ABSTRACT
The most significant theoretical advance which Adam Smith made over the work of his predecessors was undoubtedly his inclusion of profit on capital as a constituent element in the 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’. 436 With one bold stroke Smith cut through the difficulties involved in these earlier approaches to the problem. He postulated profit as the income of the class of employers of labour—the third of ‘the three great, original and constituent orders of every civilized society’; 437 he argued that competition would tend to reduce this profit to ‘an ordinary or average rate’ on the capital employed; 438 and he included profit at this ‘natural’ rate along with wages and rent (at their ‘natural’ rates) in the supply price of commodities. 439 What was more, he was careful to distinguish profit from wages of management, 440 and to emphasize 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 the lender (if any), there still normally remained a ‘neat or clear’ surplus, out of which new capital could be accumulated. 441 Profit, in other words, was not only a constituent part of the supply price of commodities: it also constituted, on an aggregative view, an important part of the ‘net revenue’ of society.
