Aran Patrick Murphy

Econ 407 - Paul Heyne

Adam Smith's dim view of landlords - is it justified from an economic standpoint? And…Preferring rent over ownership

Adam Smith has an insightful understanding of the benefits of division of labor (I.i,ii,iii) and of the allocative power of the price mechanism (I.xi.b.9, for example). Yet strangely he gives the impression that rent is a drain from the economic cycle of wealth production, created by the monopoly each landowner has on each parcel of land (Ixi.a.5). The implied - though not explicit - view of landlords as perhaps a parasitical element in society, if this be true of Adam Smith's views, would be contrary to his other tenets.

In the beginning of chapter 11, the rent of landlords is described as the maximum allowable "share" or cut that the landlord can exact from the toiling farmers, and although Smith goes on to great lengths to describe the factors that increase or decrease the size of the cut that (oh, heartless!) landlords may exact, he never explicitly, unless I missed something, says why there should be such a cut, or whether the cut is justifiable from an economic standpoint. With all the exactions made from the crops by the tenant's costs (labor, seed, etc.), the landlord then takes his, leaving the farmer "with the smallest share with which the tenant can content himself without being a loser, and the landlord seldom means to leave him any more." Only "the ignorance of the landlord" allows for the tenant, through unexpected variations in corn prices, to receive any more than this "smallest share."

At one point he offers what sounds like someone else's justification for rent, that rent is justified in the land improvements made by landlords. Yet in I.xi.a.2 he describes how, even in cases where landlords have made no contribution to the land by means of their own stock, they still demand rent. A good example is the Duke of Argyll, who exacted rent from the harvest of sea kelp thrown onto his rocks, though not an iota of improvement came from him. Even for the improvements made by previous tenants, out of the tenants' own toil and stock, the landlord will exact higher rents on future tennants.

In later chapters (III.ii7 and (III.iv.3) Smith ridicules the country squires, who pump great amounts into improvements (to satisfy the vanities; mazes, fountains, and gardens I suppose) on the lands immediately surrounding their manors, without improving it in worth a tenth of the amount poured into it. This is enough, I believe, to say that Adam Smith did not take an approving view of landlords or their role in the economy.

However, if one applies Smith's tenets of the productive improvements made through the division of labor, and the allocative nature of the price mechanism, to the question of land use, then one should see that landlords are under rated in Smith's eyes. Although he acknowledges that the price mechanism will help determine the use to which land is applied, he doesn't say too much about who will get to use it or how that should be determined. I would say that landlords, by looking after the size of their share, are very useful in society by selecting the tenants who will best and most profitably work their land. Also, landlords are likely to specialize in their knowledge, just as what occurs in all other fields of human endeavor, so they might develop a keener perception as to what are the most likely and profitable users and uses of their lands would be.

In my opinion landlords are merely specialists in the allocation of land resources. Their self interest requires them to be such, and thus they perform an important function in society.

Which leads me to the second part of the paper - my view of the virtues of renting over ownership. Adam Smith wrote in a time when change was not occurring so quickly as in our time, and most owners of land were in possession of it merely by virtue of birth. In light of this, the sluggishness of adaptation and the incompetence of many landlords might reasonably jade Smith against them as an element in society. Afterall, they were getting large amounts of the share for fulfilling what seemed like no worthy function. In today's largely merchant society, however, the need for specialists in land resource allocation is painfully much more clear. Consider downtown Seattle, a three-dimensional real estate market, where the placement of a retail store one story too high can mean the difference for that store between prosperity and insolvency. Specialists who hold a detailed knowledge of the rents and desirable returns actively seek out tenants who are able to pay those rents, and deliver to society that wonderful, convenient, and unique phenomena of a highrise business and shopping environment.

I propose that ownership of land, at least in high-density areas, by the people who use that land, is rarely economical from most anyone's perspective. The reasoning is this: People who own and use the same parcel of land are often sluggish in their responsiveness to changing market conditions, and are inclined to ignore price signals. For a renting tenant, increasing rents are a signal to move if revenues produced on the site are not sufficient to meet the landlord's share. For an owner/user, the rents are often confounded with profits, to paraphrase Smith, and a declining profitability may be mistakenly misunderstood as some unrelated factor affecting business. Also, personal attachment are often associated with the real estate by owners/users, and may cause business to linger at that sight needlessly rather than moving to a more suitable location.

If I were to own my own skyscraper, I might be tempted to put my own office at the very top, for egotistical reasons, while the opportunity costs might never be sought out (the office space never put on the market). However, if I were a mere renter, seeking office space, I believe I would balk at paying top-of-skyscraper rents no matter how wealthy I am. I'm just too Scotch to fork out the real value. Other misallocations might occur along similar lines, and even for a very shrewd businessman, figuring the costs would be best left to a specialist, i.e. a landlord.

Even if the counterargument of "renters don't take care of things like owners do" is put forward, I can easily forward the opulence of downtown, which is nearly 100% rented and very complexly so, as counterevidence. Property rights are extremely well delineated, so this is a relatively minor problem.

In conclusion, Smith would have done well to leave landlords alone.