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Book 1, Chapter 10
Themes
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.
Themes
“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.
Themes
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.
Smith analyzes how different stages of development, or degrees of advancement in the division of labor, affect the price and use of land. Bread is more expensive than meat in early societies because people have not yet come together and organized to farm the available land. Once they do, rents increase, until they push animal husbandry out to land that cannot be farmed (like the Scottish highlands). In this way, agricultural improvements have a ripple effect: as some farmers implement more efficient methods, this raises rents on the surrounding area. The market thus pressures farmers to use their land in the most efficient way possible.
Themes
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.
Animal products are perishable, so the need to bring them to market quickly can more than counteract their relatively inefficient land use. Of course, modern technology has fundamentally altered these dynamics. Today it’s possible to preserve and transport nearly all agricultural products over long distances, including meat and dairy.
Themes
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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.
The fall in London beef prices reflects more efficient meat production, while the rise in London grain prices reflects massively increased rent prices. Contemporary readers must take Smith’s argument about grain and livestock being the base of the economy with a grain of salt: his analysis applies above all to the land use and consumption patterns that were widespread in Europe in his era. While these patterns are still typical around the world, societies that depend on large-scale nomadic herding, fishing, irrigation, or hunting for their food supplies have different fundamental economic dynamics. (For instance, in desert societies that depend on irrigation from rivers, the price of water may be more important than the price of land.) Like most European thinkers of his time, Smith treats all these other systems as primitive alternatives to European civilization, but contemporary social scientists no longer take that line of thought seriously. Moreover, in the 21st century, our food system is increasingly global, not national. Still, Smith’s more general principle still applies: the cost of producing food regulates the price of land.
Themes
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.
Wine naturally functions like a monopoly, raising prices to the highest anyone will pay, because of terroir—or the unique geographic conditions that make each producer different from the next. But the high value of French vineyards translates into elevated rents, not elevated profits, because landlords always charge the highest rent farmers can afford to pay. If a winemaker tries to keep more of their revenue in profit, the landlord will simply rent to someone else, who is willing to keep less. In contrast, Caribbean sugar functions like a monopoly because of market conditions, and American tobacco because of its legal advantages.
Themes
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.
In addition to successfully predicting the trajectory of European agriculture and diets, Smith’s analysis of potato production reflects the way colonization transformed life in Europe by giving it access to new crops. Of course, 21st century readers will likely associate Irish potato farming with the potato famine, which occurred about 70 years after Smith published The Wealth of Nations. This should remind us that Smith fails to take another key dimension of the problem into account: the agricultural methods that are most efficient in the short term can actually deplete the land, transform people’s health, and trigger food insecurity in the long term. In summary, reading Smith in the 21st century, with the benefit of hindsight, can help us to separate the principles that do serve as universal economic truths from those that merely reflect the conditions of life and prejudices of learned people in the 18th century.
Themes
“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.
Land used to grow food always affords rent because it always produces an economic surplus, but land used for animals, non-food crops, building materials, or housing only produces such a surplus when demand for them exceeds supply. This tends to happen as agriculture spreads, so less and less land remains for these other uses. Note that a rise in fur, clothing, or housing prices does not necessarily mean that fewer people can access those goods (as it tends to in the present day). Rather, these price increases drive production increases, and they generally accompany a rising standard of living across society as a whole.
Themes
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.
Herding land and furs are much like stone, timber, and the land that produces them in that they only become valuable once they are scarce. Indeed, the example from North America shows that it’s possible to have too much of such goods, to the point that they hinder human economic development. The way that demand from England can drive timber price increases in Europe also shows how free trade integrates different markets into a larger, unified whole—which enables each country to sell whatever it produces best to other countries. Book IV will focus on how this happens on a global scale.
Themes
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.
Smith explains why growth in agriculture is the foundation for development in the whole economy: people can only afford to switch from farming to other professions once a nation produces more than enough food for all its people. And they only choose to do so once some people have amassed enough wealth to be able to buy other goods. In turn, the more efficient agriculture becomes, the fewer people have to farm in order to feed everyone. This is why the wealthiest countries tend to have the smallest proportion of their population working in agriculture (even after controlling for food imports).
