Henry George's System of Political Economy

History of Political Economy

History of Political Economy 11 :I 0 1979 by Duke University Press

Henry George’s system of political economy Charles Collier, Hamilton College

I. Introduction Henry George is now remembered, if he is remembered at all, as a somewhat eccentric propagandist who had curious ideas about property rights and an unsound fiscal po1icy.l The point so often missed is

1. George argued that the only truly legitimate property rights were those based upon the production of the good involved. Of course, it was possible to acquire a good from the producer in legitimate ways, but the first right, and hence all subsequent rights, had to be based upon the production of the good. George extended that belief to conclude that since nobody ever produced the naturally given land, exclusive of improvements nobody could ever justifiably own land. Individuals could claim valid property rights to all of the improvements which they had made. Further, George argued that increases in land value were inevitably due to social developments. That is, he believed that society “produced” all land value increments, including the very first increment which gave land its initial value. He concluded that since the product belongs to the producer, all land value was the one property right which could never be traded away. He used his interpretation of the philosophy of Thomas Jefferson to support that claim. George believed that the doctrine “All men are created equal” necessarily implied that all men were also to have equal access to land, the source of all life- sustaining products. He then argued that no generation ever had the right to give up the social claim to land value by allowing private property rights in land. That, said George, would necessarily interfere with the perceived natural rights of all subsequent genera- tions. It is worth noting that Jefferson’s phrase, “The earth belongs in usufruct to the living, and . . . the dead have no power or right over it,” is probably the single most-quoted phrase in all of George’s writings. The belief that society could never legitimately give or trade away its rights to land value meant for him that all existing private ownership of land was morally illegitimate. For that reason he had no qualms about proposing to end all private ownership of land. George, however, was an indi- vidualist who believed in self-interest. He realized that it would be in the interest of individuals and society for society to let individuals use-but not own-the land. The users were simply to pay the owner for the use. That payment was to be in the form of a 100 percent tax on rent or land value. (He believed that nationalization of the land would be as undesirable as it would be unnecessary.) George also believed that since individuals produced all things which were not naturally given, these things belonged solely to individuals and hence were not appropriate objects for taxation, which in- fringed upon these property rights. The tax on land value was, then, the only tax-it was known as the single tax although George was less than happy about that-which should be imposed. The fullest account of George’s views about property is “The ‘Reduction to Iniquity’ ” originally written for the Nineteenth Century of July 1884, The essay now appears in Henry George, The Land Question: Property in Land and The Condition of Labor (New York, 1965), pp. 41-74.

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that underlying the policy prescriptions there is a systematic analysis of political economy. The components of the system are scattered and sometimes stated implicitly, but they are there nonetheless. This article presents an outline of Henry George’s system of political economy. The issue of the single tax, the subject of so much passionate debate, will be discussed only when related to the formal system of analysis. There can be no doubt that George intended to undertake a formal study of the interrelationships of the economy. He explained that his major work, Progress and Poverty, was written specifically to present completely and clearly the relations among views which he had earlier expressed in less systematic fashion.* He began his final work, post- humously published, The Science of Political Economy (the title itself is suggestive) with the statement “I shall try in this work to put in clear and systematic form the main principles of political economy.’’3 George always referred to his science as political economy. Clearly, he meant to confine his inquiry to what today would be called macroeconomics. He noted, “Political economy, therefore, is a par- ticular kind of economy. In the literal meaning of the words it is that kind of economy which has relation to the community or state; to the social whole rather than to individual^."^ The discipline was to be divided into three, and only three main parts: (i) the nature of wealth, (ii) the laws of production, and (iii) the laws of distribution of ~ealth.~ The first two main parts were defined in a more or less standard fashion, but for the third, the term distribution was defined so as to include only the division of the product among the aggregate factor shares. Specifically, it did not relate to distribution among individuals. Further, he claimed that the inquiry was complete once the aggregate distribution had been determined. Consumption was expressly ruled out of political economy because it dealt exclusively with individuals. George believed that an excessive concern with matters related to individuals was a trait of the new study called economics.6 Further, taxation was also ruled out of the science on the ground that it was a

2. Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth . . . The Remedy (New York, 1962), p. xi. The work first appeared in 1879. 3. Henry George, The Science of Political Economy (New York, 1%8), p. xxxi. The work first appeared in 1897. 4. Ibid., p. 66. 5. Ibid., p. 421. 6. George always used the term economics in a pejorative sense to refer to what he considered to be a bastardization of the true science, revitalized “classical political economy.”

