Is Profit a Sin? Re-examining Adam Smith’s View on ‘Interest’ and the Ethics of Passive Income

Your landlord just raised your rent again. Your savings account yields 0.5% while inflation runs at 3%. Meanwhile, someone’s trust fund baby Instagram account shows them sipping cocktails in Bali, captioned “passive income life.” And somewhere in your chest, something tightens—a feeling that’s part envy, part moral indignation, and entirely confused about whether it should feel either.

Welcome to one of humanity’s oldest arguments, dressed in modern clothing.

For centuries, we’ve wrestled with a peculiar question: Is making money without breaking a sweat somehow… wrong? The question sounds almost quaint until you realize it’s at the heart of every debate about landlords, investors, inheritance, and that cousin who retired at 35 by “just buying Bitcoin early.”

What makes this especially interesting is that the father of modern capitalism himself—Adam Smith—had thoughts on this that might surprise you. And I do mean surprise, because Smith is usually wheeled out as the patron saint of making money however you please. But the man who wrote about invisible hands also had quite a bit to say about invisible ethics.

The Medieval Money Problem

Let’s start where Smith himself started: with a world that was deeply suspicious of profit.

For most of Christian Europe’s history, charging interest on loans was considered exploitation—literally a sin. Not “tacky,” not “frowned upon”—an actual sin that could land you in the hot place. The logic was straightforward: money doesn’t breed. A cow can have calves, a field can grow wheat, but a gold coin just sits there, inert as a stone. So how could you justifiably charge someone for borrowing it? To demand more back than you gave was to demand something from nothing, to claim fruits from a barren tree.

This wasn’t just religious fussiness. It reflected a deep intuition that there’s something troubling about making money from money itself, rather than from labor or creativity or risk. The medieval mind saw interest as a kind of theft—stealing from the future, or from the borrower’s labor, or perhaps from God’s domain of creation itself.

Of course, this created spectacular problems. How do you run an economy without lending? How do merchants finance voyages or farmers survive bad harvests? The result was a festival of creative accounting. “Interest” became “late fees.” Loans became “partnerships.” Jewish lenders, exempt from Christian rules, became essential to economic life while shouldering the moral suspicion that came with the role. It was a system designed to feel bad about itself.

Enter the Professor from Glasgow

Adam Smith arrives in the 18th century with none of the medieval hang-ups about merchants and money-making. His “The Wealth of Nations” in 1776 is often read as a liberation theology for capitalism—go forth and prosper, the market will sort it out, self-interest is secretly public virtue.

But here’s what’s counterintuitive: Smith was actually quite uncomfortable with passive income.

Smith divided income into three types: wages (from labor), profit (from enterprise), and rent (from ownership). And while he defended profit vigorously, he had a notably chilly view of rent—money that flows to you simply because you own something. In his view, landlords “love to reap where they never sowed.” That’s not a compliment.

For Smith, the crucial distinction was between earned and unearned income. Profit from running a business? Absolutely justified—you’re taking risks, making decisions, organizing resources, creating value. Interest from lending money? Still defensible—you’re foregoing present consumption, taking a risk on repayment, making capital available for productive uses.

But income purely from ownership, from holding title to something while contributing nothing? That made Smith twitch. He saw landlords as beneficiaries of a system rather than participants in it, extracting value rather than creating it. They were, in his framing, economic rent-seekers—and yes, that term was originally about actual rent.

The Paradox of the Invisible Hand

Here’s where it gets ironic. Smith is famous for the invisible hand—the idea that individuals pursuing their self-interest somehow generate public benefit. Except Smith himself only used that phrase three times in all his writing, and he was considerably more ambivalent about it than modern interpreters suggest.

Smith’s actual view was more nuanced: self-interest could serve the public good, but only within the right institutional framework, and only certain kinds of self-interest. The butcher and baker serve society through their self-interest because they must create value to capture value. They make meat and bread, and we all benefit.

But the landlord? The trust-fund inheritor? The patent troll? They can capture value without creating it. And Smith was acutely aware that not all money-making serves the invisible hand. Some of it just picks the invisible hand’s pocket.

This is the distinction that gets lost when we turn Smith into a cartoon libertarian. He wasn’t against profit—he was against parasitism. He celebrated commerce that expanded the pie, not rent-seeking that merely redistributed it.

The Modern Passive Income Dilemma

Fast forward to today, and we’re drowning in passive income streams. Rental properties. Dividend portfolios. Affiliate marketing. Online courses that sell while you sleep. Automated dropshipping businesses. Cryptocurrency staking. It’s an entire economy built on the premise that money should make money.

And we have deeply conflicted feelings about all of it.

On one hand, passive income is sold as freedom. It’s the escape from trading hours for dollars, from being a wage slave, from the tyranny of the alarm clock. Every personal finance guru preaches it. Build assets that generate income! Make your money work for you! Achieve financial independence!

On the other hand, there’s a persistent whiff of unfairness to it. When housing becomes an investment vehicle and prices soar beyond what workers can afford, something feels wrong. When corporations buy back stocks to reward shareholders while workers’ wages stagnate, something feels wrong. When someone makes more from their investments in a month than a nurse makes in a year, something feels wrong.

But what exactly feels wrong? And should it?

The Labor Theory of Moral Value

Part of our discomfort stems from what we might call the labor theory of moral value—not economic value, but moral deservingness. Deep in our cultural DNA is the belief that you should earn what you get, that rewards should flow from effort and contribution.

This intuition is powerful. It’s why we feel differently about an entrepreneur who builds a business from scratch versus an heir who inherits one. It’s why we respect the person who saves and invests over decades differently than someone who won the lottery. It’s why “self-made” is a compliment and “trust fund kid” is not.