Themes
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.
Much of the world’s land—like deserts, ice caps, and inaccessible tracts of mountain and rainforest—is still empty and worthless to people today. But, as Smith points out, new technologies and infrastructure development could always change this. Indeed, while coal is still cheap and widespread today, other energy sources have largely displaced it due to significant technological advances.
Themes
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.
Rent for coal mines is cheap in part because the land is typically good for little else. If it could be used for agriculture and thus yield a rent, landlords would rent to farmers instead. The difference between coal markets and gold and silver markets comes down to transportation costs, which raise coal prices in proportion to distance from the mine (and make it unprofitable to trade coal internationally). This is similar to the way that perishability makes meat and dairy markets more localized than grain markets.(That is one of the main reasons that humans use those precious metals for money, and to store value in bullion.)
Themes
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.
Once again, the larger the market, the more competitive it becomes. Producers drop their profit rates to lower prices and attract customers until it reaches the lowest profit rate they will accept. The same principle affects landlords, too: mining companies set up wherever local rents are the lowest. This is why Spain conquered Peru (to eliminate rents) and enslaved its people (to eliminate wages). Of course, the same dynamics explain colonialism and slavery more broadly over the last several centuries, as well as the global mining industry’s extreme brutality today.
Themes
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.
While people value most commodities for their use-value, they value gold and silver primarily for their exchange-value as money. Thus, there can never truly be a shortage of gold or silver money, in the way there can be a shortage of food, timber, or stone. Increasing the money supply—the amount of gold and silver in circulation—would not make people any wealthier. It would raise the price of everything in terms of money (nominal prices), but not in terms of labor (real prices).
Themes
“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.
Smith now brings together his insights from the first two parts of this chapter: food “always affords Rent,” while other produce “sometimes does and sometimes does not.” He has already established that grain prices offer the best approximation of real prices, since grain is the foundation of the food supply and the amount of labor required to produce it changes little across time and place. Thus, analyzing the relationship between grain prices and other prices over time will allow Smith to show whether nominal prices, real prices, or both are changing. Changes in grain prices reflect nominal price changes across the whole economy (which are driven by changes in the money supply). It is only after correcting for these nominal price fluctuations that we can truly understand how the real prices of other goods change over time.
Themes
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.
Prices depend on the relationship between supply and demand, so it’s only logical that price changes depend on how supply and demand change over time, too. In this passage and the long digression that follows, Smith discusses these changes with regard to gold and silver. He is explaining what we would now call inflation: a massive increase in the money supply raises nominal prices, putting financial pressure on people without making them any wealthier in real terms.
Themes
“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.
This long digression may seem unnecessarily detailed and irrelevant to the present day, and readers certainly do not need to remember the specific wheat prices Smith lists here. However, it is essential to grasp Smith’s argument, at least in general terms, because the data he presents here serve as the foundation for his critique of mercantilism—and explain why his thinking has been so influential in modern economic history. In brief, the “first period” is when silver prices rose until the late 1500s, as Smith outlines here. The “second period” is when they collapsed from roughly 1570–1640, and the “third period” is when they recovered from 1640 to the 1770s (when Smith was writing). This history shows that changes in the money supply create inflation, not new wealth, which means that mercantilists are wrong to try and hoard as much money as possible (instead of letting it circulate). All of this will become clearer over the course of the work, particularly in Book IV.
Themes
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.
Smith emphasizes that the increased demand for silver was the result of Europe growing wealthier, and not the cause. While this demand would certainly drive more people to mine silver, the subsequent mining would have little economic effect. Indeed, if the silver supply hadn’t increased at all, it would have simply become more valuable and the economy would have gone on functioning as normal, albeit with lower nominal prices. This is what makes money special—and the mercantilists wrong about it.
Themes
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.
