"the original source of value"

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.

- Adam Smith

Work. Someone pays you to make something. Work is the source of wealth, but not only because you get paid. Also, the creation of goods and services. The production of output. That's why Milton Friedman said in Money Mischief that

Nothing is more important for the long-run economic welfare of a country than to improve productivity.

Friedman also said it when he spoke of money relative to output.

The creation of output is the source of the wealth of nations. That was Adam Smith's main point, for crying out loud. Nobody missed it, right?


This is old now, but I'm afraid somebody might have missed it.

My notes are from October 2013. Never made it to my blog. In a long post, recent at the time, JW Mason wrote:

One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between.

Well, yeah, maybe. But Mason reduces Adam Smith's creation of exchangeable value -- his "wealth" of "nations" -- to the purchase and sale of "commodities". Mason places money high on the pedestal, and the creation of exchangeable value, low. Adam Smith must have been turning in the grave. I know I am.

No, Mason doesn't exactly miss Smith's point. But I think he misses the significance of it. He continues:

What is the relationship between these two forms of income? For someone like Cassel, interest has priority; profit is a derived form combining interest with income from managerial skill and/or a rent. For Marx on the other hand, and also for Smith, Ricardo, etc., profit is the primitive and interest is the derived form; interest is redistribution of profits already earned in production.

Mason captures the difference perfectly. And yet, he presents Cassel's contradiction of Smith as easily as Smith's own view. Mason misses the significance of Smith's view, a significance which tells me that Cassel cannot possibly be right.

Hey, I don't know from Cassel. But if he sees interest as the primary relation between a man and his money (and profit as sloppy seconds attributed to some lowly entrepreneurial shtick) then Cassel is not thinking of the wealth of nations. He is thinking of individuals, the wealth of individuals. And he is doing micro, not macro.

And Cassel may be right, as far as micro goes. But you must keep in mind that the success of individuals draws money from circulation, and often reintroduces it to circulation coupled with interest cost. Keep also in mind that this additional interest cost does not immediately undermine the wealth of nations; but the long term reapplication of additional interest costs is the serial killer of civilizations.

Bezemer and Hudson describe how it works:

To the extent that the FIRE sector accounts for the increase in GDP, this must be paid out of other GDP components.

Adam Smith laid it out for us: Profit is the income for producing real output; Interest is the income for not producing output. If you earn profit, you make output bigger. If you earn interest, you make output more expensive. Do not confuse the two.