Theory of Distribution

Smith's ideas on Distribution are:- 

1. Rent:

Smith’s ideas on rent were not well formed. At some places, he is surprisingly close to the modern viewpoint on rent, at others he is hopelessly embedded in Physiocratic notions. Rent is considered as a monopoly price paid to the landlord for the use of land. It varies with fertility and situation.

Improvement in transport services tend to lower and equalize rents. Haney considers that except for the mistaken notion of the landlord as a monopolist and rent as a monopoly price, this viewpoint is allied to the modern concept of rent.

Gide and Rist, however, emphasised that Adam Smith, under the Physiocratic influence, considered rent as a gift due to the special natural powers of the soil. In manufactures, man worked without the aid of nature, hence the remuneration just covered his cost of production. In agriculture, he worked in Cooperation with nature, hence the rent of land was a special surplus available to the owner of land over and above the cost of production.

Relationship of rent and prices is not clear to Smith. His point of view shifts according to the convenience of the argument. At one place he considers rent determining price of commodities, and at another, just the opposite.

2. Wages:

Smith’s theory of wages is also confused. In fact, he had thought of practically all the theories that have been emphasised by later economists.

Generally, he talks of demand and supply of labour as the factors determining wags. The supply of labour is limited by the cost of living of workers, depending on current prices of commodities. The demand for labour is determined by the quantity of stock available, the level of national capital.

In an expanding economy, higher wages will prevail due to greater demand for labour. In a stationary economy, wages will sink below the subsistence level. Adam Smith also indicates the outlines of the Wages Fund Theory, by speaking of a “fund predestined for payment of wages”. However, he does not elaborate the idea further.

3. Profit and Interest:

Adam Smith did not clearly distinguish between profit and interest. Profit was the return on the capital. Interest was a part of profit which was to be paid to the owner for the use of the capital borrowed. In brisk business conditions, competition kept the rate of profit low, because wages were increasing. In slack conditions, the opposite happened. Wages decreased and profit went up.

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