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66 History of Political Economy 1 I :I (1979) product of human law, not the natural laws which governed the elements of political economy.’ 11. The Static Model Henry George’s whole system of political economy was inspired by the following ‘observation. In many countries of the world there had been considerable material progress over time, and this progress had clearly benefited some people. But there had also been increased poverty in the same places at the same time. It appeared to him-and he never questioned the validity of the appearance-that progress and poverty were different results of the same development. More important, it appeared to him that there was a causal relation between the two phenomena: This fact-the great fact that poverty and all its concomitants show themselves in communities just as they develop into conditions toward which material progress tends-proves that the social difficulties existing wherever a certain stage of progress has been reached do not arise from local circumstances, but are, in some way or another, engendered by progress itself.8 George’s whole system can be viewed as the framework for an analysis of this apparent causal relation and a discussion of the policy measures which can be used to remedy the social difficulties which it presented. The most important behavioral principle in George’s system is ‘‘the principle of least exertion. ’ ’ Indeed, it is called ‘‘The Fundamen- tal Law of Political Economy” and George devoted an entire chapter of The Science to it: “The primary postulate on and from which [political economy’s] whole structure is built is not that men are governed only by selfish motives, or must for its purposes be considered as governed only by selfish motives; it is that all men seek to gratify their desires whatever those desires may be, with the least exer- ti~n.”~George maintained that all economic reasoning should be

7. Ibid., p. 426. George criticized John Stuart Mill’s belief that distribution should be excluded from political economy because was a matter of human law. He reasoned that while a society could distribute existing goods in any way it wished, an inappropriate distribution would adversely affect future production. See The Science, Book IV, ch. 2. Since George went on to contend that taxes on goods whose supply was not perfectly inelastic would hinder future production of those goods, one would have expected him to include taxation among the topics within the purview of political economy. But he did not include it. 8. George, Progress and Poverty, pp. 7-8. 9. The Science, p. 91. The chapter referred to above is Book I, ch. 12. When set into its complete context the quoted passage served two purposes: it set out what

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based upon this principle, which, he insisted, plays the same role in political economy as the law that bodies in motion seek the line of least resistance plays in physics. He also claimed that the principle was as natural and as important as the law of gravitation.1° George’s value theory dealt exclusively with value in exchange. Value in use was excluded from the inquiry because it dealt with individual consumption, a matter previously excluded. His theory of value in exchange was based upon the principle of least exertion and the concept of exchange. He realized, of course, that most human desires can be gratified only by products or services which are the results of exertion. And he postulated that it was natural for men to seek gratification with minimal exertion. He concluded, therefore, that production and exchange were based upon a principle very similar to the Ricardian theory of comparative advantage whereby each producer would produce the good which required the least exertion from him and exchange it for one which would require relatively more exertion if he produced it himself. He noted, “Each party to the exchange gets in return for what costs it comparatively little labor what would cost it a great deal of labor to get by either of the other modes of production. Each gains by the act.”” George argued that value in exchange was related to exertion: “the fundamental relation of value must be a relation to exertion.”l* He added that the value which any good possessed for exchange purposes did not depend upon the exertion required to bring the good into existence. Instead, the value of the good derived from the fact that possession of it gave the owner the potential ability to secure the exertion, or the products of such exertion, which others would un- dergo to acquire the good. He illustrated the point by saying that the value of a diamond which he might possess did not depend upon the exertion which he expended to acquire it. It made no difference whether he spent years in mining it or if he simply found it. He further denied that the cost of production, incurred in an earlier period, determined its value. That value was, instead, determined by the amount of toil and trouble which would have to be expended now or in the future to acquire a similar good.13 That which the possessor can

George considered to be the most basic law of political economy, and it criticized what he believed to have been the basis of classical economics-the principle of self- ishness and greed. George’s favorable view of humanity caused him to deny that it was necessary to believe that men were selfish. 10. Progress and Poverty, pp. 11-12, and The Science, pp. 87-88. 11. The Science, p. 332. 12. Ibid., p. 245. 13. Ibid., p. 246.

