II. Adam Smith and the Vineyard

Typical studies in the history of economic thought begin their coverage in earnest with classical economic ideas, starting with Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations.Footnote ¹ In addition to being considered the first of the modern free-market economists, Adam Smith has also been called the “father of wine economics” (Veseth, Reference Veseth2008). Veseth cites several passages from The Wealth of Nations concerning economic theory and wine economics. On the value of the vineyard, he points to Smith's statement that land used for growing wine grapes attracts the highest rent: “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 antient agriculture as it is in the modern through all the wine countries” (Smith, 1981, p. 170). Smith cites Lucius Junius Moderatus Columella as his source for this “maxim.” Columella, a Roman agriculturalist during the first century, “decides, like a true lover of all curious cultivation, in favour of the vineyard, and endeavours to show, by a comparison of the profit and expence, that it was a most advantageous improvement” (p. 170, referring to Columella's analysis in De Re Rustica, iii, 3). Here, nearly 2,000 years ago, is a cost-benefit analysis linking the price of wine to the value of land. And, because the price of wine leads to the highest rent, the value of vineyards might be considered price determined—that is, the price of land is derived from the price of wine (the possible reasons given by Smith for wine's relatively high price are discussed below).

In tracing the history of the value of land, Columella was not the first to note the value of the vineyard. Marcus Cato (Cato the Elder), in his De Agri Cultura (On Farming) (1913), written in around 200 b.c.e. and what is said to be the oldest surviving work of Latin prose, noted the same. “If you ask me what is the best kind of farm, I should say: a hundred iugera of land [two-thirds of an acre], comprising all sorts of soils, and in a good situation; a vineyard comes first if it produces bountifully wine of a good quality; second, a watered garden; third, an osier-bed; fourth, an oliveyard; fifth, a meadow; sixth, grain land; seventh, a wood lot; eighth, an arbustum [tree plantation]; ninth, a mast grove [feed grain]” (Cato, Reference Cato and Farmer1913, p. 27). Cato continues later with discussions of the economic calculations needed to profitably manage the farm, store wine, and price wine, along with detailed instructions for wine production.

In fact, the precedent for much of modern economic thought might be traced to the ancient Greek and Roman thinkers, as Smith notes, and there is some evidence that wine was the subject of economic analysis even before this. For example, Columella cites a Carthaginian (Phoenician) writer named Mago from 350 b.c.e. whose works did not survive but were apparently well known to Cato and Columella and from which economic theory was likely gleaned. Columella notes that his contemporaries should: “[pay] greatest reverence to the Carthaginian Mago as the father of husbandry, inasmuch as his twenty-eight memorable volumes were translated into the Latin tongue by senatorial decree” (Columella, Reference Columella1960, p. 35).

Even earlier evidence of the economic importance of wine and its price can be found in several of the laws documented in the Code of Hammurabi (circa 1750 b.c.e.). Section 108 of the Code, for example, notes, “If a (feminine) tavern-keeper does not accept corn according to gross weight in payment of drink, but takes money, and the price of the drink is less than that of the corn, she shall be convicted and thrown into the water” (King, n.d.). Wine, at that early date, was valued at least as highly as the amount a merchant was expected to accept for the wine in a quantity of corn (or grain)Footnote ²—although it is not clear what these quantities were. This is not the only time in the history of economic thought that the value of wine is mentioned alongside the value of grain, another crucial crop (as well as one of the determinants of the value of land). It is also interesting to note that the wine merchants referenced in this and other laws were women—who were participating in the labor force long ago.

III. Of Prices and Profits

Whether relatively higher prices for wine, especially quality wine, noted by Adam Smith and others were the result of demand or supply factors, or both, was left open by Smith, who did not say much overall about the interaction of supply and demand. However, Smith (expanding on another Veseth citation of Smith) wrote:

Here, Smith is tying the relatively higher equilibrium prices for wine, and the resulting profits (and rents) derived in the vineyard, to either consumer tastes and incomes that enable higher demand or to limited supply.

