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Book 1, Chapter 10
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Landlords typically try to charge the highest rent their tenants can afford, which is everything the land produces, minus the tenant’s cost of subsistence. They charge rent even for infertile or unimproved land, and rent prices aren’t proportional to improvements they make to this land, so rent is a monopoly price. In other words, rent is based primarily on “what the farmer can afford to give,” which in turn depends on the demand for whatever they’re producing. This demand always exists for some products and varies for others. Thus, wages and profits determine prices, and prices determine rents.
The monopoly price is the highest price that anyone will pay for something. Since only one tenant can occupy a plot of land at a time, land always functions like a monopoly, and landlords will always charge the highest price they can get for it (or the monopoly price). As a result, the stronger the local economy and the higher the demand for land, the more landlords can charge in rent. But rent levels are always an effect of this underlying demand economic strength, never their cause. Of course, the availability of cheap, fertile land can drive economic growth by encouraging migration, as in North America. But this causes rents to rise over time.
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“Part I. Of the Produce of Land which always affords Rent.” There is always demand for food, and nearly all land produces enough food to cover wages and profits, so nearly all land yields rent. The more fertile the land and the closer it is to town, the higher its rent. But as roads and navigable waterways make it easier to bring produce to market, they decrease location-based differences in rent. This enriches both towns, which get cheaper produce, and the countryside, which gets new markets for its produce and new imported goods from town.
Landlords charge farmers whatever they can afford to pay, which is their revenue minus the wages they pay their workers and the profits they keep for themselves (at the ordinary profit rate). The trade between the town and country is mutually beneficial to both—indeed, Smith will later argue that the same principle applies to all free trade, as it brings distant places into a common market.
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Fields of grain produce more food than pasture, but they also require much more labor. Thus, in early societies, bread is more expensive than meat, but as people start to occupy and cultivate land, this flips. Land rents are tied to the land’s production potential, and cattle require vast amounts of it, so raising cattle on fertile farmland becomes very expensive. People start grazing cattle on infertile grasslands, like moors, which is why rent in some such areas in the Scottish highlands has tripled in the previous century. Farmers working on improved land can choose to produce either a lot of grain or a little beef, but pay the same rent either way, so beef prices rise correspondingly.
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Near major towns and in densely-populated countries, high demand for meat and milk sometimes makes pasture even more expensive than grainfield. Indeed, the Romans used the land around Rome chiefly for pasture, while giving the people free rations of grain imported from distant provinces. And in some grain-producing countries, enclosed pasture is particularly valuable because the harvest requires cattle. Still, in most situations, the rent and profit for grainland determines the rent and profit for pasture.
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Planting different grasses and vegetables has made pasture more efficient and reduced meat prices in London, which helps explain the strong evidence showing that beef was more expensive and grain much cheaper from 1600–1612 than from 1752–1764. Since most land is dedicated to either grain or livestock, the price of grainland and pasture is the basis for all other land rents. In other words, people will only decide to grow other produce if this is more profitable than growing grain or raising livestock. These higher profits, and the higher rents that accompany them, only reflect the much higher cost of improving or cultivating land for those other uses—like fruit gardens, enclosed kitchen gardens, and especially vineyards, which are highly profitable in France because the law restricts who can cultivate grapes.
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In some cases, there simply isn’t enough land for production of a certain crop to ever meet demand. So this land’s price is much higher than grainland or pasture, and most of this difference goes to rent. This applies to specialty French wineries because other soils cannot produce the same wines. It applies to Caribbean sugar plantations because global sugar demand is so high, and to tobacco plantations in Virginia and Maryland because they’re the only places without heavy taxes on tobacco. North American planters even restrict tobacco production to keep prices up. But if any of these land uses ever becomes less profitable than food production, farmers will turn back to grain and livestock.
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If land could produce a larger quantity of a different staple food, then its value (and rent) would rise. While rice produces much more food per acre than grains like wheat, they can’t grow in the same kind of land. But potatoes also produce more food per acre than wheat, so if large-scale potato cultivation catches on in Europe, population and rents will both increase, and the rent on potato land will start to regulate the rents on other land. Differences among English, Scottish, and Irish people suggest that potatoes are more nourishing than wheat, which is in turn better than oatmeal. But potatoes are difficult to preserve, which has limited their popularity.