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use to satisfy his desires with less exertion becomes valuable, and hence exchangeable. But, George insisted, in the causal relation between the two concepts, things were exchangeable only because they had value. l4 The statement that the value of a good is the largest amount of exertion which anybody will render to acquire the good raised the obvious problem that all such estimates of toil and trouble are subjec- tive in nature. George, like others before him, resorted to two concepts to solve that problem: the marketplace and money. After remarking about the subjectivity of estimates of exertion and value he added, “Thus it is that there is no measure of value among men save competition or the higgling of the market, a matter that might be worth the consideration of those amiable reformers who so lightly propose to abolish competiti~n.”~~In the market, of course, a large number of estimates could be made and a consensus could be reached. Like others, George realized that market transactions would be facilitated if there was a medium of exchange, or money. But money also had to serve as a measure of value, since the concepts of exchange and value were related. George felt that although our individual estimates of exertion might differ, we might compare them if we could relate them to a common standard. He supposed that it was natural for societies which had reached a certain level of development to select as the common standard of value some tangible product of human exertion. That commodity became the money for that society and served as the standard of value and medium of exchange. That, of course, meant that the original monetary unit in society tended to be a commodity, viz. gold or silver. Cheaper metals or paper could be substitutes for the more expensive metals only as long as the government strictly limited the issue of the cheap-metal or paper money. These monies should be so limited in supply that they are as hard to acquire as the gold or silver money. That would preserve the relation between value and exertion. l6 George then extended his ideas on value by relating them to his conception of wealth. In the course of defining wealth, he remarked, Thus wealth, as alone the term can be used in political economy, consists of natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the gratification of human desires. It is, in

14. Ibid., p. 247. 15. Ibid., p. 253. 16. Ibid., pp. 498-503 and 520-24.

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other words, labor impressed upon matter in such a way as to store up, as the heat of the sun is stored up in coal, the power of human labor to minister to human desires.17 He argued that there were two sources of value: “value from production” and “value from obligation.” The kind of value discussed above, that which saves future labor in satisfying desires, is called value from production. Value resulting from production increases the wealth of a society, since it provides an addition to the stock of natural products modified by human exertion to allow them to satisfy human desires. George implied that “the true meaning of wealth” and “value from production” are identical. l8 Value from obligation, on the contrary, is defined as “the value which comes from the acquisi- tion of power on the part of some men to command or compel exertion on the part of others, or what is the same thing, from the imposition of obstacles to the satisfaction of desire that render more exertion necessary to the production of the same satisfaction.”19 Items under this heading included securities, debts, special privileges and fran- chises, patents, slaves, and, of course, land. Increases in the value of any of these items are not associated with production of new wealth; they are simply additions to the value of things which already exist. Within fairly broad limits, George’s distinction between the two kinds of value is similar to the distinction made in modern GNP accounting according to which the sale of a newly produced item may be counted, while the resale of, or increase in the value of, a previously existing asset may not be. George further stated that the production of commodity money represented value from production, production of paper money or of checks represented value from obligation, and the production of any cheap-metal money represented elements of both value from production and value from obligation. The principle of least exertion has a corollary which George im- plies even if he does not explicitly state it: if the amount of exertion is held constant, men will seek to maximize their gratification. The principle and its corollary are vital to George’s theory of income distribution. Consider rent theory first. Since men seek to maximize their gratification from a given amount of exertion, they will clearly want to get the maximum product from any amount of labor applied to land. They will, therefore, always settle on the most fertile plots available. In urban areas, they will always settle on the most favorably located