Smith provides several explanations for wine's scarcity and subsequent producer and landlord profits and rent.Footnote ³ One is based on nature, where certain high-quality wines grow only in specific and limited terroirs or soils, resulting in shortages and higher prices. Another is that some vineyards receive extensive additional cultivation and care, with higher expenses that are passed on in higher prices—although he surmises that the additional care in the vineyard is likely the result of higher prices, not their cause. As another explanation, and consistent with laissez faire, Smith notes “another opinion, that this superior profit [in wine production] can last no longer than the laws which at present restrain the free cultivation of the vine” (1981, p. 171). Smith here links wine's scarcity to legal restrictions on the planting of new vineyards in France, under the guise of the need for additional corn and pasture to feed the population and due to what he implies is a fake claim of a “superabundance” of wine. That is, high vineyard values, wine prices, profits, and rent are the result of monopolistic practices—and these results would be more consistent with those of other agricultural products should free competition prevail.Footnote ⁴ This advocacy for limits on vineyard acreage is nothing new. In fact, Roman wine merchants, “[t]o put a stop to Gallic wine imports they claimed to the government in Rome that vineyard plantings in the provinces led to neglect of grain production. … Responding to the merchants, Emperor Domitian issued an edict in a.d. 92 ordering immediate reduction of vineyard acreage in the provinces: vineyards throughout the empire were to be uprooted and new plantings halted” (Pellechia, Reference Pellechia2006, p. 57). This, of course, increased the prices that merchants received for their wines.

Wine, though, may not have always had above average prices or extraordinary profits or value. Aristotle (384–322 b.c.e.), for example, did not indicate that wine sales led to unusual profits or monetary gains (Aristotle condemned profits). Aristotle's important contribution to economic analysis is the use of money in exchange (Landreth & Colander, Reference Landreth and Colander2002, pp. 31–32). As Joseph Schumpeter (Reference Schumpeter1954) said in his History of Economic Analysis, “Aristotle's theory of money is a theory in the ordinary sense of the term … and [h]e bequeasted it to the whole line of thinkers that descends from him. … And it survived, in spots, until today” (pp. 63–64).Footnote ⁵ And wine played a role in descriptions of the use of money. People, wrote Aristotle, “exchange with one another the necessaries of life and nothing more; giving and receiving wine, for example, in exchange for coin, and the like. This sort of barter is not part of the wealth-getting art and is not contrary to nature, but is needed for the satisfaction of men's natural wants” (Aristotle, 350 B.C.E., part IX). Wine, it seems, was an ordinary part of life.

Interestingly, this thought by Aristotle concerning money and wealth, which he posited in terms of wine, predicts a distinction (and sometimes confusion) between value in use and value in exchange that appear much later in classical and occasionally neoclassical economic thought. Karl Marx, for example, echoes Aristotle when he declares that the exchange of goods for use value does not enrich the capitalist and that money used to facilitate trade between two parties is neutral. Yet goods produced for exchange value would enrich capitalists. This relationship between use and exchange values and prices was not fully resolved by Smith or Ricardo, with their emphasis on total utility; the neoclassical economists and the marginal utility school of thought subsequently helped clarify the link between them.

It is not surprising that Aristotle should use wine as a common everyday good useful for describing economic concepts. Tarrant (Reference Tarrant and Allhoff2008) notes, “Homer's work, at the beginning of European literature, seems to presuppose a great many things about wine. To begin with, it was an ordinary part of life, made from a common plant, and often safer to drink than water” (p. 15). Standage traces the commercialization and widespread availability of wine to the start of the Greek civilization, when wine became “plentiful enough to be widely affordable because the climate and terrain of the Greek islands and mainland were ideal for viticulture” (2005, p. 53)—although one's position in society determined the quality of the wine that one drank. Earlier, wine was too expensive for all but the wealthy; one estimate placed the price of wine at 10 times the price of beer in ancient Mesopotamia (circa 870 b.c.e.) because of the high costs of transporting wine from favorable growing regions (Standage, 2006, p. 45). Standage's description of the elaborate rituals involving wine at the Greek symposion, or drinking party, where democratic arguments about all aspects of life and society were debated, indicates that wine was central in the development of economic, as well as political, legal, scientific, and philosophical thought (pp. 56–66).

IV. David Ricardo, Mercantilism, and Wine

David Ricardo's demonstration of the gains from trade that result from his theory of comparative advantage is well known. He illustrated this using the example of the trade of cloth or other merchandise from England for Portuguese wine. England had a comparative advantage in cloth, Portugal in wine, and both gained from trade. Asking why Ricardo chose wine, and why Portuguese wine and not French wine, though, provides unique insights into the role of world events and of wine on the development of economic thought.

