Smith covers the topic of rent of land in chapter eleven, which is the final chapter of the first book.

In opening the chapter, he reveals that he sees the rent of land as a monopoly price:

The rent of land, therefore, considered as the price paid for the use of land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or what he can afford to take; but to what the farmer can afford to give.

As usual, let’s give an example. Let’s say that in order to produce a thousand pounds of radishes, the farmer needs to use $800 worth of labor and $2000 worth of capital, such as a hoe and a fence. Let’s say that the farming doesn’t cause any wear and tear to his capital, and that the average rate of profit is 10%. In this case, the true labor and capital cost of the year would be $1000 – $800 for labor and $200 as the opportunity cost of his capital. Since the total cost of 1,000 pounds is $1000, each pound of radishes should have a labor + capital unit cost of $1. If people would only be willing to pay $1 per pound for radishes – that is, not a single person would buy a pound of radishes for $1.01 – the landlord would not be able to charge any rent. If he tried to charge even a $100 rent, there would only be $900 left for labor and profit. Laborers will generally not work in one place when they can be better compensated in another; capitalists will generally not employ their capital in one place when they can better profit with another employment. As such, neither capital nor labor would flow to this plot of soil, and the landlord would have no one to charge rent. If there is only enough demand for a commodity paying the labor + capital costs, the rent of land will be 0 and the land will be worthless.

This is because land has a feature that capital doesn’t: fixed supply. That is, while an elevated price of coal can induce an increase in the supply of miners and an increase in the capital employed in the mines (e.g., pickaxes), it cannot bring about an increase in the number of coal mines.

So, if a market has a strong demand for coal and only a few coal mines to fulfill that demand, the price will naturally be high. It will be higher than necessary to pay both the regular wages of labor and the regular profits of stock. The difference between the market price and what is sufficient to pay wages and profit will be captured by the landlord as rent. Importantly, although a commodity’s price is determined by the average prices of labor and stock, and the amount of those resources that are required to produce the commodity, rent functions in the inverse way. It is because a commodity is valuable that rent is high and that land is valuable. What determines the price of rent is the amount of demand in the market relative to the total production capacity of land in the market. To quote Smith directly,

Rent, it is to be observed, therefore, enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit, are the causes of high or low price; high or low rent is the [result] of it. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low. But it is because its price is high or low; a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit, that it affords a high rent, or a low rent, or no rent at all.

This is the reason why cost of living is more expensive in some areas (e.g. cities) than others (e.g. rural areas). The same capital is employed to produce a toothbrush destined for the Bay Area as one destined for Montana, and the capitalist may enjoy a similar level of profit. The cost of labor will be the same in manufacturing both. However, the rent of the CVS store that sells toothbrushes in Montana will be very different than the rent of the CVS store that sells toothbrushes in the Bay Area, and this will reflect itself in the higher price. You may say that the people working in the store in the Bay Area will also have higher wages than the one in Montana, which will make the price higher. Isn’t this also though an effect of the price of land? That is, the laborer needs to be paid higher because they need to pay a higher rent to their own landlord? After all, I don’t imagine that it’s more painful to be working at a CVS in Palo Alto than in Bozeman. If land’s supply could expand (i.e. if we could somehow produce more of it in the dense areas), then it would be just as expensive to live in a city as a rural area.

Another thing that Smith points out is that a single piece of land can have multiple uses. He uses the example that in many places the same piece of land can be used to grow corn or to grow cows. In this case, the price of one commodity will have an effect on the price of the other. If it was possible to get $100 from an acre of land for growing corn, no landlord would accept $50 a year to grow cows. As such, landlords would convert their plots of land from cow farms to corn farms until these prices reached equilibrium i.e., a landlord could make just as much growing cows as corn. And this is what Smith claims has happened. In many places that hadn’t developed agriculturally yet, such as the highlands of Scotland, cows were abundant and butcher’s meat could be had for cheap. Once they had developed more, landlords realized that they could also grow corn on their lands. Since you can harvest corn once a year but cows take several years to reach maturity, and they take up the same land, the price of butcher’s meat which resolved into rent naturally grew, until the price of a pound of butcher’s meat was about ~4x the price of corn.

Before closing, let’s summarize the factors which determine the price of land. Rent is positively proportional to demand for commodities that the land can produce, and negatively proportional to the supply of other land that can produce the same commodities and to the labor and capital which must be required to produce those commodities.