Smith’s analysis of historical silver price calculations suggests that records overvalued silver, which means that its price probably has not fallen. This is easier to illustrate with numbers. If one ton of wheat was really worth three ounces of silver, but the conversion price was two ounces, records would indicate that an ounce of silver was worth half a ton of wheat, when it was really worth a third of a ton. In this way, they overvalued it.
Themes
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.
Smith suggests that historians confused the lowest entries in a price conversion table for actual prices. Once again, underestimating something’s price in terms of silver amounts to overestimating the value of that silver. This discrepancy reflects the difficulty of conducting accurate research in economic history—as well as showing Smith’s commitment to grounding his theory in the best available data.
Themes
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).
Smith’s data show that wheat prices were falling, which means that silver prices were rising. (In theory, this could also mean that agriculture became more effective and wheat became more abundant, but he will shortly explain why this is not the case.) He has already explained that animal products become more expensive over time because nations transition their fertile lands from grazing to agriculture as they develop. Thus, rising livestock prices simply reflect economic development, and not any reduction in the value of silver. Overall, then, Smith’s data for the “first period” clearly indicate that silver prices gradually rose from the 13th through 16th centuries, as demand for silver increased faster than the supply of silver.
Themes
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.
This analysis confirms why grain is the best proxy for measuring the value of human labor. To this end, whereas Smith will talk about nominal prices in terms of silver, he will present real prices in terms of grain. Of course, this principle has arguably changed in the last century, particularly as new agricultural techniques and the Green Revolution have dramatically improved crop yields (and increasingly led these yields to diverge between wealthier and poorer countries).
Themes
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.
This discussion sets up and foreshadows the more in-depth critique of mercantilism that Smith develops later on. He points out that real gold and silver prices depend on supply and demand, just like all other prices. They also tend to drift toward an equilibrium market price within each country, because as he shows here, merchants can easily supply gold and silver to wherever demand starts to rise. The opposite could happen in rich merchant countries like Genoa and Holland, which (like the countries of the Global North today) can afford to import most of their necessities, but would see their access to these imports change dramatically if the price of silver changed. This is similar to how exchange rate fluctuations can make imports dramatically cheaper or more expensive in the world today. Thus, only major shifts in the global gold and silver supply will significantly affect silver prices.
Themes
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.
Smith only briefly describes the second period not because it’s insignificant, but rather because the data about it are relatively cut-and-dry. In fact, this second period offers the clearest proof of Smith’s argument that an increased silver supply just lowers silver prices, without enriching anyone.
Themes
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.
Silver prices presumably started rising again because demand finally caught up to the new, higher levels of silver production in South America (or because that level of production dropped off). France’s data unambiguously show that only recovering silver prices could have brought grain prices down, but England’s data are more complicated. War creates both food and labor shortages, wheat export incentives would create wheat shortages at home, and coin debasing would make silver coins less valuable. All of these would increase the nominal price of grain, and apparently they did so enough to more than offset the rising price of silver throughout the world.
Themes
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.
Smith focuses on separating the general long-term principle of falling wheat prices from the way unpredictable natural events inevitably lead to shorter-term fluctuations in those prices. Rising silver prices will generally make the nominal price of everything else fall, so rising nominal wages in Britain mean that the economy is growing fast and ordinary people are seeing their fortunes improve significantly. In contrast, the fall in nominal wages in France indicates that real wages are not rising fast enough to compensate for the simultaneous rise in silver prices.
Themes
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.
The discovery of the American mines explains why the second period, in which silver prices fell, started around 1570. Much like rents, taxes depend on how much producers can afford to pay. If the king was forced to cut taxes, then, this means that the Spanish-controlled silver mines were becoming less and less profitable. To some extent, this could be because they grew less fertile, but it was mainly because the price of silver fell too low. This passage can also help readers overcome two common misconceptions about the early modern world. First, we tend to think of the European discovery and conquest of the New World as the source of great wealth and power, but actually, it occasioned something of an economic crisis in Europe. Second, in Smith’s time Asia was still far wealthier than Europe. This would change rapidly in the years after he published this book, largely due to the Industrial Revolution.
Themes
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.
