An Inquiry Into the Nature and Causes of the Wealth of NationsBy: Adam Smith
Major Topic: Economics
Minor Topic: Politics
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Chapter Eleven: On the Rent of Land
The rent will be the highest that the renter can pay based on the particularities of the land. Often it is thought that rent comes from the improvements to the land but the income from this is properly called profit. Since landlords charge rent even for unimproved land, this rent is properly called rent although commonly the combination of profit and rent is simply called rent. The rent of the land is the price for its use and this price is a monopoly price – that is it is based on the highest amount that can be afforded by the renter and is not proportional to any improvements or investments or the actual type of work done on the land.
Ordinary commodities have a natural price which allows the stockholder and the laborer to bring them to market and collect a natural wage and/or profit, if there is any surplus this will go to the landlord. Therefore the rent enters into the price differently than do wages and profits. If the profit or the wage is high then the price will be high; conversely if the profit or wage is low then the price ought to be low. However if price is high then rent will be high too because the landlord's rent is a result of the price of the commodity. It is therefore possible that rents may be high, low or zero. This chapter is divided into three parts: the first deals with the case in which land always produces some rent; the second deals with the case in which land may or may not produce some rent; and the third part deals with the dynamic in land use between these two possibilities.
PART 1: On The Use of Land that Always Pays a Rent
Since human population grows in proportion to the food supply, food is always in demand (although sometimes more and sometimes less so) and some one is always willing to do some work in order to obtain it at a rate common to that particular locale. Land, devoted to the staple food, will almost always produce more than what the workers need to survive and what the stockholders need to replace their stock and therefore something always remains to pay the landlord's rent.
Rent rises in proportion to the fertility of the land and it rises with its proximity to a town (due to lower transportation costs).
Roads and other facilitators of transportation will reduce the transport cost, encourage cultivation of more remote land, break the monopoly of the countryside's food production, encourage better management of farms and bring more and different types of food to more markets. Transport facilities are some of the greatest improvements that can be made to a nation.
The actual crop grown or animal raise will depend on the relative price for each in the market. Prices will determine what the farmer or renter will do with the land. Cultivated land is mostly used to produce food for men [corn] or food for cattle [grass] – the rent and profit of these determine the rent of all land. If a particular piece of land with some other commodity makes less than corn or grass its use will soon be turned to grow corn or grass. If a piece of land with some commodity is making more than corn or grass, some land currently being used to grow corn or grass will likely be converted.
If a landlord is lucky and has a unique piece of land uniquely suited for a particular exotic commodity, he may be exempted from all the usual movements of the market and will garner excessive rent. Wine is one such example, for it seems that the quality of a grape vine's fruit is more affected by soil than is the quality of any other fruit.
In other countries corn may not be the main food for men, but what ever the main food is, it is and it can substitute for corn in the same analysis. Except in the case of rice because it requires bogs which are not easily convertible into another use nor are other pieces of land easily converted into rice paddies.
PART 2: On Produce that Sometimes Does and Sometimes Does Not produce Rent
Human food, the author claims, always and necessarily earns some, even if only a small amount of, rent. All other things may or may not earn enough to pay a rent depending on certain factors.
After food, all humans need clothing and shelter. In its natural state land can produce for human use much more clothing and/or shelter than it can produce food for human consumption. By improving the land for food production or by adding transportation facilities it may be able to supply more food than clothing or shelter. Therefore in the natural state there is a surplus in the raw materials used for clothing and shelter but a dearth of food; in the improved state the conditions are reversed: namely there is a dearth of clothing and shelter materials and an over supply of food. The natural over supply of clothing and shelter materials always made them next to valueless and therefore they could never pay any rent.
A country ought to be considered populous, not in how many can be clothed and sheltered, rather in how many can be fed. This is so because although the materials of clothing and shelter may be abundant it is not necessarily so that food will be abundant. But where food is abundant then the minimum levels of clothing and shelter will be made available. This is so because the raw material requirements of clothing and shelter create products that are much longer lasting than the food of anyone's last meal. Furthermore this is so because the need for food in all men is determined by the size of the stomach (and it is very similar among all men). So those who have a surplus in food are always willing to trade it for improvements in clothing or shelter or other diversions. This demand is without a natural limit and extends to all imaginable items both useful and ornamental.