17. Progress and Poverty, pp. 41-42. 18. The Science, p. 276. 19. Ibid., p. 260.

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70 History of Political Economy 11 :I (1979) plots available. When the plots of the highest degree of fertility (location) are settled, plots of the second highest degree of fertility (location) will be settled. This pattern of settlement according to decreas- ing fertility or less favorable location will be followed until society has occupied all the land it needs. George’s whole analysis rests upon the idea that plots are settled according to that pattern. George then completely accepted Ricardo’s view that rent is a differential return, and, like John Stuart Mill, he referred to Ricardian rent theory as the pons asinorum of political economy.20 When George combined his land settlement pattern with Ricardian rent theory, he arrived at a major conclusion about rent. Since rent is a differential return, and since the margin of cultivation or building is moving continuously downward and outward, the rent on any given plot continuously rises, and rent continuously arises on hitherto marginal plots. Hence the total rent paid continuously rises as long as society is progressing. It is only in connection with the theory of depressions, to be discussed below, that George considered decreases in rent. The conclusion that rent continuously rises in a progressing society was not, of course, new with George. The novel features of the Georgian rent theory were the stress with George put upon it and the additional factors which he believed contributed to increases in rent. The Ricardian rent theory, and the conclusion which he drew from it, are vital to everything else in George’s system. And it is doubtful whether there is any other system of political economy- including Ricardo’s-in which Ricardian rent theory plays such a major role. Further, George believed that there were factors other than population increase which led to increases in rent. Among these factors he listed improvements in the art of production and exchange and improvements in knowledge, education, government, police, manners, and morals to the extent that they increased the ability to produce wealth.21 George claimed that almost anything at all which increased the ability to produce wealth would increase rent-and perhaps only rent. The ideas about rent, value, and wealth can be reconciled as follows. Since wealth was defined in terms of natural products, the increased ability to produce wealth or increased population would lead to an increased demand for land, the source of natural products. That would cause rent to rise. When new products are produced there is “value from production” and the stock of wealth increases. But

20. Progress and Poverty, p. 168. See also John Stuart Mill, Principles of Political Economy (1848), ed. W. J. Ashley (reprinted, New York, 1965), p. 432. 2 1. Progress and Poverty, p. 228.

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Collier * Henry George’s system 71 since no new natural land is ever produced, the increment to land value is wholly “value from obligation.” The Georgian definition of wages as payments for human exertion by any kind of laborer, whether self-employed or employed by another person, is not novel. The Georgian theory of wage determina- tion, however, is of considerable interest. George was always an ardent opponent of the wages-fund theory. 22 He argued vehemently that adherence to the wages-fund theory and the definition of capital implied by it caused other writers to misunderstand almost all topics in political economy, since it caused them to misunderstand the nature of the factors of production. He argued that wages were never drawn from any previously accumulated fund of capital. Rather, he maintained, wages were paid out of the product of labor and, more specifically, paid out of the product produced during the period through which the labor was employed. He explicitly denied that there had to be any prior accumulation of capital before the labor could be employed. That denial, he felt, un- dermined the basis of the wages-fund theory. In developing his own theory of wages George followed the prece- dent, set by Adam Smith, of discussing historical stages of society. That is, he began with the most primitive possible level and then progressed to more and more complex and advanced levels. At the most primitive, Robinson Crusoe, level, . . . the laborer is his own employer and takes directly the produce of his labor as its reward, it is plain enough that wages are not drawn from capital, but result directly as the product of the labor. If, for instance, I devote my labor to gathering birds’ eggs or picking wild berries, the eggs or berries I thus get are my wages. Surely no one will contend that in such a case wages are drawn from capital. These is no capital in the case. An absolutely naked man thrown on an island where no human being has before trod, may gather birds’ eggs or pick

22. All of Book I of Progress and Poverty was dedicated to the argument against the theory. In all of his other works, including his last, George considered the wages- fund theory to have been an integral part of classical political economy, and he considered his first arguments against the theory to have been so conclusive that he never revised them-he simply referred to them as final. In The Science he wrote, “But in ‘Progress and Poverty’ I devoted to it an entire Book, consisting of four chapters. In this, with what follows, I so disposed of the theory that it is not necessary to go over the reasoning again, but can refer to my previous work those who may wish to inquire as to the nature, grounds and disproof of that theory” (p. 334). The vehemence of George’s attack and the widespread circulation it achieved made him one of the theory’s more important critics. 23. Progress and Poverty, p. 51.

