User:Mikcob/Returns (economics)

Returns, in Classical and  Neoclassical economics and Political Economy, are the distributions (incomes and/or payments) distributed among the various factors of production as the production process takes place. Such distributions may be strictly allocative (as in the cost of naturally occurring resources) or necessary to promote human action.

Wages
Wages are the direct return that promotes human action; the immediat return to an individual action (mental or physical) that draws a human into any productive process. Wages are realized by individuals regardless of society or any employer. A person gathering mushrooms in a national forest for the purpose of personal consumption is realizing wages in the form of mushrooms. The want of mushrooms draws the person into the forest to get them. Human action when viewed in the context of production is called "labor". Labor is the cost of production.

Profit
Profit is the direct return to the proprietor(s) of  capital stocks (machinery, tools, structures); the realization of value attributable solely to the use of capital stock. The realization of value through the use of capital stock is often expressed as a reduction in cost per unit of output. A person using a stick to dislodge fruit from a tree instead of climbing the tree is using capital to reduce the labor necessary to the realization of the fruit. The capital is the stick and the labor saved is the profit. The ownership of the stick is irrelvant. Simple possession and use is all that is necessary,

Interest
Interest is the direct return to the owner of capital; the realization of value attributable to the ownership of capital. The classical economists referred to the fee paid for the use of money as "interest" but declared this to be a derivative income paid from profit. The distinction between interest and profit often murky but it is the difference between "renting out" the capital and actually employing it.

"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 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." (Smith )

Rent
Rent is the direct cost of scarcity. In classical economics rent was a direct payment for the use of land. Unlike wages and profit, rent is totally allocative in that no individual action is necessary to the existence of natural rent. While rent may innure to (be a return to) an individual person or group all such privatised return in excess of cost which is not atributable wages and profit as defined above and interest as defined below is rent. In a one man economy there is no such thing as rent. Rent arises due to population and it increases as population increases, i.e. the cost of rent will increase as the number of bidders for any resource increases. In a free market the payment of rent serves to assure that fixed resources such as land will be allocated to their most economically efficient use, i.e. the highest bidder for the use of the resource will use it in whatever manner provides maximum utility to the payer of the rent. In a free market the payer of the rent must be productive in order to gather the income necesary to pay the rent.

In Europe in the 1700's the rent of land was paid to an "owner" who was seen as a member of the nobility. Hence, it was said that rent was a return to a "landlord". There seems to have been an underlying assumption that the landlord was providing a necessary service of governance; a necessary service in the division and specialization of land use. In later economic theory rent is expanded as economic rent to include all payments or returns arsing solely from barriers to entry.

"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

Smith on Profits and Interest
The diminution of the capital stock of the society, or of the funds destined for the maintenance of industry, however, as it lowers the wages of labor, so it raises the profits of stock, and consequently the interest of money. By the wages of labor being lowered, the owners of what stock remains in the society can bring their goods at less expense to market than before, and less stock being employed in supplying the market than before, they can sell them dearer.*70 Their goods cost them less, and they get more for them. Their profits, therefore, being augmented at both ends, can well afford a large interest. The great fortunes so suddenly and so easily acquired in Bengal and the other British settlements in the East Indies, may satisfy us that, as the wages of labor are very low, so the profits of stock are very high in those ruined countries. The interest of money is proportionally so. In Bengal, money is frequently lent to the farmers at forty, fifty, and sixty per cent. and the succeeding crop is mortgaged for the payment. As the profits which can afford such an interest must eat up almost the whole rent of the landlord, so such enormous usury must in its turn eat up the greater part of those profits. Before the fall of the Roman republic, a usury of the same kind seems to have been common in the provinces, under the ruinous administration of their proconsuls. The virtuous Brutus lent money in Cyprus at eight-and-forty*71 per cent. as we learn from the letters of Cicero.*72

Smith on Cost
"The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. ... Labour was the first price, the original purchase-money, that was paid for all things."

Neoclassical Economics
In Neoclassical economics profit is total investment performance and includes economic rent.

Total investment return
The total investment return, also called investment performance, includes direct incomes (dividends, interests...) and capital gains (less capital losses) due to changes in the asset market value.