what is profit? where do profits come from?

Topics: Capitalism, Labor theory of value, Adam Smith Pages: 8 (2081 words) Published: July 8, 2014
ECOP1001 Economics as a Social Science Essay

The essay should compare Two different schools of economic thoughts Question 4. What is profit? Where do profits come from?

Economic theories simplify the relations among key economic concepts and enable us to understand different economic concepts. Throughout history, different economists in different time periods have formed diverse thoughts on how markets work by building and improving on the work of those who came before them. Therefore in order to gain a wider understanding of a particular economic term, it is helpful for us to investigate more than one economic theory. This essay will explore classical and Marxist and compare their portrayal of the concept of profit and where is it from. While classical economists believe profit has a large role to play in land and rent, Marxist economists put more emphasis on surplus value gained through the exploitation of workers’ labour.

Classical economic thoughts originated in the 1770s by its leading economists: Adam Smith and David Ricardo. David Ricardo divided the participants in the economy into three classes with profit being the income received by one of the classes (i.e. the capitalists), with the other two classes being landowners and workers who receive rent and wages, respectively. Profit is then differentiated from the other two incomes as a bonus for entrepreneurs – it is a surplus of the total income in the economy after wages and rent have been paid. Adam Smith (1776) espouses the view that the employer “shares” in the value added to the materials from which produce is made through the labour of workers and that “in this share consists his profit”.

In classical economics, profits of capitals have a close connection with the rise and fall of the rent and wages (Stilwell, 2011). The rent of a particular piece of land is defined as the difference between its productivity and the productivity of a piece of land which produces just enough to sustain the capitalists and wage earners who work it (Stilwell, 2012). Ricardo explained that ‘rent is in all cases a portion of the profits previously obtained on the land, it is never a new creation of revenue, but always part of a revenue already created (Stilwell, 2011, p.77).’ Therefore, if a particularly fertile piece of land were available for lease, the extra produce it might generate would be invariably appropriated by the landowners.

Reisman (1985) defines wages as payment “for the performance of labour”. Ricardo indicated there are three factors can be used in order to increase the profits of capitals: to decrease the real wages of labour, to improve the machineries in agriculture and to discover new market where a lower wage is required by workers to produce the same amount of products (Stilwell, 2011, p.78). In classical economics, if there is no external intervention, it is held that the economy should always maintain an optimal level of both wages for the workers, and profit for the capitalist. Smith espouses the labour division theory as a chief foundation for increasing labour productivity. The labour division theory increases the labour productivity by specializing the tasks into one simple operation, saving time from moving among tasks and the invention of machineries to facilitate and speed up the work (Stilwell, 2012).

Income in the economy is determined by market prices, which are in turn determined by the exchange values of goods. There are three contributions to the analysis of value in classical political economy (Stilwell, 2012). First of all is the difference between the product’s use value and exchange value (Stilwell, 2012). A product like water may have a high use value but not necessarily in its exchange value. Whereas a luxury product likes a diamond has a high exchange value but does not have a high use value. Smith explains a product’s exchange value is highly connected with its supply conditions (Stilwell, 2012). Secondly, the...
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