The “Corn Economy” and its Legacy

When Adam Smith wrote his landmark economic treatise, his homeland was still a largely agrarian society. Smith’s model of the economy reflects this. This corn economy depends on each year’s harvest, which can be eaten, used as livestock feed, or used as seeds for the next harvest. Therefore, each harvest is a capital stock for the next year. This capital is homogeneous, lasts only one year, and is always used completely. As a result, there is no capital structure, since all capital is the same.

In this simple world, capital is identical to output, so it can be easily valued. In such a case, the imputation problem disappears. This idea of capital as a homogeneous, self-reproducing stock was influential for both the classical economists, such as Ricardo, and more modern economists, such as Knight. It led to such fallacious ideas as the “uniform rate of profit” and the “declining rate of profit.”