Clearly, Portuguese wine was on Ricardo's mind when he wrote On the Principles of Political Economy and Taxation (1821) in 1817. Ricardo, of course, was a staunch supporter of free trade (as was Smith) and argued for the repeal of the English Corn Laws, which placed heavy tariffs on imports. Concurrent with the Corn Laws and the trading environment in England was the nearly prohibitive tax on French wine. As a result, no French wine entered England except for some high-priced Grand Crus (which weren't yet called that). Nye (2007), in War, Wine and Taxes, documents the decline in England's importation of French wine due to restrictive economic policies from the late seventeenth to the mid-nineteenth century, as well as the growth of Britain's economic synergy with Portugal. Portugal was England's largest wine supplier at the time that Ricardo was advocating free trade, but, interestingly, he did not suggest free trade with France by using French wine as his comparative advantage example; rather, he used the example of Portuguese wine.

At the time that Ricardo was writing, and during the centuries leading up to the start of classical economics, England pursued an essentially mercantilist policy. These policies had an important influence on the development of classical economic thought, especially as seen in Smith and Ricardo (Nye, 2003). Mercantilism defines the wealth of a country in terms of the amount of surplus that accumulates, which enters and remains in a country. In the purest sense, this involved collecting bullion and other specie; in practice, it is the growth of wealth through positive balances of trade, established through a nationalistic perspective, protectionism, and an emphasis on producing exportable goods.

Nye demonstrates the central role that wine played in such mercantilist polices, and works by Smith, Ricardo, and others emphasized the need for England to move away from such policies. “What is especially interesting,” notes Nye, “is the tendency to overlook Smith's remarks on the restrictions on the importation of wine—which he often used as an example of mercantilism—when discussing the influence of his work on British ‘free trade’ in the nineteenth century” (2007, p. 27). Wine was central to Britain's restrictive trade policy because it was the biggest component of Britain's trade deficit with France, which was a “major source of concern to the English government and local merchants” (Nye, p. 45). Hence, Ricardo's use of Portuguese wine in his example of comparative advantage becomes clear. England, “[a]nxious to find outlets for their manufactures, … took advantage of their privileged position in Portugal to promote bilateral trade agreements that would guarantee a market for English goods and develop substitutes for French imports such as wine or linens” (Nye, p. 25).

A discussion of the events leading to these economic and political arrangements between England and Portugal, along with a contrasting perspective on the impacts of this relationship on the two countries’ economies, is presented by Sideri (Reference Sideri1970) in his Trade and Power: Informal Colonialism in Anglo-Portuguese Relations. Conflicts in Europe, including England's frequent wars with France, as well as Portugal's importance as a trading partner and strategic location for the English fleet, led to a series of treaties, culminating of the 1703 Methuen Treaty between England and Portugal. This treaty, among other things, allowed English cloth to be sent to Portugal and ensured that Portugal would be charged no more than two-thirds of the duty on wine that France paid. “[W]hether there be peace or war between the kingdoms of Britain and France, anything more shall be demanded for these wines by the name of customs or duty, … than what shall be demanded for the like quantity or measures of French wine, deducting or abating a third of the customer duty” (Sideri, Reference Sideri1970, p. 59, n. 18, citing the Methuen Treaty). Sideri concludes that Portuguese exports to England of wine and the reverse for cloth, purposefully based on comparative advantage, may not, in fact, have benefited both countries as Ricardo claims and ultimately hurt Portugal's economic development and industrialization. Portugal, by disproportionately allocating resources and specializing in wine production for the English market, greatly reduced its capacity to produce other agricultural products and industrial goods, which led to an increased need to import such goods. This led to a large trade deficit with England, paid for by transfers of gold to England from Portugal's most important colony, Brazil; this further limited capital for Portugal's development. Hence, according to Sideri, the “negative effects of this kind of international division of labor on Portugal's economy contradict Ricardo's tenet that foreign trade based on the doctrine of comparative advantage was beneficial to all trading partners” (1970, p. 4). Although Portugal may indeed have had a comparative advantage in wine production (as did France), the international political and noneconomic factors that led England to seek a substitute for wine, among other things, and “the explicit integration of the national power element into the theory of trade,” must also factor into analyses of international economic development (Sideri, Reference Sideri1970, p. 7).