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“Part II. Of the Produce of Land which sometimes does, and sometimes does not, afford Rent.” Besides food, humans’ primary needs are clothing and lodging, which both also require land. Unimproved land can satisfy these needs better than food, but it’s the opposite for improved land. For instance, North Americans clothe themselves in skins, which they have in abundance because they are a byproduct of hunting for food. It was only trade with other nations that gave economic value to these skins (and the land they come from). Similarly, England had more wool than it could possibly use, until it started trading it to Flanders.
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Lodging materials like stone and timber are harder to trade over long distances, but when they are abundant, they have no value. For instance, a stone quarry would command a high rent in London, but none in Wales and Scotland, where there is plenty of stone. Similarly, there are so many trees in North America that landlords often pay people to cut them down and haul them away. But high demand for timber in Great Britain has made European forests more valuable.
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There is usually enough clothing and lodging to support population growth, but food is the limiting factor. The division of labor enables some people to take up other occupations while others remain farmers. While all people consume similar amounts of food, the wealthiest demand more luxurious clothing, lodging, furniture, and accessories—which the poor learn to produce in exchange for food. The more food is available, the more people can be supported in these other trades. Thus, the improvement in food cultivation techniques makes land valuable enough to yield rent, and then determines how fast those rents increase.
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Other land uses cannot always yield a rent. For instance, some coal mines are too barren to be profitable, while others are too far from roads and waterways to profitably exploit. Since wood is a more agreeable fuel than coal, people only use coal when it’s cheaper than wood. Like cattle, wood starts out at a price of zero, then becomes more expensive as land gets improved and trees become scarcer.
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In the 1700s, timber is a more profitable land use than grain or livestock in many parts of Britain. Coal is comparatively cheap: at the most, it will reach the price of wood, and at the least, it will cover the cost of the wages and profit involved in mining it, with no part left over for rent. Since coal is much heavier by value than precious metals, the value of coal mines depends heavily on their location, while the value of metal mines depends mainly on their fertility. These metals get traded all around the world, so for each such metal, the cost of production at the world’s most fertile mine determines global prices.
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This global competition keeps rents very low for most mines. Data from silver mines in Peru and tin mines in Cornwall shows that these rents fall over time and confirms that, the more valuable the metal, the lower the rent. Profits are low, too. In both places, nobody would search for new ore deposits if the government didn’t guarantee them exclusive rights over a portion of whatever they discover. As for all other goods, the lowest price for silver and gold is the cost of wages plus the ordinary rate of profit on the capital required to mine and sell them. But their highest price is determined mainly by scarcity. Silver and gold may be superior to other metals for many practical uses, but they are mainly valued because they are beautiful—and because their scarcity turns them into status symbols.
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Since precious metal and gem prices are global, the rent for any single mine depends on its relative fertility, compared to the world’s best mines. If silver and gold suddenly become abundant, people won’t actually become any wealthier. But for other land, rent depends on its absolute fertility, as people actually need food, lodging, and clothing to survive. Anything that makes agriculture more efficient increases the value of all land because it enables population growth and increases overall demand. Indeed, people can only afford to worry about gold, silver, and diamonds because food has become abundant. This is why native people did not understand the Spanish lust for silver and gold.
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“Part III. Of the Variations in the Proportion between the respective Values of that Sort of Produce which always affords Rent, and of that which sometimes does and sometimes does not afford Rent.” As food grows more abundant, demand for everything else grows with population and affluence. So these other products generally become more expensive over time. But this process isn’t smooth and linear. Changes in supply, like the discovery of new silver mines, can interrupt it.
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Specifically, with the discovery of new mines, the sudden increase in supply might fast outpace the gradual long-term increase in demand, causing prices to fall. Thus, the relationship between the rate of supply and demand increase determines the direction that prices move. Prices rise if demand rises faster than supply, they fall if supply rises faster than demand, and they stay the same if supply and demand rise at the same rate. History shows that all three have happened at different times with regards to silver, and Smith will now explain how in depth.
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“Digression concerning the Variations in the Value of Silver during the Course of the Four last Centuries.” First Period. In England, a quarter-ton of wheat was worth four ounces of silver in 1350 but only two ounces by the 1600s. Edward III’s 1350 ration laws, records from a 1309 feast, and Henry III’s 1262 bread price regulations support this initial number, which was roughly equal to six shillings and eight-pence in the money of the era. This remained the standard price into the mid-1500s: an earl’s 1512 household accounts and a series of import/export laws in the 1400s confirmed this. But due to coin debasing, six shillings and eight-pence contained less and less silver over this time, settling around two ounces. French scholars found the same rise in silver prices relative to wheat.
