Smith + Reax

The third and last part of Blogging Adam Smith is up.

And as a bonus, alert reader John Cowan sent me a bunch of comments on the first two parts that are worth sharing.  Alert reader Keith Gaughan also wrote about the health of Irish potato farmers.

Corn (30): It’s easy to underestimate just how important bread was to the diet of ordinary Britons in the 18th century.  It was like rice in China: essential to every meal, and everything else was optional. (Some bread came in the form of beer.)  Interpreting it as a proxy for the cost of living was indeed reasonable for the times.

Supply and demand curves (46):  I don’t think that knowledge of analytic geometry was very widely diffused in 1776, and the familiar supply-demand graph doesn’t appear until 1890.  (By the way, have you ever seen such a graph with actual labels on it? That tells you something.)

Trade secrets (50):  Smith’s right, these are more like capital than labor.  The essence of labor is that you have to keep doing it over and over: yesterday’s dish-washing won’t get tomorrow’s plates clean. But a trade secret keeps on working for you until it stops being a secret, as a factory does until its machines wear out.

Wages in BNA (59):  They were high because rents were low, and rents were low because, as you say later, people had a huge free gift of land to absorb.  When rents are low, capital and labor don’t really compete for the distribution pool, and you get both high wages and
high profits.

Other uses of land (135): If everyone is growing olives, that’s probably because it’s the “highest and best use” of the land, which in the case of olives typically means it’s almost worthless for anything else.  In general, non-essential crops get squeezed into land that isn’t good for staples.

Feeding the poor (140):  Potatoes and cow’s milk are pretty much a complete diet, which is how Ireland’s population octupled after potatoes were introduced from the New World, displacing millet and other low-yield grains that were all that would grow in the peaty
soil.  So Smith may well have been right: the Irish poor were healthier.

Proportion of rent (178):  Actually, the proportion of rent in modern economies is huge and mostly unacknowledged.  If you buy land, all you are doing is giving the previous owner the net present value of an infinite stream of rent payments on the land, all in one lump.  (If
there are buildings or other improvements, like standing crops, you pay for them as capital.)

You then end up mortgaging the property, which means that the bank is getting the rent stream that the landlord would get in a more traditional tenancy relationship.  If you pay off the mortgage, the land rent then becomes “imputed income” that you pay yourself, in the
same way that when you work as an independent contractor you are both capitalist and laborer and pay your own wages — except that nobody accounts for it as such, hence “unacknowledged”.  The blurring of the land/capital distinction by 20th-century economists only makes avoidance of this subject easier.

What Smith and almost all his successors missed is the ever-growing importance of rent in city land; they only think of it in agricultural terms, though London and a few other cities mostly had rented houses at this point.  To give a modern example, the building I live in and
its land were seized by New York City in the 1960s for non-payment of taxes, and never sold to anyone; the land is leased directly to a non-profit maintenance company at $1/year or something.  (The city finds this a better deal than collecting rent and doing maintenance itself.)

Since then, the building has been almost entirely rebuilt, so the $500/month “rent” I pay is really maintenance, which is upkeep on capital (the building) and the labor that upkeep requires, plus contributions to a “prudent reserve”.  As such, it’s about 1/6 of what
comparable privately owned apartments rent for in the immediate neighborhood.  Huge, eh?

Poking about a bit, I find that a plot of vacant land 260 feet by 50 feet, less than a third of an acre, was on offer recently in a somewhat similar neighborhood (historically poor but now up-and-coming again) for a cool $3.2 million (the actual price is confidential, of
course).  That is the importance of rent in the modern economy. Rich companies tend to stay that way because of their direct and indirect real-estate (i.e. rent) investments.

Treasure trove (194): The motivation for reporting it used to be punitive: coroners held inquests to determine who was, or might be, the finder of treasure, “and that may be well perceived where one liveth riotously and have done so of long time”.  Concealment of
treasure was punishable by fine or imprisonment.  (Coroners used to deal with all kinds of Crown rights, hence their name.)  In addition, the royal right was often franchised to locals.  Nowadays finders who report discoveries promptly to the Treasury (ha!) are paid, which encourages them to do so, but the right is still the Queen’s.

Bankers’ patience (216): Nowadays, of course, bankers have become impatient again, and recapitalize their loans as fast as they can. It’s hard to realize that when you buy dinner on a credit card, the bank is making an investment loan, but it is.  This kind of thinking is what led to the mortgage crisis.