Adam Smith: Profit Like Compound Interest
on Thursday, April 20, 2017Adam Smith Money Quote saying attempts to understand the effect of product costs with comparisons of interest types on both wages and profits. Adam Smith said:
“In regards to the price of commodities, the rise of wages operates as simple interest does, the rise of profit operates like compound interest” — Adam Smith
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In this quote, Adam Smith is comparing how wage increases and profit increases each impact commodity prices. He states that a rise in wages, which are the costs paid to workers, operates on commodity prices “like simple interest” – meaning it directly and linearly increases the price.
However, he notes that a rise in business profits operates on prices “like compound interest” – implying it has an exponential or compounding effect that causes prices to increase at a faster rate over time.
Smith is arguing that while higher wages impose a direct cost increase, rising profits allow businesses to continually raise prices in a self-reinforcing cycle. So in essence, the quote examines how wage hikes versus profit hikes differentially influence the prices of goods and commodities in the economy.
Birthday: c. 16 June – Death: July 17, 1790