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The price increase in silver could reflect increased demand over a period of stable supply, stable demand over a period of reduced supply, or a mixture of both. Demand for silver certainly increased: Europe grew wealthier and more stable over this period, and the amount of money in circulation rose significantly.
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Most scholars think that silver prices have fallen continually since Roman times, but they are wrong for three reasons. First, they mistake historic silver-denominated grain prices for market prices, when they were really conversion prices. Farmers used to pay rent “in kind,” by giving the landlord a portion of whatever they produced, but landlords could also choose to demand a sum of money at the conversion price instead. This system only worked if the conversion price was much less than the real value of the farmer’s produce.
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Second, ancient price records are incomplete. These records stipulate bread and ale prices, depending on the corresponding prices of wheat and barley. Instead of writing out the whole table of potential prices, scribes would generally only note down the first few prices—which were the lowest—because they knew that everyone could use that information to calculate out the higher prices as needed. But historians have often wrongly treated these partial tables as complete.
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Third, wheat prices fluctuated much more in the distant past: its lowest prices were much lower, and its highest prices much higher, than in the present. Historians have paid too much attention to these extreme prices, and too little to average ones. The price tables at the end of this chapter are not perfectly reliable, but they reflect the best available information, and they show that wheat prices fell from the 13th century to the mid-16th century, when they started to rise again. Some scholars mistakenly conclude that silver prices rose during this period by analyzing livestock prices, but it’s crucial to recall that livestock was much cheaper “in those times of poverty and barbarism.” These low livestock prices reflected not high silver prices, but rather land scarcity and thus the high cost of raising livestock in terms of human labor (which is the real measure of all commodity prices).
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Indeed, the amount of labor required to raise livestock varies significantly. In contrast, the amount of labor required to farm grain remains stable over time—improvements in farming technique may make it a bit easier, but the cost of the cattle required for those improvements rises. This is why, across different times and places, it usually takes the same amount of labor to produce the same amount of grain. This is why grain prices are historically the most accurate measure of value—including the true price of silver.
An increase in mining does cause precious metals’ prices to fall. However, when a country becomes wealthier, the amount of gold and silver in circulation increases, but so does demand for them, and so their prices rise. Merchants start transporting these metals from poorer countries to wealthier ones, where they fetch the highest prices. Due to the quantities involved, it is far easier to transport silver than to transport grain, so silver prices tend to vary less than grain prices. In rich countries like Genoa and Holland, which sustain their populations by importing grain, a fall in wealth would make silver less expensive but grain far more so. Thus, the price of superfluous goods (or luxuries) falls during times of poverty, while the price of necessities rises. And the fall in British silver prices could not have been due to Britain’s increasing wealth, but only due to increased mining.
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Second Period. Scholars unanimously agree that, from 1570–1640, silver prices fell dramatically and grain prices rose. This is clearly because of the fertile silver mines discovered in South America.
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Third Period. The price of silver hit its lowest point around 1636 and has gradually recovered since. Yet the money price of wheat actually rose slightly from 1637–1700, due to the English Civil War, massive silver coin debasing, and a policy offering incentives for grain exportation, which increased both the production and the price of wheat. French scholars confirm that silver prices rose and grain prices fell in France during the same period, even though grain exportation was prohibited. This makes it clear that what really happened in England was not that the real price of grain fell, but that the real price of silver rose.
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Indeed, throughout the 1700s, grain prices have fallen because silver has continued to rise. While grain prices are very high in the 1770s, this is mostly due to a decade of very bad weather and poor harvests, and not silver prices. In contrast, these prices were very low in the 1740s, when harvests were excellent. But they would have been even lower if the government hadn’t kept paying a bounty for exporting it. Meanwhile, during the 1700s, the money price of labor has risen in prosperous Britain but fallen in France.