But here’s the twist: this intuition might be outdated, or at least incomplete.

Consider: a software developer writes code for an app that then serves millions of users. The value created is vastly disproportionate to the hours worked. Is that wrong? Most of us would say no—the developer created something scalable, and should benefit from that leverage.

Or consider: you plant an apple tree. For years you water it, prune it, protect it. Eventually, it produces apples with minimal effort from you. Is it somehow immoral that you’re now getting “passive” food? Of course not. You front-loaded the work and deferred the reward.

This suggests that passive income isn’t automatically problematic. The moral question is more subtle: What did you do to create or acquire the asset that generates the income? And does your ownership of that asset prevent others from creating value?

The Finite Resource Problem

Smith’s critique of landlords becomes sharper when we consider finite resources. You can’t make more land. When landlords own property and extract rent, they’re not creating houses—they’re controlling access to a resource that exists independent of their effort.

This is the key insight: some passive income comes from gatekeeping finite resources. The landlord charges rent not because they built the house (often they didn’t) or manage it well (often they don’t), but because they control access to space in a desirable location. That location’s value typically comes from public goods—infrastructure, schools, services, the collective productive activity of a community. Yet the landlord captures that value privately.

Contrast this with other forms of passive income. If you write a book and earn royalties while you sleep, you created something that wouldn’t exist without you. You’re not preventing anyone else from writing books. The resource isn’t finite. The same is true for software, music, art, or any genuinely creative work.

The moral distinction, then, isn’t simply active versus passive income. It’s whether your income comes from creation or from gatekeeping, from expanding possibility or restricting it.

The Risk Complication

But wait—doesn’t investing involve risk? Doesn’t that justify the return?

This is where Smith’s nuance about interest becomes relevant. He acknowledged that lenders deserve compensation for risk—money lent might not be returned. But he also noted that interest rates should be regulated to prevent exploitation, and that not all risk-taking deserves reward.

There’s a difference between productive risk and extractive risk. If I invest in a startup that’s trying to develop clean energy technology, I’m taking a risk, yes, but I’m also potentially contributing to value creation. The world might get better technology, and I might get returns—a reasonably fair exchange.

But if I buy up the rights to a life-saving drug and raise the price 5,000%, I’m also taking a “risk”—the risk of public backlash, regulation, or competition. Does that risk-taking deserve reward? Most of us would say no. The risk is in service of extraction, not creation.

The point is that risk alone doesn’t sanctify profit. The moral dimension depends on what the risk is in service of.

The Inheritance Question

Perhaps nowhere is the passive income debate more emotionally charged than inheritance. Someone born to wealth can live comfortably off assets they did nothing to create. Someone born to poverty must trade hours for dollars, probably for their entire life. Is this fair?

Smith actually didn’t write much about inheritance, but we can extend his logic. Inherited wealth is the ultimate passive income—you didn’t work for it, take risk for it, or create it. You simply were born to the right parents, which is the definition of moral luck.

Yet most of us are uncomfortable with the idea of prohibiting inheritance. We want to be able to pass resources to our children. It feels like a fundamental right, an extension of caring for them.

The tension here reveals something important: our moral intuitions about earned versus unearned income exist alongside other moral commitments—to family, to property rights, to freedom. Ethics is rarely about applying one principle consistently; it’s about negotiating between principles that pull in different directions.

What Smith Might Say Today

If we could resurrect Adam Smith and show him our modern economy, what might he say about passive income?

I suspect he’d be troubled by the financialization of everything—the way housing, education, and healthcare have become investment vehicles first and public goods second. He’d likely see this as a form of rent-seeking that extracts value without creating it.

He’d probably be impressed by entrepreneurship and innovation but concerned about monopoly power and wealth concentration. He argued that merchants would always conspire against the public interest if given the chance—and that was before too-big-to-fail banks and platform monopolies.

He might appreciate the legitimate forms of passive income—returns from genuine innovation, from creative work, from patient capital that enables productive enterprise. But he’d be skeptical of passive income that comes from controlling finite resources or gaming regulatory systems.

Most importantly, I think he’d insist we keep asking the question: Is this income stream serving the wealth of nations, or just the wealth of individuals? Is it expanding the pie or just claiming a bigger slice?

Beyond Binary Thinking

Here’s what this historical excursion should teach us: the question “Is profit a sin?” is the wrong question. Or rather, it’s too crude.

The better questions are: Where does this profit come from? What value was created to generate it? What risks were taken? What resources are being controlled? Who benefits and who bears the costs?

A landlord charging exorbitant rent in a housing crisis because they own property in a desirable area is doing something meaningfully different from an inventor earning royalties on a medical device. Both are receiving “passive income,” but the moral character of these incomes is entirely different.

The medieval prohibition on exploitation was too broad—it failed to distinguish between predatory lending and productive capital allocation. But the modern celebration of passive income is also too broad—it fails to distinguish between value creation and value extraction.

Profit isn’t inherently a sin. But neither is it inherently virtuous. Like most things, it depends—on where it comes from, what it serves, and whether it makes the world larger or just makes your slice larger.

Your landlord raises your rent. You check your dividend portfolio. Somewhere, someone explains their passive income on social media. And in all of it, we’re still trying to figure out what we owe each other, what’s fair, what’s earned—still having, in different words, the same conversation medieval scholars had about whether money can breed.

The conversation continues because the tension is real. And maybe that’s okay. Maybe staying uncomfortable with easy answers is precisely how we keep trying to get it right.