The science of finance/Income

Profit

A project is profitable when the value of the wealth it produces is greater than the value of the wealth it consumes.

The costs of a project are the wealth it consumes, its revenues are the wealth it produces. Supplies, labor, and wear and tear on production goods are costs. The goods and services produced are revenues. Profit is the difference in value between revenues and costs.

When a durable good is a final consumption good, its revenues are the services provided by its consumption, its cost is its acquisition price. If the value of the service consumed is counted by the value of the good consumed at the same time, the value of the revenue is equal to the value of the cost. Generally, just stocking our pantry isn't enough to make a profit. A final consumer good produces a service, but it generally does not produce a profit, because the value of the service it provides is not increased by the plan to retain it.

A durable good is quasi-eternal when it produces services without being consumed. In general, there are also usage costs, heating a home for example, or the electricity bill for a computer. If the services produced have a value greater than user costs, a quasi-eternal good resembles a goose that lays golden eggs, because it produces a profit without being consumed.

When goods or services are consumed in a production project, the value of the wealth they produce depends on the project. The more intelligent a project is, the greater the wealth it produces for a fixed cost. Profit is possible because wealth can be used to produce more wealth. The intelligent use of wealth to produce new wealth brings profit.

A business is generally an open-ended project. For a finite duration project, we count the profit made on the day the project closes. To count the profit of a company, we can consider it as a succession of projects with a finite duration. The company is like a project that is renewed each period. The value of the company at the beginning of the period is counted as an initial cost of the project for that period, the value of the company at the end of the period is counted as final revenue. To count the profit of a company, we must count its value, its capital, and its appreciation, or depreciation.

A worker is a profitable enterprise for himself. His income is the remuneration for his work. His costs are those he must pay to work. For a worker, an increase in his labor income is an increase in his profit. For the company that employs him, this is an increase in its costs, which is removed from its profit.

The calculation of profits depends on prices. If prices vary, a profitable project can become ruinous, and vice versa.

Is profit a theft?

Profit from a business or project is property income, not labor income. If there is any work involved in managing the property or business, it should be counted as a cost of the project, which is subtracted from the profit. The profits of a business or project are income paid to owners who have not worked, whereas a worker must earn his profit, the income from his work, by the sweat of his brow. Should we conclude that the owners' profits are wealth stolen from the workers?

An unfair price is a theft in disguise. If it is too high, the buyer is harmed, as if robbed by the seller. If it's too low, it's the opposite. But if the price is right, there is no theft. When labor is underpaid, it is stolen by those who purchase its services. The unfair price of labor means that in this case, profit is theft.

We often think about projects as if all prices were fixed and imposed, because there is a tyranny of prices. We often don't choose the cost prices and we can't set a price for the revenue that strays too far from the prices that already exist, if we want to hope to sell. If the price system is fair, there is no theft. A profitable project is not necessarily a thieving project. Profit is wealth created by the completion of the project. For a profitable project, revenues are greater than costs, because the project is intelligent, because the means have been well chosen to produce goods or services. The wealth created by a project is a fruit of intelligence. If prices are right, the most profitable project is not the most thieving project, only the most intelligent project.

Owners take profits from businesses and leave nothing for others, who may feel they have been robbed, if property is very unfairly distributed. But it is the injustice in the distribution of profits that causes theft, not the profit itself.

Even if the property is public, we must still count the profits of a project, if we want to know if we have made good use of our wealth, because profit is a creation of wealth. Even in a purely socialist economy, we want profitable projects, because we want to create wealth.

To repair the injustice of the distribution of property, one might believe that workers should always be owners of their means of production: the land to those who work it.. In this way, the wealth produced returns entirely to those who produce it and the owners cannot earn anything without working. The redistribution of wealth to workers is sometimes a measure of justice, but it can also lead to senseless consequences if it is generalized excessively. The responsibilities of an owner are not the same as those of a worker. We may want to work without being an owner. Requiring a flight attendant to be a shareholder in the airline in which she is recruited would be insane, and would pose recruitment difficulties. Additionally, capital per worker (the value of the firm divided by the number of workers) varies a lot depending on the firm. Some workers should therefore be much richer than others. The redistribution of the means of production to workers could therefore worsen wealth inequalities instead of reducing them.

