said is not hard to figure out.

Wiki guy's confusion is his own.