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When the Spanish discovered massive silver mines in America in 1545, they initially made huge profits. But then, silver prices started to fall. The Spanish king repeatedly reduced the silver tax, and by 1636, silver approached its natural price. If the taxes went lower, or some of the mines were abandoned, the price would have fallen even lower—but the huge and constantly growing demand for silver prevented this from happening. Demand has grown fast in industrializing Europe, faster still across the Americas, and reasonably fast in Asia, where it fetches the highest price of all due to the region’s wealth, which is based on its rice agriculture. Low labor costs and extensive inland waterways make Asian manufactured goods cheaper than European ones, and so exporting silver to Asia is one of the most profitable businesses ever. This commerce builds enduring links between these disparate parts of the world.
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Much of the gold and silver that enters the market doesn’t continue circulating through it, whether due to coins wearing away, tradespeople using it in decorative arts, and even people burying their treasure and dying without recovering it. Diverse sources agree that Spain and Portugal import roughly six million pounds sterling worth of silver each year, and much also goes to Asia and stays in America. Likely, the world uses up as much silver and gold as is produced each year, preventing an increase in the total amount in circulation. Indeed, the same applies to brass and iron, even though they are mainly put to practical uses. Since metals are durable, their prices change little from year to year, even as production levels vary.
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“Variations in the Proportion between the respective Values of Gold and Silver.” By weight, gold was worth 10–12 times as much as silver before the Spanish mineral discoveries in the Americas, and 14–15 times as much by the mid-1600s. The proportion is lower in Asia, reaching as low as one to eight in Japan. There is much more silver than gold out in the world, both circulating through markets and in private possession. The total value of all the silver is higher, too.
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But gold is closer to its lowest possible price—wages plus profit, with no rent—because the Spanish king’s tax on gold is lower than his tax on silver, and these taxes are only reduced when they become impossible to pay. All mines eventually require digging deeper, so they become more expensive over time; as a result, either metals become more expensive, the taxes on them get cut, or both. Indeed, silver prices have continued to rise, even if tax reductions have kept them 10% lower than they would have been otherwise.
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Silver prices most likely rose during the 18th century, but any change was small enough to be unclear. As more gold and silver are imported, their value decreases, so the consumption of them increases. As a result, the level of consumption eventually catches up to the level of importation. Conversely, if imports fall, prices rise and consumption falls, eventually reaching the level of importation.
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“Grounds of the Suspicion that the Value of Silver still continues to decrease.” Many people wrongly think that gold and silver are decreasing in value as their quantity rises. All kinds of rude produce except grain and vegetables grow more expensive as society advances. This is not because silver prices fall but rather because that produce’s real price rises.
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“Different Effects of the Progress of Improvement upon three different Sorts of rude Produce.” Rude produce can be divided into three types: things whose supply humankind can’t increase, things whose supply it can increase, and things for which its attempts to increase supply may or may not succeed. First Sort. Nature limits the supply of things like birds, fish, and game, so as societies become wealthier, their prices tend to rise higher and higher, with no theoretical limit. This explains why wealthy Romans paid so much for rare fish and birds.
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Second Sort. Humans can always increase the production of certain crops and animals to meet demand. Nature produces some of these crops and animals, but once there is enough human demand for them, people will start deliberately cultivating and raising them. The price of such goods will never go higher than the price at which people start to dedicate more land and labor to producing them.
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The point when cattle reach this price is an important milestone for agriculture: manure makes improved agriculture possible, but feeding the cattle needed to produce enough manure is impossible unless land is dedicated to growing food for them. In America, the abundance of land makes cattle so cheap that it will take a long time to reach this point. If cattle is generally the first product to reach that point, then venison is usually the last—and poultry, pork, and dairy are intermediate. A country’s land can’t be “completely cultivated and improved” until all such livestock are expensive enough to justify producing them in the most efficient way, by dedicating land to growing the grain to feed them. Thus, people should celebrate, not despair, when their prices rise.
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Third Sort. Due to uncertainty and/or natural limits, human activity can only sometimes improve some kinds of rude produce, whose prices generally rise in line with the improvement (but not always linearly). For instance, a country’s wool and rawhide production depend on how developed the rest of its agriculture industry is. Wool and rawhide are far easier to export than meat, and in countries with less developed agriculture, they often fetch even higher prices than meat. But their prices also rise slower than meat prices. In fact, wool prices fell by about half from the 14th to 18th centuries in England, but this was mainly due to trade policy.
