Definition
Rent in Smith's vocabulary is the price paid for the use of a resource — paradigmatically land — whose supply cannot be expanded by labour or capital. Because the resource is fixed, its owner can charge whatever the next-best alternative use leaves available, without that price calling forth additional supply.
Smith distinguishes rent sharply from wages (the return to labour) and profit (the return to capital). The three together compose the price of every good, but they obey different laws. Wages and profits respond to supply and demand; rent largely does not.
Why it matters
How it works
Smith's mechanism is differential. The best land yields more produce than the worst land that is still profitable to cultivate. Competition among tenants bids the surplus from the best land up to whatever the difference between best and marginal will support. That surplus is rent, and it accrues to the landowner without the landowner contributing anything to the difference. Improvements raise the value of land; population growth raises it; new transport infrastructure raises it. In each case the gain is captured by the owner, not by the agents whose work created the conditions.
The framework generalizes far beyond agriculture. Urban land near a new transit station, electromagnetic spectrum, mineral rights, prime retail frontage, and patent monopolies all generate economic rent in the modern sense — a return that does not require the holder to replenish anything. Recognizing rent as a distinct category lets a policy designer think clearly about who is paying and who is gaining when prices in a sector rise.
Smith's policy attitude toward rent is pragmatic. He does not call for its abolition; he points out that taxes on rent fall on the owner without distorting production, because the supply of land is fixed regardless of the tax. This insight runs straight from Smith to David Ricardo to Henry George to twenty-first-century discussions of land value taxation.