V. Wine and the Transition to Neoclassical and Modern Economic Thought

Wine remains on the minds of economic thinkers as economics transitioned to neoclassical and contemporary ideas. The neoclassical school moved economic analysis into the age of marginal analysis, with Alfred Marshall and Léon Walras often thought of as founders of modern economic partial and general equilibrium analysis, respectively. This transition also clarified the simultaneous roles of supply, demand, and market equilibriums or disequilibriums in explaining pricing and production decisions. This section notes some interesting roles played by wine in this transformation of economic thought. Although publicly accessible electronic versions of historical and relevant economic works have allowed an efficient means of discovering even small links between wine and economic thinking, this search is not exhaustive; rather, it may be considered as an impetus for further contributions.

Karl Marx was born and lived as a young man in the Mosel region of Germany (then a Prussian province), an important area for wine production. A key factor in the formation of Marx's overall economic ideas was the poverty and suffering of vintners in this region, caused in part by the establishment of a new tariff scheme by Prussia. In several articles in the newspaper Rheinische Zeitung, he wrote against government complicity in causing such hardship (Marx, Reference Marx1843). For Marx, “[a]n investigation of the wretched conditions of the peasants in the Moselle wine country brought home to him the effects of private property” (Callinicos, Reference Callinicos1995, p. 16). Engels recalled, years later, ” ‘always’ having heard Marx say ‘that it had been precisely in dealing with the Law on Thefts of Wood [another Prussian imposed law] and with the situation of the peasants of the Mosel valley’—the subject matter of those two articles [in Rheinische Zeitung]—‘that he had been prompted to focus on economic relations instead of mere politics and so had come to socialism’ ” (Lubasz, Reference Lubasz1976, p. 24).Footnote ⁶

Marx (Reference Marx1967) provides his detailed criticisms of classical economics in Capital (among other places). There, Marx mentions wine in several contexts. In one interesting note, Marx uses wine as an example of exploitation. In the middle of his dissection of horrible working conditions in factories and the exploitation of labor by capitalists, he offers a brief digression to discuss the adulteration of bread and other products, including wine. These are, according to Marx, further examples of unregulated exploitation or manipulation by capitalists. In a footnote, he states, “The French chemist, Chevallier, in his treatise on the ‘sophistications’ of commodities, enumerates [many] … different methods of adulteration [used in production]. He adds that he does not know all the methods, and does not mention all that he knows. He gives 6 kinds of adulteration of sugar, 9 of olive oil, 10 of butter, 12 of salt, 19 of milk, 20 of bread, 23 of brandy, 24 of meal, 28 of chocolate, 30 of wine, 32 of coffee, etc.” (Marx, Reference Marx1967, p. 249, n. 1, emphasis added). It might be said that similar ideas have yet to be resolved in current-day wine economics, as questions about the manipulation of wine, flying consultants, and big business's winery ownership and quests for profits continue, as seen in the film Mondovino and other works stressing the disconnect between new- and old-world perspectives.

In another instance, discussing the conversion of surplus value into capital through abstinence, Marx notes, “If the corn is not all eaten, but part of it is also sown—abstinence of the capitalist. If the wine gets time to mature—abstinence of the capitalist” (1967, p. 597). Marx is railing against profits and seems to disagree that aging wine is a necessary step in the production process for a finished, quality wine (there is no mention of which wine Marx was drinking). Marx continues by citing George Scrope, an English political economist in 1841, “No one … will sow his wheat, for instance, and allow it to remain a twelve-month in the ground, or leave his wine in a cellar for years, instead of consuming these things or their equivalent at once … unless he expects to acquire additional value” (Marx, 1967 p. 597, n. 2).

John Stuart Mill, whose ideas might be viewed as a bridge to Alfred Marshall, Walras, and others, had an especially interesting distinction between short-run and long-run supply that is relevant to wine economics.Footnote ⁷ For wine, at least in the short run, Mill notes, “The difficulty of attainment which determines value, is not always the same kind of difficulty. It sometimes consists in an absolute limitation of the supply. There are things of which it is physically impossible to increase the quantity beyond certain narrow limits. Such are those wines which can be grown only in peculiar circumstances of soil, climate, and exposure” (1965, p. 464). This fixed, or totally inelastic, supply, he goes on to explain, has a price determined by the interaction of demand with the inelastic supply—or, put differently, by demand increasing or decreasing along a fixed vertical supply line with a corresponding increase or decrease in price. Mill further expands, and maybe hedges a bit, on this idea:

It appears that in the latter part of this statement, “until the supply can accommodate itself to the demand,” Mill might be qualifying a totally inelastic supply, saying that over the longer period wine might have a bit more elasticity or at least supply might shift (vertically) to the right.