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The next phase in the evolution of wages is the situation in which labor is hired and paid in kind out of the product. Such cases include share cropping in agriculture and any case in which a salesman or superintendent is paid a percentage of the income of the enterpri~e.~~ In each of these cases the laborer gets, in kind, all or a portion of the product which he directly produces. In the next most complex level of society, wages are estimated in kind, but actually paid in terms of something else. Thus, in whaling, crew members were not paid a fixed wage, but rather a fixed share of the catch. But since it would be most cumbersome to pay in the actual whale meat and blubber, wage payments were made in money and in amounts equivalent to the value of the share of the catch.2SIt is at the time when production becomes more certain than it is in hunting and gathering that the payment of wages takes its usual form. In such cases it would be quite possible to pay the laborers in kind. But since that would be inconvenient in a money-using economy and since the quantities produced are fairly stable and predictable, it is often more expedient to pay wages in money, in amounts equal to the value of the product attributable to the laborer under consideration. 26 Finally, George discussed the payment of wages in a complex industrial society. Referring to the con- struction of the gigantic steamship, the Great Eastern, he wrote: Here is a blacksmith making picks. Clearly he is making capital-adding picks to his employer’s capital before he draws money from it in wages. Here is a machinist or boilermaker working on the keel plates of a Great Eastern. Is he not also just as clearly creating value-making capital? The gigantic steamship, as the pick, is an article of wealth, an instrument of production, and though the one may not be completed for years, while the other is completed in a few minutes, each day’s work, in the one case as in the other, is as clearly a production of wealth-an addition to capital. In the case of the steamship, as in the case of the pick, it is not the last blow, any more than the first blow, that creates the value of finished product-the creation of value is continuous, it immediately results from the exertion of labor.27 It is, perhaps, in the last case that some of the most interesting elements of the Georgian wage theory are most clearly seen. There is, of course, the idea that wages are not drawn from capital, but rather

24. Ibid., p. 53’. 25. Ibid., p. 54. 26. Ibid., p. 55. 27. Ibid., p. 65, and The Science, pp. 288-89.

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that the creation of capital precedes the payment of wages. And there is the idea that the creation of value is a continuous process throughout the production period. This continuity was important, since it provided George with an explanation of the fact that wages could be paid before the job was completed. George realized that if the project was still incomplete at the end of the pay period, the workers could obviously not be paid in kind out of the product of their labor. But he argued that such payments were not necessary. Instead, he stated that the workers were paid an amount equivalent to, but not identical with, the value of their marginal product. All that was required for the payment of wages was that somewhere in the “circle of exchanges” somebody was willing to produce contemporaneously the means of subsistence for the laborers and to exchange the goods, direct1,y or indirectly, for the thing upon which the labor was exerted. George concluded, The series of exchanges which unite production and consumption may be likened to a curved pipe filled with water. If a quantity of water is poured in at one end, a like quantity is released at the other. It is not identically the same water, but is its equivalent. And so they who do the work of production put in as they take out-they receive in substance and wages but the produce of their labor. 28 George went a good deal further than to state that the creation of value was a continuous process over the time interval through which the labor was employed. He actually suggested a way to determine the wage rate. In the case of the naked man who gathered berries, measurement is trivial. The whole product is wages-whatever is “produced” is wages. In advanced societies, however, labor does not get the whole product, and it is necessary to separate the product of labor from the product of cooperating agents. The device with which George proposed to determine the product of labor was the same no-rent margin which he used in the most primitive case included in his wage theory and in his rent theory.

28. Progress and Poverty, p. 79. It is at least suggestive that John Bates Clark’s denial of a lag between production and payment of wages was framed in terms of a full pipeline of production in which increased input at one end automatically forced some output from the other end to pay the factors. See S. Scott Gordon, “The Wage-Fund Controversy: The Second Round,” Hisrory of Political Economy 5 (1973): 28. Since Clark explicitly stated that his own notions of marginal productivity theory were derived by following up on the analysis of George, it might not be implausible to suppose that the full-pipeline concept had Georgian origins. See John Bates Clark, The Distribution of Wealth: A Theory of Wages, Interest and Profits (London, 1924) p. v and p. 9. The work first appeared in 1899.

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Consider a worker with no special skills and no capital.29Let him work on a plot at the no-rent margin. He is not allowed to own the land-he is either a squatter or a tenant on a short lease.3o He produces a product because the land on which he works is not totally barren. But precisely because this land is on the no-rent margin he gains no advantages whatever in terms of fertility or location. George realized that one could never totally eliminate land from the production process because it would always be needed as a standing place, even if it served no other purpose. His appeal to the no-rent margin, however, allowed him to eliminate all of the special advantages of the intramarginal plots and thereby eliminate as much as possible. Further, this worker had no capital and therefore paid no interest. In such a case, the product is the wage. George concluded: Wages depend upon the margin of production, or upon the produce which labor can obtain at the highest point of productive- ness open to it without the payment of rent.31 George considered his wage theory to have been a direct corollary of the Ricardian rent theory; “Like Ricardo’s law of rent, of which it is a corollary, this law of wages carries with it its own proof and becomes self-evident by mere ~tatement.”~~He considered his law to have been a major improvement upon the classical theory. He believed that there were no fundamental underlying principles to the classical theory of income distribution. His own theories were all based on Ricardian rent theory, and he felt that this basis gave his system a unity which was lacking in classical political economy. More important, George argued that the wages which were paid at the no-rent margin would become the general wage for all unskilled labor throughout the economy via a perfectly working market mechanism and the principle of least exertion. George assumed that in every occupation there is a fringe of workers who can shift into new jobs if there are suitable opport~nities.~~The principle of least exertion and its corollary insure that these workers will, in fact, shift from