Therefore food is the original source of rent and the determiner of all other products of land that can pay rent. This rent of other products of land derive their proportion of rent from the increased production due to the improvement of labor, use of stock and the improvement in the land itself.
When some products of land sometimes do and sometimes do not pay rent, their ability to pay is dependent on other factors too. Two factors are productivity and circumstance. Productivity refers to the relative output of an enterprise (such as a mine or a field) with a certain amount of labor when compared to the enterprise's competitors. If the productivity is too low such that wages and profit cannot match the natural rate of each then there will not be any activity; if productivity can pay only the wages and profit at the natural rate then there will not be any rent. If there is rent then there is enough of a scarcity to justify a price that can pay a rent.
The circumstances of a commodity will also help determine its price. If there is a suitable substitute, the price of a commodity will be determined by the most plentiful (which is often synonymous with the most easily obtained) commodity. It is impossible for an easily substitutable commodity to be long more expensive than its easily obtainable substitute. And in all cases, there is not any commodity that will long be brought to market at wage and profit rates below the natural rate.
Another circumstance is the size of the neighborhood. Perishable and/or difficult to transport commodities have small neighborhoods. A precious metal mine has the whole world as its neighborhood. The natural wage and profit rate in different parts of the world may be different then in the smaller local neighborhood so a gold mine in neighborhood with relatively high wage and profit rates may go un-mined due to the low relative wage and profit rates in a distant country if there is plenty of other work or investment opportunities in the smaller neighborhood. Therefore depending on the circumstances of the commodity the rent may be high, low or non-existent for non-food commodities.
In cases with inter-neighborhood trade the productivity of the enterprise will have a determining effect on the price. The most productive enterprise will determine whether or not other enterprises of the same type will remain in business and the rent they will pay.
In the case of precious metals it is the qualities of utility, beauty and scarcity that are the foundations of their high price. In the case of precious stones it is only their beauty and scarcity that influence the price. But it is always the relative productivity of the mine that will determine the rent.
In the production of food clothing or shelter the value of the rent is determined by the absolute productivity of the land. It is not negatively affected by the proximity of more productive land; in fact more productive land often raises the value of less productive land around it by providing a place for other enterprises that may be supported as a result of the increase in population due to the work on the more productive land. Additionally, whatever improves land (such as roads or canals) will have synergistic effects on less productive land by creating more demand for more and different commodities and by increasing the size of the market.
PART 3: Variations in the Proportion of Value between Produce
An increase in food production due to improvements in the land will lead inexorably to greater demand for all produce of land. But this does not mean that all things will go up in price for it is also likely that the supply of many different kinds of produce will go up by more than the demand. The neighborhood of the commodity is one crucial factor. If the neighborhood is small and it is improving then the value of an enterprise is also increasing in tandem. If the neighborhood is very large then the enterprise's value may rise if the whole neighborhood is also improved. If the neighborhood is the whole world, as it is with silver, then the whole world would need to be advancing before the enterprise would become more valuable.
If we consider the variations in the proportion of values of corn (which always pays a rent) and silver (which sometimes does and sometimes does not pay a rent) we see that there are three possibility.
(1) If the demand for silver increases at a greater rate than the supply then the value of silver will rise in proportion to the value of corn.
(2) If the supply of silver increases at a greater rate than the demand then the value of silver will drop in proportion to the value of corn.
(3) if the supply and demand of silver change in close proportion to the value of corn then the value of silver will remain unchanged in proportion to the value of corn.
These three cases are all the possible combinations the can occur as the land is improved and/or the society is advanced. In fact these three cases, and in the same order, have been the history of silver values over the last 400 years in Great Britain and Europe.
DIGRESSION ON THE VALUE OF SILVER OVER THE LAST 400 YEARS
In addition to a history of the prices of silver and corn, the author offers up (1) period specific reasons for the changes. (2) Explanations for the historical variation in the values of gold and silver.
As a country progresses and becomes richer the prices of raw materials will naturally change. But how the price changes is determined by the sort of commodity. The author divides all raw commodities into three categories. (1) those whose quantity cannot be increased, (2) those whose quantity can be increased in step with demand and (3) those whose quantity depends on an other factor independent of the economic progress of the nation.
In the first case, the price will rise perhaps astronomically due to an increased demand but little or no increase in supply.