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Hides’ real and nominal prices generally increased from the 15th to 18th centuries, although policy made their real price slightly lower in 1776 than the 1400s. This is in part because hides are more difficult to preserve and transport than wool. In improved countries, policies that reduce wool and/or hide prices naturally raise meat prices, as farmers must cover their rent and profit for raising animals with the revenue from selling those products. But in unimproved countries, most empty land goes to raising animals anyway, and those animals’ wool and hide is more valuable than their meat. Thus, in such places, policies that reduce wool and/or hide prices simply hurt farmers and discourage land improvement, with no effect on meat prices. Fortunately, this didn’t happen in Scotland, where the union with England greatly reduced wool prices, but meat prices rose to compensate.
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In conclusion, human efforts to increase wool and hide production are both limited (as they depend on livestock numbers) and uncertain (as they depend on an international market). The same is true of fish production, which is limited by local geography. The more fish gets caught and sold, the harder it becomes to find more, and nobody yet knows if it’s possible for humans to increase fish populations. The same is true of minerals. A country’s stock of minerals depends on its purchasing power and the quality of its mines—which respectively increase and decrease the price of those minerals. The search for new mines produces uncertain results: nobody knows if the American mines are the richest in the world, or if even more fertile ones will soon be discovered. But either way, this will only affect nominal prices, not real prices.
“Conclusion of the Digression concerning the Variations in the Value of Silver.” Most scholars wrongly assume that the ancient world was poor due to the low nominal price of goods there. But actually, this just reflects the higher value of gold and silver before the discovery of the American mines—which did not seriously change the standard of living in Europe. Indeed, even though Spain and Portugal bring in all the gold and silver, they are still among the poorest countries in Europe. In contrast, low real prices for cattle, poultry, and game do reflect a country’s poverty, as they show that these products are more abundant than grain. This means that most of a country’s land is dedicated to such livestock, which in turn means that this land is unimproved.
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The nominal price of grain has increased much less than all other nominal prices since the discovery of the American mines. In fact, the evidence indicates that it was actually more expensive from 1637–1700 than 1701–1764. Ordinary people may not care whether prices have risen due to productivity improvements or falling silver prices, but this distinction is crucial to understanding a nation’s level of development and calculating public sector salaries. As a nation develops, rising meat prices may harm its poor, but not nearly as much as falling grain prices will help them.
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“Effects of the Progress of Improvement upon the real Price of Manufactures.” Manufactured goods become cheaper as a nation develops, as the efficiency benefits of new machinery and the advancing division of labor more than compensate for the growth in wages. In a few trades, like carpentry, the rising cost of raw materials more than offsets productivity gains, which causes total prices to increase over time. But in most trades, from watchmaking and locksmithing to cutlery and metalworking of all kinds, machinery has brought incredible productivity gains and price reductions to Europe in the 1600s–1700s. The clothing industry saw similar gains in the late 1400s, particularly for coarser fabrics, in part because the manufacturing process started to incorporate spinning-wheels, yarn-winding machines, and water mills, and in part because coarser fabric was a household product but fine fabric was produced by specialists in Flanders.
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“Conclusion of the Chapter.” As a society’s circumstances improve, rents rise and landlords grow more powerful. Land improvement raises the rent directly: the real value of the land’s produce increases, but not of the labor or capital required to work it, so the difference goes to rent. Manufacturing improvements raise the rent indirectly, by raising agricultural produce’s value relative to manufactured produce. And a rise in society’s wealth or level of employment also raises rents indirectly, by encouraging the more intensive cultivation of land.
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The value of a country’s annual produce gets divided into rent, wages, and profit, which respectively go to landlords, workers, and employers. These are “three great, original and constituent orders of every civilized society.” Because all improvements in production raise rents, landlords’ interests are closely tied to society’s. But landlords often don’t know this because they tend to be passive, living off the rents they collect without seriously trying to understand or improve society. Workers’ interests are also closely aligned with society’s: their wages rise when the economy is growing fast and demand for workers is high, and they suffer the most during periods of economic decline. But they are generally too busy and uninformed to join public deliberations.
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However, employers’ interests don’t align with society’s because profit rates don’t track economic growth—rather, profit rates are highest in poorer countries and lowest in richer ones. Employers tend to be the most informed and politically engaged of the three groups, but not for the sake of the public good. Rather, they deceive workers and landlords into prioritizing profit over their own interests, so they should not be trusted.
