Monday, April 07, 2008

Adam Smith on the Economics of Wine Making

Mike Veseth of “The Wine Economist” Blog (‘How globalisation is Reshaping the World of Wine’) writes on ‘The Father of [Wine] Economics?’ HERE:

“Adam Smith is generally regarded as the Father of Economics, even though many wrote on economic topics before him. Was he also the Father of Wine Economics?
The case for Smith’s paternity is made in the most obvious (and least likely) of places, The Wealth of Nation (1776), his most famous work. It is the obvious source because Smith wrote about everything in Wealth of Nations: history, theory, policy, even provided practical advice. It is the least likely place to look, however, because it is so little read (really read, if you know what I mean) and because people only remember the book for two thing: the Invisible Hand and the Pin Factory example of the division of labor. But there is a lot more to be found, including an early treatise on wine economics.

Adam Smith wrote a good deal about wine. This was partly because he traveled in France and learned about wine markets first hand. But it was also a fact that Britain was for centuries a wine-drinking country, as John Nye’s fine book explains, just as it is so today, with a practical interest in wine market concerns.
The foundation of Smith’s wine economics is laid out early in Wealth of Nations, Book One, Chapter 11: Of the Rent of Land. Here Smith tries to explain why some kinds of land earn more than other lands. Land suitable for viticulture earns higher rent, Smith said, and has long done so.

That the vineyard, when properly planted and brought to perfection, was the most valuable part of the farm, seems to have been an undoubted maxim in the ancient agriculture as it is in the modern through all the wine countries
But viticultural profits were constantly threatened, Smith argued. Not by nature, although this could cause bad crops, and not by high taxes, although he argued against them. The chief threat (or perceived threat) to viticultural earnings was expansion to new lands. Old vineyards, as he called them, were threatened by New Vineyards — and would seek protection from them or to prevent their development. This section reads very well today if you change Old Vineyards to Old World wine and New Vineyards to New World Wine. Certainly New World Wines (and their vineyard, cellar and marketing practices) are seen by many Old World producers as a threat to their livelihood. Adam Smith understood why Old would seek by any means to prevent development of the New. You don’t have to have a Ph.D. in economics to already know that he did not approve.

Smith wrote about terroir, too. I can’t really say that Adam Smith invented terroir, the idea of a special taste of place that winemakers strive for, but I can say that he understood its economic value. Smith wrote that: The vine is more affected by the difference in soils than any other fruit tree. From some it derives a flavour which no culture or management can equal, it is supposed, upon any other. This flavour, real or imaginary, is sometimes peculiar to the produce of a few vineyards; sometimes it extends through the greater part of a small district and sometimes through a considerable part of a large province."

I note with interest that Smith recognized terroir and doubted the reality of its existence in the same sentence (“real or imagined”). It isn’t terroir that really matters to a wine economist, I suppose, it is only that people think there is terroir. Smith wrote at length about the economics of these special wines and, because of their limited quantities, the premium prices they could command. Any modern winemaker, upon reading this section, would immediately try to create an A.V.A. to cash in on the possibility of terroir by limiting supply.
The whole quantity of such wines that is brought to market falls short of the effectual demand, or the demand of those who would be willing to pay … The whole quantity, therefore, can be disposed of to those who are willing to pay more, which necessarily raises the price above that of common wine.

A small part of this higher price … is sufficient to pay the wages of the extraordinary wages bestowed upon their cultivation, and the profits of the extraordinary stock which puts this labor in motion.

Smith’s treatment of wine is not complete - there is no discussion of cork versus screw-cap, for example, and no treatment of en primeur wine futures, but what he does say shows pretty clearly how well he understood the political economy of wine.
So, to answer the question that started this entry, is Adam Smith the Father of Wine Economics? Probably not, is my answer. His analysis in Wealth of Nations is certainly very good, but I am pretty sure that earlier economists did not ignore the wine market. The reason: because wine was so very important to economy and society from the earliest days.”

Mike Veseth has written a most interesting and informative article which shows some familiarity with Wealth Of Nations. No, I am not going to nit pick through it, not least because its author is so accurate.

I would suggest an observation that adds to the article’s value as a reference source on wine economics and Adam Smith.

Among Adam Smith’s friends in Glasgow, where Smith was both student and later, Professor, was Joseph Black, whose father was a resident Scottish wine negociant in Bordeaux. At the time, Baron Montesquieu, was active in the Bordeaux ‘parliament’. Though a Monarchist, he was the author of ‘The Spirit of the Laws’ (De l'Esprit des Lois, 1748), still a classic account of the evolution of law and the need for the constitutional ‘separation of powers’ (legislature, executive and judiciary), which operates today, if sometimes imperfectly (e.g., the UK), in secular democracies, but not in dictatorships (North Korea, Zimbabwe, Iran, and so on).

There is a direct connection between Bordeaux and Scotland and not just in the importation of wine (‘claret’), but also in Montesquieu’s ideas. Smith, among many others, used them extensively in his own writings and he translated sections of The Spirit of the Laws in articles he published in the Edinburgh Review. When he visited Bordeaux twice in 1764-66 he had introductions to several wine producers, almost certainly from his close friend, Joseph Black. Given what we know of Smith’s diligence as an observer, he would have paid close attention to wine making and its economics. He would have walked the vinyards with his pupil, the Duke of Buccleugh, and listened closely to the local experts regarding every aspect of wine growing, production and marketing.

Joseph Black was a life-long friend of Adam Smith, he became a professor of chemistry in Glasgow and later at Edinburgh, and was appointed an Executor of Adam Smith’s Will. Close contact with Joseph Black accounts for Adam Smith’s knowledge of the wine trade through regular contact and exchanges with Joseph's father and from his visits to Bordeaux - and it seems a taste for the region's finest products.

Tutors could develop interesting assignments for their students on wine economics from Mike Veseth's article, and perhaps from contacing him for further details (HERE). Michael Veseth is the Robert G. Albertson Professor of International Political Economy at the University of Puget Sound. The author of many books, including 'Globaloney: Unraveling the Myths of Globalization', Mike is currently writing a book on the global wine market.

[On Thursday I return to my house in the Bordeaux region for two months for my annual period of creative thinking.... while walking among the fields of vines around the house, I shall think of Adam Smith's visits .. Joseph Black.. Monstequieu's great work and Mike Veseth's article...]


Blogger Michael Veseth said...

Thanks very much for linking to The Wine Economist and for the additional information about Adam Smith and wine.

2:20 pm  

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