Adam Smith on the Rentier

40 Smith pic3
(1723 – 1790)
Karl Williams’ biographical take

“Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them.”

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”

“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”

“The sea in the neighbourhood of the islands of Shetland is more than commonly abundant in fish, which make a great part of the subsistence of the inhabitants. But in order to profit by the produce of the water, they must have a habitation upon the neighbouring land. The rent of the landlord is in proportion, not to what he can make by the land, but to what he can make both by the land and water. It is partly paid in sea-fish.”

Born in a lonely corner in Scotland to a mother already widowed, he became known as the very father of capitalism and one of the most influential figures in history. Yet the man who appears on Britain’s £20 notes and who wrote The Wealth of Nations, unquestionably the most important work on economics ever written, has seen (when he floats out from his grave) both his economics and his morals become increasingly misinterpreted over the years.

After a childhood remarkable for being so unremarkable, the bright young Adam Smith won a scholarship in 1738 first to Glasgow then on to Oxford universities where he studied not economics (which didn’t exist as a discipline in Britain at this point) but moral philosophy. He returned to Glasgow in 1751 to take up a chair in logic then in moral philosophy – there’s yet little hint of the intellectual revolution he was about to unleash on the planet.

He was moderately successful, but it was only when he broadened his interests through hanging out in London and mixing with the leading intellectuals of his day that he started to come into his own, especially as a result of his subsequent travels.

So Adam Smith is the father of economics, is he? No sirree! – a group of so-called French physiocrats (led by the brilliant Francois Quesnay) had been developing a solid body of economic theory, and when Smith lived in France and Switzerland in 1764-66 his meetings with the physiocrats swept open his perspective to a societal level – that is, he began to realise how economics can provide answers to how society as a whole can live and work prosperously. And guess what? – the physiocrats were early geoists who well knew of the centrality of the rent from land as the fundamental source of public revenue.

This was the definitive intellectual turning point in Smith’s life – returning from France in 1766, he pretty much went straight back to his village to devote much of the next ten years to his magnum opus. An Inquiry Into the Nature and Causes of the Wealth of Nations (to give it its full title) was published in 1776 but it has had its thrust deliberately distorted by right-wing laissez-faire economists, so let’s set the record straight.

Firstly, Smith was a classical economist – that is, he carefully distinguished land from capital philosophically, morally and economically. The context of Smith’s declarations is not often appreciated – land tax in England had been levied in Smith’s time for a century. As his accompanying quotes bear out, Smith advocated the state collection of the rent of land and deferred to how the physiocrats regarded such a tax as the most equitable of all taxes.

Smith was indeed a free trader, but only within the context of a free and fair market. Smith forcefully criticised the major alternative to free trade at the time, mercantilism – that is, the establishment of a series of colonies (at enormous cost, he emphasised) so as to establish exploitative trade monopolies. In spite of Smith coining the term “the invisible hand” (implying the harmony of interests of market participants), Smith found many more occasions for pointing out cases of conflict and of how the narrow selfishness of human motives can distort market transactions.

Smith was certainly not an advocate of ruthless individualism – indeed, his first major work concentrated on ethics and charity. He opposed slavery and advocated decent wages for the poor. Only after his death it was discovered that this eccentric but benevolent intellectual, comically absent minded and with peculiar habits of speech and with a smile described as “inexpressible benignity”, had devoted a considerable part of his income to numerous secret acts of charity. You walked the walk, Adam, and it’s not your fault that those who concocted the wretched perversions that is nowadays called neoclassical economics have twisted some of your noble principles beyond recognition.