Marshall has little to say about wine. However, in one rare mention, he surmises that wine, at least an expensive one, exhibits high elasticity of demand. “The current prices of such things as rare wines, fruit out of season, highly skilled medical and legal assistance,” he states, “are so high that there is but little demand for them except from the rich: but what demand there is, often has considerable elasticity” (Marshall, Reference Marshall1920, p. 106). This might be the first mention of the price elasticity of demand for wine at various price levels —a topic of current wine economics research (and marketing).

Walras, whom Schumpeter called “so far as pure theory is concerned, … the greatest of all economists” (1954, p. 827), has an interesting example of the way in which wine might affect an analysis of equilibrium, both partial and general. Walras notes an imaginary conversation between a critic of his detailed mathematical and graphical methodology and himself with this passage:

Here is an illustration of the emerging distinction between changes in quantities supplied and demanded, and possibly implied changes in (shifts of) supply or demand, while noting that other products might enter into a more general equilibrium solution. In addition, the last part of this conversation might be interpreted as describing a backward-bending supply curve for wine.Footnote ⁸

VI. The Current and Future Role of Wine in Economic Theory and Practice

Wine was present right from the beginning of the development of economic thought. What is interesting is that as the reach of economic theory grew, and as modern economies and production expanded and became more complex, wine appears to be cited relatively less frequently as a cornerstone for economic thought.Footnote ⁹ For example, it is surprising that there is no specific mention of wine in Thorstein Veblen's The Theory of the Leisure Class, given his emphasis on conspicuous consumption and a wealthy leisure class. Veblen does mention the generic “drink” in several instances, but does not describe wine and its use by some as a form of conspicuous consumption. For example, he notes in part of his justification for conspicuous consumption that “a gentleman of leisure … consumes freely and of the best, in food, drink, narcotics, shelter, services, ornaments, apparel, weapons and accoutrements, amusements, annulets, and idols or divinities” (1912, p. 73). It might be that Veblen was writing during the depth of the phylloxera period in the late 1800s, when aspects of wine were not what they might once have been or subsequently became after that plague was controlled. Alternatively, he might have steered clear of the contemporary controversies in the United States in the years leading up to Prohibition (even though its main focus was likely spirits and not wine).Footnote ¹⁰ Or certain wines, going back to the assumption of Aristotle, did not have conspicuous consumption attributes until more recently; wine was formerly for drinking and not for show. That is, these conjectures suggest that for this brilliant but eccentric thinker, writing in a turbulent era for the economy and for wine, for some reason might not have seen wine as a prominent indicator of the leisure class.

As new and more recent economic concepts become increasingly specialized and further grounded in mathematics and modeling, however, wine's usefulness in demonstrating economic concepts might also be rebounding, along with the growth of wine economics as an emerging discipline. Just as wine played a part in developing modern economic theory, it continues to serve as one of the more applied forms of economic analysis. No other good can come close to the diverse range of applications as wine can, whether as an agricultural commodity, an investment good, a cornerstone of international trade, a contributor to price theory, or even as a form of investment in human capital.

It is likely that wine will play a role in the observation and analysis of current and future economic pedagogies, just as it has in the development of economic ideas over time. Emerging trends in China, for example, which has one of the world's most rapidly growing economies, have led some economists to label China's currency, trade, and other economic policies as a form of modern mercantilism (Krugman, Reference Krugman2009). China also ranked fourth-in the world in terms of the number of acres of grape vines under cultivation in 2009, the last year for which data are available, and fifth in terms of total volume of wine consumed; it ranks thirteenth in terms of its share of the world market among wine-producing countries in the same year (Trade Data and Analysis, 2010, pp. 29, 47 and 33, respectively). In view of these data, it is likely that new economic paradigms that might be developed as a result of China's economic emergence, perhaps a new form of mercantilism or some other model, will include the role of wine. In addition, as another example, there is speculation that the growth of a new and large nouveau riche class of consumers in developing countries, such as Brazil, Russia, India, China, and elsewhere, are disproportionately driving up the price of the most prestigious wines on world markets. Could this be the time for renewed interest in or proposals for a new look at the economics of conspicuous consumption? Further research into the past and continuing expansion of economic thought will likely strengthen the central role of wine as an important factor in the development of these and other ideas.