In the second case, since the real measure of value is labor, prices will become cheaper, however in terms of money they will likely become more expensive up to the limit set by the sum of the average rate of wages, profit and rent in the neighborhood. The land of any country can only be fully cultivated when the price of all produce has risen to pay for improving the land so it can be cultivated. This is true when the price of each produce can (1) pay the rent of good corn land (since corn is the determiner of price of all other produce) and (2) pay the wages of labor and profits of stock as well as on good corn land. This must happen before cultivation else there would not likely be any reason to cultivate the land if the landlord, or the laborer or the stockholder could cultivate corn land instead.
In the third case the price may go up or down depending on the particular circumstances. There are some cases where the produce of land is tied up with another produce of land. For example raw hides are associated, at first inseparably, with cattle and cattle is associated with dairy and butcher's meat. However the size of these markets is different. In such cases the the demand for one produce may exceed the other. The natural limit of such cases is the same as in case two (above) but it will apply to the highest priced market which will likely lower the price of the secondary market below its natural rate.
In concluding the digression the author lambastes the notion that a nation is wealthy or poor in proportion to the plenitude or scarcity of gold or silver. An analysis that will be dealt with in greater detail in book four.
The best determiner of whether a country is rich is the low price of non-corn produce (such as cattle, poultry, etc.) in proportion to the price of corn. The low price of non-corn produce in proportion to corn shows the large abundance of non-staple food production (and hence opulence) and huge extent of the cultivation of land.
If the price of non-corn produce is great in proportion to corn, it means that there is very little of it and consequently little beyond the basics of life. Furthermore it means that the value of much uncultivated land is so low as to not be worth improving.
From the high or low money price of commodities we can only infer the fertility or barrenness of the mines that supplied that nation's money supply.
The Effects of Growth on the Real Price of Manufactured Goods
Economic progress has the effect of lowering the real price of almost all manufactured commodities. Sometimes the increase in the price of inputs may offset the decrease in manufacturing cost and raise the overall price – but this case is not as common as when the real price of inputs drops. In such a case the overall price can plummet greatly.
Conclusion
Every improvement in the wealth of a society will effect an increase in rent – that is a landlord's power to command labor. The direct improvement in the land will increase the rent directly and the rise of the price of produce will also increase the rent directly and in greater proportion. All the possible things that improve the productivity of labor will indirectly increase the rent of land. An increase in the opulence of the society will also indirectly increase the rent of the land. The reverse is also true: neglected land, lower produce prices, impoverishment of society and a reduction in the division of labor will all lower the rent of land.
The interests of the landlord are tied directly to the interests of the people and the nation. Therefore what is good for the nation is good for landlords and what is good for landlords is good for the nation. However landlords tend to be indolent probably due to the lack of mental effort needed to collect rent and are often not well informed as to what is in their best interest.
The interest of the laborer are just as much tied to the good of the nation as are the interest of landlords. Hence whatever is good for wage earners is good for the nation and vice versa. As a country grows, workers find it good but when a country slides in wealth, it is the worker who feels the greatest pain. Most laborers are so concerned with earning a living that they often do not have time to consider their best ends and the policies of government that would be directed to their and the nations best ends.
It is stock that is most commonly used to put to work the whole of the working class. But the rate of profit does not rise with the progress of the nation like rent and wages. Nor does it fall with the wealth of the nation like rent and wages. In fact profits are naturally low in rich countries; high in poor countries and highest in countries that are in ruins or going to ruin. Therefore the interests of the stockholders are not concordant with the best interests of the nation or with those of the public. Merchants and manufacturers are always engaged in planning and executing plans to make their businesses better, this skill has made them unusually adept at knowing what is in their interest. They have often convinced many that the interest of society is one with their interest. However the interest of those who live by stock is always at least slightly different from the interests of society and in many cases their interests are completely opposite to the interests of society. Merchants and manufacturers always want to expand their market and decrease their competition. The first is generally in the public interest but decreasing competition is never in the public's interest. For it raises profits beyond the natural rate – and that is like an absurd tax on the rest of society that is use to increase the profits of stockholders. For these reasons legislators should hold as very suspect any advice given by stockholders, businessmen, manufactures, merchants and dealers.
Added on: 2010-05-29 07:03:41
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