Rent and corn
Smith possessed several elements for the development of a consistent theory of rent, but failed to use them adequately. He noted that the rent of land “is naturally a monopoly price” which “is not at all proportioned to what the landlord may have laid out upon the improvement of the land” (^A I.xi.a.5).
He also observed that “high or low rent” is not the cause but rather “the effect” of a high price of agricultural products (^A I.xi.a.8), but the arguments he put forward in explaining this proposition, which David Ricardo was later to confirm on the basis of his theory of differential rent, are not sound. Although Smith in one place referred to cost differentials in connection with rent, he failed to grasp the principle of differential rent and its underlying rationale. The main shortcoming of his theory of rent, however, was his adherence to the physiocratic idea that “rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.... It is the work of nature” (WN II.v.12). In fact, in the final analysis Smith appears to have seen the source of rent not in the “work of nature” in general, but in its “work” specifically in the production of “food” or “corn” (WN I.xi.c.8). When “the labour of half the society becomes sufficient to provide food for the whole... [the] other half... can be employed in providing other things” (WN I.xi.6-7). Also, since the “desire of food is limited in every man by the narrow capacity of the human stomach”, Smith is confident that “those, who have the command of more food than they themselves can consume, are always willing to exchange the surplus” for “conveniences and ornaments of building, dress, equipage, and household furniture” (WN I.xi.7). These passages show that the circular character of the social process of production, which had been brought out so clearly in the Tableau economique, was perceived by Smith only partially. In Smith’s Wealth of Nations circular production relations are in fact confined to the agricultural sector alone, where the products are envisaged as being produced by means of themselves as inputs. However, the agricultural sector is depicted as requiring no necessary inputs from the manufacturing sector. The latter is rather envisaged as producing more refined consumption goods and luxury commodities (“conveniences and ornaments”), using as inputs the “raw produce” and the foodstuff received from the agricultural sector. The social production process is thus envisaged as a one-way avenue or unidirectional process with a clear hierarchical structure.That Smith was, in this regard, more agrocentric than the Physiocrats can also be seen in his discussion of the natural course of development. In chapter V of book II, Smith argued that the employment of capital in the different sectors “puts into motion... different quantities of productive labour” and adds “different values... to the annual produce of the land and labour of the society” (WN II.v.37). Both with regard to the employment effects and the generation of value added he envisaged a clear sectoral hierarchy, leading from agriculture (and mining) to manufacturing and, finally, to wholesale and retail trade (see Jeck 1994). If undisturbed by (mercantilist) policy interventions, capital would therefore first be employed in the agricultural sector, thereafter in manufacturing and domestic trade, and finally in the distant foreign trade (WN III.i.2). Interestingly, it is not agriculture in general, but more specifically the production of food or “corn”, which Smith regarded as of central importance. In Smith’s thinking “corn” (as a catch-all for means of subsistence) has a special role, owing to his belief that there exists a “great and essential difference which nature has established between corn and almost every other sorts of goods” (WN IV.v.a.23): in its capacity as the principal wage good corn enters into the production of all commodities.
The special position which “corn” occupied in Smith’s thinking comes out also in his development of (some elements of) a corn-ratio theory, similar to the one put forward later by Ricardo in his Essay on Profits. This was used by Smith, however, unlike it was used later by Ricardo, not in order to determine the general rate of profits, but rather the entire surplus, shared out between profits and rents (see Vianello 2011). Smith’s argument, which seems to have provided the original stimulus for Ricardo’s later adoption of a corn-ratio theory in his Essay on Profits, is to be found in book IV of the Wealth of Nations. There, Smith maintained that “the money price of corn regulates the money price of labour” (WN IV.v.a.12). Money wages depend chiefly on the price of corn, Smith contended, because corn is the principal wage good (WN I.xi.e.29), and also because the money prices of other agricultural products that might enter into the workers’ wage basket are also regulated by it (see WN IV.v.a.13). Through its influence on the money wage and on the money prices of other agricultural products the money price of corn then also regulates the money prices of manufactures (WN IV.v.a.14). While Smith thus clearly suggested that the price of corn regulates all other prices, he did not derive from this a determining role of the agricultural rate of profits for the general rate of profits (which he rather considered to be determined by the intensity of competition in the economy as a whole).