This is the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.
The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.
What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.
And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.
COMMENT 2 (at http://nyti.ms/1mqlXmh):
The wealth of the rich is not the cause of the poverty of the poor, but rather of making the poor less poor, indeed, rich. The wealth of the rich is invested in means of production, which are the foundation of the supply of products available to everyone through purchase. Their wealth—their capital—is also the source of the demand for labor and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labor, i.e., the higher are real wages and the general standard of living. Where would you rather live and work? In a society whose means of production were a few goat farms, accompanied by a correspondingly small demand for labor, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labor?
Over the last generation or more, economic progress has greatly slowed, and many people are economically worse off than they used to be. Why should that be a surprise? Producers are laboring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level.
Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich. It has also caused massive losses of capital through such things as the construction of millions of homes whose buyers could not afford to pay for them.
COMMENT 3 (at http://nyti.ms/1lvZN0B):
The fortunes of the rich can grow only to the extent that they save and invest out of their relatively high rate of return. But to the extent that they do so, economic progress tends to increase and the rate of return tends to decrease.
Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labor) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit.