The owners of a project are those who have provided the money or wealth to carry it out. If they cannot receive the profits from a project and only suffer its losses, they have no incentive to advance their wealth. Abolishing profits from private property means removing incentives to make good use of property.

If the workers do not want to put up the money for a project, or cannot, because they are not rich enough, if the private owners do not want to either, all that remains is the State- Providence to finance the project. Private property is not necessary for freedom of enterprise because the state can play the role of a universal bank that finances all projects as soon as they merit financing.

With a magnificent state, always intelligent, competent, honest and dedicated to serving its citizens, all big property could be public without infringing on private liberties. But the state isn't always beautiful. We can fear, not without reason, that the State is sometimes tyrannical.

Private property often provides good incentives: take care of wealth and make good use of it to carry out profitable projects. But it can also provide bad incentives. If prices are unfair, the most profitable projects can also be the most thieving. In this case, the search for profit pushes us to steal. Private interests can also be contrary to the public interest by ignoring costs paid by the public. Owners do not always pay all the costs of their projects. If the unpaid costs are costs of environmental degradation, the search for private profits can lead to ecological crime.

Large projects are generally those that concern the greatest number of citizens. If wealth is very concentrated, the very rich can behave like tyrants and make decisions based on their private interests that concern everyone, and which sometimes harm everyone. When projects concern many citizens, it may seem desirable that ownership be public, because a good state always makes its decisions in the general interest. Public power can therefore be a way of limiting the tyranny of the very rich. But if the State is unjust, we have the choice between the plague and cholera, the tyranny of the very rich or the tyranny of the State.

Social democracy is about taking the best of both worlds, private wealth and public wealth. It is the most commonly chosen option, on the left, the center and the right.

Creating wealth without work

Nature constantly produces wealth without our assistance, the light that the Sun constantly sheds on the Earth for example.

A fully automated or robotic production unit can operate with almost no labor, provided that supervision and maintenance costs can be neglected.

Good quality housing is an almost eternal good which provides a great service, being housed, almost without work. We still have to clean up.

If we consider reading as a pleasure and not as work, a book is an almost eternal good which produces wealth, the pleasure of reading, without work and without being consumed.

If new, very useful uses are found for a raw material, the value of the stocks already accumulated is automatically increased. This is a real increase in wealth, because stocks are like reservoirs of the services they can provide. The owners of the stocks can make a profit by reselling their stocks for more than the purchase price. This is profit earned without any work having been done and without anyone having been robbed. Knowledge is a wealth that can create wealth without requiring any work, other than that of acquiring the knowledge.

What is income?

An agent's income is the sum of their labor and property income. It is consumed or saved.

Property income is profit, which includes capital appreciation, net of depreciation.

Depreciation of capital must be distinguished from consumption. When a durable good is consumed by its use, a car or a pair of shoes, for example, it is a consumption of capital, not a depreciation. Depreciation of capital is the decrease in its value when it is not consumed, diminished or partly sold.

We increase our capital by saving a part of our income, therefore by investing our money: by buying durable goods or company shares, or by paying the initial costs of profitable projects. Appreciation of capital is the increase in its value when we have not bought anything.

When a company reinvests its profits, it increases its capital by advancing money, as if shareholders had received dividends and used them to buy new shares of the company.

We can consume by spending part of our income, by consuming or selling part of our capital, or by borrowing. Borrowing to consume is dissaving, because it increases liabilities without increasing assets. The value of a property is the difference between assets and liabilities.

Savings can always be counted as an investment. They are the difference between the value of the property held at the end of the period and the value of the property held at the beginning of the period.