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Adam Smith’s Key Ideas in ‘Off the Rent of the Land’
In this paper, I will discuss the ideas of Adam Smith in his book ‘An Inquiry into The Nature and Causes of the Wealth of Nations’, specifically, chapter 11 in the first book which is called ‘Off the Rent of the Land’. The chapter is divided into four parts: off the produce of land which affords rent, the produce of land that could afford or not, the variations in the value of the produce, and digression concerning the variations of the value of silver. In this chapter, Adam Smith talks about the factors that determine the rent of land and the types of commodities produced within that period. Moreover, he ends the chapter explaining why the value of silver varied in an unprecedented way during the last four centuries. Essentially, the issues addressed in the chapter are interrelated. The connection between the demand for a good that is produced using the land, its rent and the discrepancy between the prices of different kinds of goods form a foundation for the chapter. In the subsequent paragraphs, each part will be explained concisely.
Adam Smith views rent as the price paid for the use of land which is equivalent to the maximum amount a tenant is willing to pay. In some cases, the tenant is charged less due to the incompetence of the landlord, while sometimes tenants tend to overpay due to their naivety. Rents are valued based on the profits generated from the use of land after the production of a certain good. Even if the tenants improved the land by their own money, the landlord would charge more for rent. These characteristics of rent lead to the belief that the price of rent is considered a monopoly price (Smith, 1776, p.116). Although the production of certain goods won’t necessarily guarantee rent. While other kinds of goods insure rent after their production. These factors are what determine the rent charged by a landlord and the good produced by a farmer.
The cost of labor to maintain the production process is what determines whether the process is profitable or not. The bigger the cost of labor, the lower the profits that are generated which in return isn’t favorable for the landlord. According to Adam Smith, the landlord is merely a lazy member of society since he earns money effortlessly. Some possible ways to use the land are growing a cornfield or raising cattle. Although the labor required to keep to production process going is different between these goods, it is certainly profitable enough to provide the rent for the landlord. This would happen because the food is an essential part of human life and it will certainly continue like that.
The profits generated from these different types of uses depending on the cost of production. If the land is further, then the transportation costs will increase the price of maintaining such goods. Essentially, this affects the supply of the good, therefore demand and pricing (Smith,1776, p.120). Landlords prefer to rent the land out to a tenant who is willing to produce a profitable good using the land. This will ensure that the surplus left after paying the costs of production is enough to pay the rent. Moreover, the location of the land would affect the rent since it could either decrease or increase the incurred costs. Therefore, the food industry would always afford rent to the landlord due to the need for it for subsistence.
In part two of the chapter, Adam Smith discusses why there are some commodities that won’t always afford rent. However, due to the need for it in society, it is a must to produce such goods. For instance, the demand for clothing is inconsistent because the supply is great. This would happen due to the fact that the skin of an animal would be used for clothes (Smith, 1776, p.131). Therefore, it would sometimes leave a surplus for the landlord as opposed to being unprofitable in specific cases. This depends on the amount of labor required, population, and supply of animals. In addition to clothing, silver mines, and coal mines are considered some of the industries that generally don’t always generate necessary profits to afford rent. Although sometimes it might be very lucrative to employ labor in these industries, it doesn’t necessarily mean that this is always the case. The quantity of silver and coal produced varies according to natural resources. One mine could generate a lot more than another even if the same resources are used in the investment process.
Moreover, the complexity of the demand and supply of these commodities would make it even harder for the landlord to predict if an operation would be profitable. This means that if one day the operations were successful enough to pay rents, it doesn’t guarantee another successful day. Even if the mining process was considered a success, the demand for these types of goods would ultimately determine whether rents are afforded for the landlords or not. Also, the demand for such kinds of goods would be affected by materialistic people that already satisfied their essential needs. This demand is inherently inconsistent and varies according to the needs of a certain group of people.
The third part of the chapter is concerned with the pricing of different types of commodities whether it could afford rent or not. In essence, the need for food to sustain life would only mean that the supply of food is abundant compared to different types of goods. Therefore, the demand for food will always be there. However, what determines the price of these goods would be the supply of it and the population in society. The upper class would definitely consume more than the lower class. What determines whether the price of goods such as wheat and meat is increasing is how much the supply of it is growing compared to the population. The demand for the food would react according to these two factors. On the other hand, goods such as clothes and metals would have a higher demand if the city advanced in general. Although the supply would grow in the same way as the demand in order to satisfy the demand. This doesn’t necessarily mean that profits would be generated from the use of land for such operations.
Eventually, Adam Smith would address the topic of the discrepancy of the change in the value of silver in the last four centuries. The unprecedented change in the value of silver throughout the period between 1350 and 1770 led to a revelation regarding the causes of it. The first period between 1350 till 1570, the price of grain and silver were going down. This was followed by a period of increase in the price of grain between 1570 till 1640. Therefore, Adam Smith was trying to prove that there is a relationship between the price of grain and the value of silver. Then during the third period that is between 1640 and 1770, the price of silver increased after the civil war that causes a low production of grain. This would lead to a higher price for corn. Later on, exporters of grain were incentivized to produce more due to the increase of the reward for doing it. This was followed by an increase in the value of silver after that period. Food is considered a necessity and is strictly utilitarian. However, commodities like gold and silver have an intrinsic value that would change the demand for it accordingly. The correlation between the price of grain and the value of silver was relatively relevant back then. In spite of that, this connection would be considered obsolete in modern economic thinking.
The supply of silver would change according to the productivity of the mines or to the demand of it by wealthy people. Furthermore, the quantity of silver available in the market and the demand for it would ultimately determine the value of it in the market. Essentially, Adam Smith was trying to find a relationship between the value of silver and the highly demanded goods such as food in the economy. He was disregarding the notion that economic prosperity would increase the value of silver and gold. There is a relationship between economic growth and the prices of such goods. Nevertheless, the different factors that determine the value of silver and the prices of goods would make this correlation somewhat irrelevant. In statistics, these factors would be called unknown variables in regression models. Therefore, the complexity of the markets would lead to an overestimation in the correlation between two variables due to the unknown important factors. Nowadays, the scrutiny of different markets would require market isolations to understand the pricing in such markets. When Adam Smith discussed the value of silver in an economy, he consequentially talked about inflation, deflation and purchasing power. This part of the chapter could be divided into two parts, each one would be analyzed on a macroeconomic level and microeconomic level respectively.
In conclusion, Adam Smith indirectly emphasizes the role of supply and demand in the markets. These forces not only would determine the value of rent, but also the commodities produced using the land. This revolutionary view of the markets would transition economic thinking regarding the prices of commodities and the use of land into a whole new level of thinking. Moreover, the way the value of silver varied would also prove the complexity of the silver markets. Even though the evolution of thinking regarding this topic has led to a vast difference in perspective, the interrelatedness of markets and consumers will always be crucial for economic analysis. Adam Smith’s contributions to economic thinking will live forever, due to his broad outlook on how markets work. In chapter eleven of his book, he discussed how the goods produced using the land might afford rent. Also, how these goods would be sold through markets according to factors affecting the prices. Therefore, Adam Smith discussed the complexity of lands, goods, and markets in an economy. He studied the cost side of the prices of goods. His work built a foundation for economic thinkers to make sense of how economies and markets would work.
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