Income and Profit

Something I saw in Aaron Russo's America: Freedom to Fascism got me thinking: is earning money from labor “income?” In a way, but the value of the labor is equal to the value of the monetary compensation. It's a straight-up trade, and the worker enjoys no net increase in wealth. Trading $1000 worth of work – of physical, mental, and emotional drainage - for $1000 in cash is the same difference as if someone trades a $1000 necklace for a $1000 computer. Taking the transaction in isolation, each party may subjectively gain - the employer prefers the labor over the money and the laborer prefers the money - but objectively neither party “profits” and society enjoys no net increase in wealth. For the government to take a portion of the worker's $1000 compensation isn't a surcharge on newly generated profit, it is only the theft or destruction of already-existing wealth. In the eyes of the government, all that happened was that one person with $1000 gave it to another. To take from the recipient does nothing but make him poorer. And the principle is the same if the worker earned $1 million, or some salary that a third party thinks is “too much.” It is literally none of their business.

And the same is true not just on the sale of labor, but on the sale of goods. You buy a bottle of pop, you are parting with one dollar for what you believe with be one dollar's worth of enjoyment. You may be happy, and the seller may be happy, but in isolation nobody is profiting from the exchange. To tax the sale is to impoverish the buyer by that much, because he has to pay more than the item is worth.

A further illustration of how nobody profits. Let's say the owner bought 1000 bottles of pop at 50 cents each, and sells each for a dollar. Is he making a “profit” of 50 cents on each sale? Not at all. He's not making any “profit” until his revenue from pop sales exceed the $500 he spent. In other words, he makes no profit on the first 500 bottles he sells, but all he sells above that is “profit.” And even that isn't really profit. His store doesn't make any profit until he gets back in sales revenue what he spent on all of the merchandise. At that point, and not before, does he begin to see profits on what he sells.

So where does “profit” come from? Profits occur when the return is greater than the investment. This could happen because the workers turned out to be more productive than what they were paid, or demand for the business's products is greater than the business spent on them. The business generates more value than what it spent. But who determines value? The market – i.e., the community. Profit is, like land value, a community-generated phenomenon. And like land value for the landowner, the business owner has only some influence on profit; he can't control his customers or how many there are. He can't control traffic.