29. It is not at all coincidental that George framed his earlier discussion in terms of a nuked man gathering berries. In the Georgian model there need be no accumulation of capital-or clothes-r anything for the employment of labor. 30. While George did not explicitly state that the laborer was a squatter, he did declare that he could always be evicted at the whim of the landlord. Later, in a discussion that owed much to George, John Bates Clark also developed a wage theory in terms of squatters. 31. Progress rtnd Poverty, p. 213. Emphasis in the original. 32. Ibid., p. 214. 33. Since George discussed unskilled laborers this assumption is not implausible. One might as well be unskilled in one job as in any other.

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Collier Henry George’s system 75 one job to another if there is any incentive to do so. If the worker can get more pay for the same exertion by shifting jobs, he will shift. This potential mobility insures that the no-rent-margin wage becomes the general wage for unskilled labor because if, for example, an urban shopkeeper will not pay his unskilled laborers an amount equal to what they can earn at the no-rent margin, the urban laborers will leave the city and move to the margin. Alternatively, if the shopkeep- ers pay more than the no-rent margin wage, laborers will flow from the frontier to the urban shops. Equilibrium results when, and only when, the urban wage equals the no-rent margin wage. George never said that this wage became the wage for the entire work force. He merely said that it became the wage rate for all unskilled laborers. He was quite aware that special circumstances or special skills would naturally lead to differences in wages: The higher wages of those occupations which can be prosecuted only in certain states of the weather, or are otherwise intermittent and uncertain, are also of this class; while differences that arise from hardship, discredit, unhealthiness, etc., imply differences of sacrifice, the increased compensation for which only preserves the level of equal returns for equal exertions.34 Generalizing, any time there is any difference in exertion or skill, there will be a difference in the wage rate. Still, the wage rate for unskilled labor serves as the basis for comparison: Thus, although [wages] may from time to time alter in relation to each other, as the circumstances which determine relative levels change, yet it is evident that wages in all strata must ultimately depend upon wages in the lowest and widest stratum-the general rate of wages rising or falling as these rise or fall. Now, the primary or fundamental occupations upon which, so to speak, all others are built up, are evidently those which procure wealth directly from nature; hence the law of wages in them must be the general law of wages.35 George summarily dismissed the concept of profits, remarking, “With profits this inquiry has manifestly nothing to do.’’ He reasoned that since profit was not a payment which corresponded to any independent factor of production, anything called profit could be resolved into wages, interest, and/or rent, once these terms were properly defined. 36

34. Progress and Poverty, pp. 209-10. 35. Ibid., p. 212. 36. Ibid., p. 161.

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Capital and interest are the only factor of production and factor payment left to analyze. This analysis may be done briefly, since George essentially equated capital and labor, hence interest and wages. George’s definition of capital relied in a crucial way upon his definition of wealth. Wealth, it should be recalled, had been defined in terms of labor impressed upon matter in such a way as to “store up” the power of labor to gratify human Capital was then defined as one special kind of wealth: Capital is wealth applied to the production of more or other wealth. It is stored labor, not applied by one further step to the ultimate end and aim of all labor, the satisfaction of desire; but in the production of more wealth to the further storage of labor. By the storage of labor, which is involved in the production of wealth, it becomes possible for man to change the time in which a given exertion shall be utilized in the satisfaction of desire, thus greatly increasing the sum of satisfactions which given exertion may procure. And by the using of wealth as capital, which is the calling of past exertion to the service of present exertion, he is enabled to concentrate exertion upon a given point, at a given time, and to call in, as it were by the way, forces of nature which far transcend in their power those which nature has put at his use in the human frame.38 George argued that capital could increase the power of labor to produce wealth in three ways. First, it could allow the labor to be applied in more effective ways, as when tools or machinery were used along with labor in the production process. Second, it could allow the laborer to gain increased access to the productive powers of nature, as when capital was used to aid in the production of agricultural crops or livestock. Third, it could allow for more division of labor which would increase the efficiency of the use of labor by allowing producers to take advantage of special skills of the laborers. These-and only these-were the functions of capital in. the Georgian model. George explicitly denied the claim of the wages-fund theorists that capital could ever limit industry. At the very most, George said, capital, or the lack of it, could limit the form of industry by limiting the extent of the division of labor. But he also added that he was inclined to think that in the normal course of events it would not even do that, because he believed that “the social organism secretes, as it were, the necessary amount of capital just as the human organism in a healthy

