Adam Smith's Doctrine of Rent

Ricardo uses this chapter to sharpen a disagreement with Adam Smith. Smith often describes rent as a surplus that food naturally leaves after paying cultivation costs and ordinary profit. Ricardo replies that rent is not guaranteed by food's usefulness or abundance. It appears because equally sized capitals earn unequal returns on different land, or on successive applications to the same land.

Smith and Ricardo both see that a farmer must recover expenses and ordinary profit. The dispute begins after that point:

Ricardo thinks Smith moves too quickly from “food can leave a surplus” to “land must always pay rent.” A surplus above labour costs is not automatically rent because the farmer's capital must also earn the ordinary profit available elsewhere.

Imagine three equal investments in cultivation. Each costs £1,000 and must earn £200 of ordinary profit. Their harvests differ because the sites differ.

The marginal field can stay in production, but it cannot pay rent. Its £1,200 return merely replaces the investment and supplies ordinary profit. Competition for the two better fields transfers their advantages to landlords as rent.

BEST FIELD         MIDDLE FIELD       MARGINAL FIELD
£1,500             £1,350             £1,200
  - £1,200           - £1,200           - £1,200
  = £300 rent        = £150 rent        = £0 rent
                                           ^
                                           |
                                 price-regulating return

This is the chapter's anchor: the rent-free margin is not necessarily unused wasteland. It may be the last field brought into cultivation or the last dose of capital applied to an existing farm.

Ricardo's strongest example avoids the objection that every visible acre in an old country pays rent. Suppose a tenant already rents a farm and has invested £10,000. The tenant considers adding another £1,000 for drainage or extra cultivation.

The tenant adds the capital only if its return matches what £1,000 could earn elsewhere. If the landlord later demands an extra payment equal to that ordinary profit, the investment becomes uncompetitive and leaves farming. The marginal investment therefore regulates the price of produce while paying no rent.

This matters because it separates the physical farm from the economic margin. One farm can pay rent overall while its last useful investment pays none.

Smith sometimes treats wages, profit, and rent as three component parts of price. Ricardo reverses the direction for rent:

Corn must sell for enough to cover the marginal producer's expenses and ordinary profit. That producer pays no rent. Better producers sell at the same market price and receive more than their own requirement; that difference becomes rent. In Ricardo's model, high rent is therefore an effect of costly marginal production, not a cause of the high price.

Do not overgeneralise the claim. A particular lease payment is a real expense for a particular tenant. Ricardo's narrower point is about the price-regulating unit for the whole market: it is supplied without a rent charge.

Begin with two fields that can satisfy demand. Equal capital produces 100 quarters on A and 90 on B. Field B is marginal.

When demand requires Field C, the price must cover producing a quarter under C's less productive conditions. Fields A and B now enjoy larger advantages over the new margin. Rent rises from 10 to 40 quarters even though no landlord caused any field to become less fertile.

The line marks the marginal return. The vertical distance above it is the rent-bearing advantage.

The existing rent Lab makes the comparison manipulable. Change the output of the three plots and watch the marginal plot and differential rents move.

Try two experiments:

1. Make all plots equally productive. With no relative advantage, differential rent should disappear.
2. Lower the output of the weakest cultivated plot while holding the better plots steady. The margin falls and the rent gaps widen.

The Lab isolates differential fertility. Ricardo also allows situation, transport access, and successive investments on the same land to create the relevant differences. It does not model demand, price formation, leases, improvements, or ordinary profit explicitly.

Ricardo notices that Smith explains mine rents more clearly than land rents. A poor mine may cover extraction costs and ordinary profit but pay no rent. Better mines earn rent because they have advantages over the poorest mine needed to meet demand.

Ricardo argues that the same comparison must govern both. Relative productivity, not the label “agriculture” or “mining,” determines rent.

Smith suggests that a more abundant staple, such as potatoes rather than wheat, could enlarge the landlord's share. Ricardo says the immediate effect can run the other way. If the same population can be fed from less land, the worst fields are abandoned and the cultivated margin moves upward.

Population and accumulation might later expand demand enough to bring the old margin back into use. Ricardo's claim is about the mechanism and sequence: abundance does not mechanically award a larger share to landlords.

The chapter closes with another distinction. Corn can have a high money price because money itself has lost value, or it can be dear relative to manufactured goods because corn has become harder to produce.

Landlords gain from a rise in corn's relative value because their rent buys more manufactured goods. A general fall in money's purchasing power merely changes the unit in which many prices are quoted.

• A productive surplus is not automatically rent; capital must first recover costs and ordinary profit.
• The last worthwhile field or portion of capital earns ordinary profit but pays no rent.
• Better land pays rent because its return exceeds the marginal return.
• Marginal production regulates the price of raw produce, so rent follows price rather than composing it.
• Land and mines obey the same differential principle.
• Greater abundance can move cultivation away from poor land and lower rent before population catches up.
• A high money price of corn is different from a high relative value of corn.

• [ ] Can you distinguish ordinary profit from rent?
• [ ] Can you identify the rent-free margin even when an entire farm pays rent?
• [ ] Can you calculate rent as output above the marginal return?
• [ ] Can you explain why Ricardo treats rent as an effect, not a cause, of corn's price?
• [ ] Can you use the Lab to make differential rent disappear?
• [ ] Can you apply the same rule to a field and a mine?
• [ ] Can you separate a fall in money's value from a rise in corn's relative value?