Returns (economics)
Encyclopedia
Returns, in economics and political economy, are the distributions or payments awarded to the various suppliers of the factors of production
.
supplier 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.
. In later
economic theory this term is expanded as economic rent
to include other forms of
unearned income typically realized from barriers to entry
. Land ownership is considered to be
a barrier to entry because land owners make no contribution to the production process. They simply
prevent others from using that which would otherwise be useful.
"Rent is that portion of the produce of the earth, which is paid to the
landlord for the use of the original and indestructible powers of the
soil. It is often, however, confounded with the interest and profit of
capital, and, in popular language, the term is applied to whatever is
annually paid by a farmer to his landlord." (Ricardo)
"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)
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.
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.
In The Wealth of Nations
Adam Smith
said the following on profits and interest.
and includes economic rent
.
, includes direct incomes (dividends, interests...) and capital gains (less capital losses) due to changes in the asset market value.
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
.
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 landLand (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
. In later
economic theory this term is expanded as economic rent
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
to include other forms of
unearned income typically realized from barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...
. Land ownership is considered to be
a barrier to entry because land owners make no contribution to the production process. They simply
prevent others from using that which would otherwise be useful.
"Rent is that portion of the produce of the earth, which is paid to the
landlord for the use of the original and indestructible powers of the
soil. It is often, however, confounded with the interest and profit of
capital, and, in popular language, the term is applied to whatever is
annually paid by a farmer to his landlord." (Ricardo)
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)
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 capitalCapital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
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.
In The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...
Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
said the following on profits and interest.
Neoclassical Economics
In Neoclassical economics profit is total investment performanceInvestment performance
Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency....
and includes economic rent
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
.
Total investment return
The total investment return, also called investment performanceInvestment performance
Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency....
, includes direct incomes (dividends, interests...) and capital gains (less capital losses) due to changes in the asset market value.
See also
- Internal rate of returnInternal rate of returnThe internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...
- Marginal returnMarginal returnMarginal return refers to the additional output resulting from a one unit increase in the use of variable inputs, while other inputs are held constant....
- Return on investmentReturn on investmentReturn on investment is one way of considering profits in relation to capital invested. Return on assets , return on net assets , return on capital and return on invested capital are similar measures with variations on how “investment” is defined.Marketing not only influences net profits but also...
- Returns and riskRisk-free interest rateRisk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....