37. Ibid., pp. 41-42. 38. The Science, p. 295.

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Collier Henry George’s system 77 condition secretes the requisite fat.”39 In his last work George emphasized the fact that there were three basic modes of production: adapting, growing, and exchanging. Adapting was the act of modifying the materials which existed in nature. Thus Robinson Crusoe, alone on his island and unaided by sophisticated technology, could alter the form and combination of the island’s resources to build himself a cabin, a boat, or other things. In more advanced societies, hunters, fishermen, miners, refiners, man- ufacturers, and transporters could all be classified as adapters. Grow- ing was the act of using the vital forces of nature to produce more crops or animals than would otherwise exist and to modify them to make them more suitable for human uses. Not surprisingly, farmers, stockraisers, beekeepers, and florists were classified as growers. Ex- changing was the act of trading one good for another, in accordance with the principle of least exertion. George believed that since exchange was mutually beneficial, it was prod~ctive.~~ Capital was said to be useful for but not absolutely essential to the adaptive mode of production. If it improved the efficiency of the adaptations it was useful; but since many, if not all, adaptations could be made without capital, capital was not absolutely necessary for that mode of production. Capital was held to be absolutely essential to growing and exchanging. George said that there could be no growing unless some previously produced crops of animals (which were current wealth) were not consumed immediately but were directed to the production of future wealth. Nor could there be any exchange unless the trading partners refrained from consuming some portion of their wealth in order to have something to e~change.~’ After cataloguing, and rejecting, what he considered to be the then-current theories of interest, George offered his own ideas on the subject. He began by stating that he would eliminate the elements of insurance payments and compensation for risk from his simplest theory of He then claimed that the basis for interest was the fact that there were often natural forces which worked with but were still conceptually distinct from labor. Thus a laborer might re- lease a swarm of bees and go off to tend livestock. After a period, the

39. Progress und Poverty, p. 86 and ch. 5. 40. The Science, pp. 327-32. George was always an uncompromkng free-trader. He believed that if society wanted more production. and that if exchange and trade were productive, society should want as much trade as was beneficial. The optimum amount of trade would occur when there were no restrictions on trade and there was free trade. 41. Ibid., p. 414. 42. Progress and Poverty, pp. 19, 21 n. and 173.

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History of Political Economy 11 :1 (I979) natural forces would have acted, apart from the labor exerted by the human being to make the animals grow and reproduce and the bees gather honey. Natural forces which increased the amount of capital were the cause of interest.43Time was considered important primarily, if not exclusively, because the natural forces operated only over time.44 George never tried to formulate an independent law of interest. Instead, he argued that since capital was only “stored up” labor, interest should be some simple function of wages: To sum up, the law of interest is this: The relation between wages and interest is determined by the average power of increase which attaches to capital from its use in productive modes. As rent arises, interest will fall as wages fall, or will be determined by the margin of c~ltivation.~~ He then tried to develop a more definite statement about interest by relying upon the fact that he had made clear statements about wages. Specifically, he postulated the existence of a fixed ratio between wages and interest. This ratio was supposed to be maintained by the market mechanism and the principle of least exertion: Thus any tendency on the part of interest to rise above the equilibrium with wages must immediately beget not only a tendency to direct labor to production of capital, but also to the application of wealth to the uses of capital; while any tendency of wages to rise above the equilibrium with interest must in like manner beget not only a tendency to turn labor from the production of capital, but also to lessen the proportion of capital by diverting from a productive to a nonproductive use some of the articles of wealth of which capital is Once the total amount of capital was determined according to the principle outlined above, it was allocated among the specific claim- ants by a doctrine very similar to the concept of opportunity cost. The interest paid for any specific unit of capital “does not depend upon what the buyer would be willing to give rather than go without it, so much as upon what the seller can otherwise get.”47 The tendency for owners of capital to apply the corollary to the principle of least exertion to maximize their return and the forces of competition will tend