Once the global supply of these metals stabilized, their prices would come to depend primarily on changes in demand. This explains why silver prices recovered from the mid-17th century onwards. Indeed, the fixed overall money supply helps explain the appeal of mercantilism—the policy of accumulating as much gold and silver as possible within a nation’s borders. Specifically, mercantilism confuses expanding the proportion of the world’s gold and silver that a nation controls with true wealth (which is really about the way money circulates and gets exchanged for goods and services.)
Themes
“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.
The proportional value of gold and silver reflects the relative difficulty of obtaining them, and thus approximates their relative abundance. Thus, when Spanish mining flooded the global market with silver, the same amount of gold started buying more silver than before. These market dynamics again show that it is all too easy to confuse money and wealth: increasing the supply of silver didn’t make people much wealthier, but rather just changed the exchange rate.
Themes
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.
The king’s mining taxes function just like rent, as they take up as much mining revenue as they can, excepting the portion that remains to cover prevailing wages for workers and average profit rates for their employers. The crucial difference is that rents tend to increase over time because of the growing demand for land in a developing economy, while mining taxes tend to fall over time because mining gets more expensive and less profitable as the most easily-accessible mineral stores get used up.
Themes
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.
Smith explains the theory behind why changes in the money supply can alter nominal prices, not a country’s true overall level of wealth. Namely, demand always catches up to supply: people will buy up all of the available gold and silver at whatever price they can get. But since money’s function is to be exchanged for goods and services, and the availability of money doesn’t truly change the availability of goods and services in an economy, increasing the total money supply doesn’t truly boost the economy.
Themes
“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.
People often correctly understand how supply shifts affect the economy, but they forget that rising demand can outpace it. This is how prices can grow even as supply increases. For much rude produce, the real price—the cost of the labor required to secure it—tends to rise over time because other sectors of the economy see faster efficiency gains than rude produce extraction. Thus, the opportunity cost of using labor to extract rude produce becomes higher.
Themes
“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.
Demand for all kinds of goods tends to increase as economies develop, but trends in supply can vary. Human activity sometimes can and sometimes cannot encourage the extraction of rude produce (or materials that humankind takes directly from nature). The first kind of goods, which Smith describes here, simply get rarer and rarer as people extract them because we cannot create (or cause nature to create) more of them. Today, we know how to farm fish and game, but we also know about many more hard ecological limits that make our current levels of consumption unsustainable.
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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.
Humans can scale up conventional agriculture in a way they historically couldn’t do to fishing or hunting. This agriculture may not see the same degree of productivity gains as manufacturing, but it still allows suppliers to scale up production in response to demand. As a result, the price of such produce tends to stay reasonably close to the natural price.
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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.
Investing in cattle is essentially a form of land improvement, because it generates fertilizer. But this investment isn’t worth it until there’s enough pressure on a nation’s food system that it needs to actively improve its farming techniques in order to sustainably feed its population. For Smith, the ideal of “completely cultivated and improved” land is crucial because it means that a country has maxed out its agricultural potential and can support as many people as possible. He will soon explain why agriculture is always the foundation of the economy, and so land improvement is the best way for a country to invest its resources if it wants to grow economically.
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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.
Wool, hide, and meat production may tend to rise and fall in parallel, but the natural size of the market for each product differs due to perishability and the ease of transportation. In Smith’s time, long before modern refrigeration, only local producers could satisfy demand for meat, so high demand in a city required converting expensive nearby land to raising animals. In contrast, wealthy cities could import wool and hides from afar, which kept down prices for those goods.
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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.
Smith emphasizes that, because farmers’ revenue depends on the sum their of meat, wool, and hide sales, government policy cannot target one of these products without also affecting the other two. The distinction between improved and unimproved countries essentially refers to whether land is an in-demand commodity that farmers have to pay market rents for, or whether there is significant unused land that farmers can cultivate for cheap (and animals can graze on rent-free). The 1707 union between England and Scotland reduced wool prices because of the massive sheep flocks in sparsely-populated Scotland. This is an example of how free trade can improve life for everyone. As Smith pointed out above, it’s actually beneficial that this policy raised meat prices, as higher meat prices push agriculture toward efficiency improvements.
