The Physiocratic Concept of Profit

The most significant theoretical advance which Adam Smith made over work of his predecessors was undoubtedly his inclusion of profit on capital as a constituent element in supply price of commodities. Before Smith, speaking very broadly, profit had usually been regarded either as a mere synonym for gain , or as a sort of superior wage, or as a surplus over cost whose level varied (as Steuart put it) according to circumstances .2 With one bold stroke Smith cut through difficulties involved in these earlier approaches to problem. He postulated profit as income of class of employers of labour-the third of three great, original and constituent orders of every civilized sociery ;3 he argued that competition would tend to reduce this profit to an ordinary or average on capital employed ;4 and he included profit at this rate along with wages and rent (at their natural rates) in supply price of commodities.5 What was more, he was careful to distinguish profit from wages of management,6 and to emphasise that after sufficient had been set aside as a compensation for the occasional losses to which every employment of stock is exposed and for payment of interest to lender (if any), there still normally remained a neat or clear surplus, out of which new capital could be accumulated.7 Profit, in other words, was not only a constituent part of supply price of commodities: it also constituted, on an aggregative view, an important part of net revenue of society. The present article discusses contribution made by French Physiocrats to development of this Classical concept of profit. The main problem here revolves around an apparent contradiction in work of Physiocrats which has never been properly resolved and which can be stated as follows: The Physiocrats stoutly maintained not only plausible thesis that land rent was an income in nature of a surplus, but also much less plausible thesis that land rent was only income in nature of a surplus, all other returns to agents of production being merely compensation for costs.8 Yet at same time their theoretical system can properly be said to have been

Aside · Economics · Gross profit · Labour economics · Microeconomics · Net profit · Payment · Profit (economics) · Rate of profit · Revenue · Wage · Economic Theory and Policy · Finance

• Trends in the development of physiocratic doctrine

  Lars Herlitz•Scandinavian Economic History…•1961

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