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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.
It is risky to invest in this final category of rude produce—things whose development humans sometimes can and sometimes cannot promote—because there is no guarantee that this investment will pay off. Smith emphasizes that this category is quite varied, and different goods can enter and exit it over time. For instance, we know much more about managing fish stocks and detecting minerals today than in Smith’s era, and we can even manufacture synthetic cloth and fur. By noting the unpredictability of finding new silver and gold mines, while emphasizing that these metals only change nominal prices (not real ones), Smith continues subtly building the case against mercantilism, which he will present in full in Book IV. For the record, humanity has continued discovering new silver and gold mines, but never with the speed and magnitude as the Spanish did during the conquest of the New World.
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“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.
Smith once again emphasizes that, contrary to popular belief, obtaining more gold and silver does not necessarily make a country rich. It changes nominal prices, but not real ones. It would have absolutely zero effect if the gold and silver market were not global; because they are global, countries like Spain and Portugal can buy foreign goods with their precious metals, but only at the cost of watching those metals rapidly lose their value. True national wealth depends on how much a country produces, and so land improvement is the single best thing a government can promote if it wants to enrich its people.
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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.
If productivity improvements are driving gradual grain price increases, then this means that a nation is improving its land and developing economically. But if silver prices are driving them, then this says nothing about a nation’s level or direction of economic development. It may seem counterintuitive that meat gets more expensive as societies develop, as we often associate meat consumption with affluence today. But the contemporary meat industry is largely global, differences in income are wider than differences in meat prices, and developed countries have invested massively in more efficient, industrial agriculture methods to produce as much meat as possible, as cheaply as possible.
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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.
Smith is describing many of the innovations that are now viewed as the earliest stages in the Industrial Revolution. While he would not live to see industrialization revolutionize modern life, his instincts about manufacturing generally hold true today. Thanks to improved production techniques, watches, locks, metal utensils, and all sorts of clothing are no longer luxuries. Construction remains a notable exception, as it still hasn’t been mechanized in most of the world. Indeed, between the cost of labor, materials, and land, housing costs are still generally proportional to income around the world, while the cost of manufactured goods is not.
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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.
In closing, Smith returns to this chapter’s original theme: how rents vary with economic development. He has shown that land used for grain and vegetables can always yield rents, while land used foranimals, mining, timber, and other construction materials only sometimes does. The long digression on silver prices showed that grain doesn’t actually get more expensive over time, in real terms. And Smith’s taxonomy of rude produce (the kinds that human effort can, can’t, and can only sometimes increase) indicates how the value of the underlying land used to generate that rude produce will vary over time, too. He concludes by bringing all of these insights together and analyzing how a society’s rents are likely to change over time. One clear principle stands out: economic development raises rents across the board. As a society’s agriculture and labor become more productive, its land values rise, and landlords can demand higher rents. This is why the most economically vibrant places continue to have the highest rents today.
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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.
Smith’s three-part economic model is the basis for his analysis of class tensions, economic development patterns, and government policy throughout the rest of this work. He depicts landlords as benefitting from their societies’ overall economic success, without having to make any effort of their own, and his greatest sympathies clearly lie with workers. Again, this runs contrary to the caricature of Smith most often cited in economic and policy discussions today. While landlords and workers all benefit from the same forces that grow a nation’s economy in general, this doesn’t mean that their political interests are always aligned—or that they will organize together to push society toward better outcomes.
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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.
Readers interested in Smith’s modern legacy should pay close attention to his warning about business owners, who play an essential role in the economy’s functioning but also do best when the economy is worse for everyone else. In particular, they rig the rules of the economy by buying out politicians and establishing monopolies. Contemporary writers and economists who equate the “free market” with a lack of corporate regulation often severely misread Smith on this point. Smith did not think that wealthy employers should be free to do whatever they want, but rather that the government should regulate them in order to keep their firms in a state of fair competition.
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