43. Ibid., p. 181. 44. Ibid., p. 184. 45. Ibid., pp. 202-3. Emphasis appears in the original. 46. Ibid., p. 200. 47. Ibid., p. 186.

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Collier Henry George's system 79 to establish a uniform rate of interest. George tended to assume that capital was mobile and potentially malleable, at least to the extent that it could be shifted from one use to another whenever capitalists had any incentive to shift it. It should be noted that this fringe of capital was quite similar to the fringe of labor discussed earlier. Both operated in competitive markets to establish equilibrium in the factor market. Finally, George noted that if there were any market imperfec- tions, the adjustments discussed above might be inc~mplete.~~ Let me summarize the remarks about the static'model. All factor income shares were derived from two basic concepts-the principle of least exertion and the Ricardian no-rent margin. The principle of least exertion implied that land would be occupied in descending order of fertility or location and that the margin of cultivation or building would continuously move downward and outward in a developing society. Rent was determined according to Ricardian principles, wages of unskilled labor were determined according to the productivity of unaided labor applied to marginal land, wages of skilled labor would tend to be higher than those of unskilled labor to the extent that skilled laborers provided more exertion than unskilled laborers, and interest was determined according to some fixed relationship with wages. The no-rent margin and the principle of least exertion thus provided a certain unity to the model. HI. The Dynamic Model Once the static model has been properly specified, it is relatively easy to construct the dynamic Georgian model. As might be supposed by those who have any knowledge of George's career, it is rent which plays the pivotal role in the dynamic model. The principle of least exertion, or its corollary, and the Ricardian rent theory together guarantee that rent will continuously rise in this model. There are three reasons for this: (i) increased population, with its increased demand for food and buildings, which served to push the margin of cultivation or building downward and outward, (ii) improvements in the productive processes, as defined above, and (iii) any social, edu- cational, or governmental improvements which directly or indirectly furthered production and made it feasible to expand the realm of production to hitherto submarginal plots. George, however, added another element-speculation in land, which would cause rent to rise even faster than the above would indicate. Once it became apparent that the three natural elements were in operation, it would become profitable for those who could

48. Ibid., p. 199.

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80 History of Political Economy I I :I (I979) afford to do so to buy land and hold it until its value rose even more. Speculation in land, said George, was the easiest and surest way to become rich. In a particularly colorful passage he wrote of the speculator: You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon, or down in a hole in the ground; and without doing one stroke of work, without adding one iota to the wealth of the community, in ten years you will be rich!49 If speculation were confined to virgin land, there would simply be some people who would become rich without providing any goods or services. But, George argued, speculation will eventually extend to land which was already in use. Occupied land will be purchased, and the laborers, who are either squatters or tenants on short leases, will be evicted and the land will be held idle for speculative purposes.so That will be sufficient to insure that society’s aggregate output will fall.s1 Some of the dispossessed laborers will flow into cities. There they may or may not be able to find jobs. If they do not find jobs, a class of urban poor and unemployed will result. If they do find jobs, they are likely to be paid less than they were paid in their earlier situations. Since the principle of least exertion applies and labor is mobile, the very fact that the workers chose to remain on the land indicates that that option was more attractive to them than any alter- native. Other dispossessed labor and capital will flow to the frontier and settle on new marginal plots. That will lower and extend the margin, and in turn lower the general rates of wages and interest, since these are directly related to the yield to capital and labor at the margin of c~ltivation.~~As long as rent and land values continue to

49. Ibid., p. 294. 50. The view that the land would be held idle is open to serious question, to be raised below. For the present, it is only necessary to note that the above is what George believed. See Progress atid Poverty, p. 256. 51. Since land was originally settled in order of descending fertility, the fact that a plot is in use means that it is preferable to any plot not in use. Since the latter plots are inferior to the former, any substitution of the latter for the former necessarily means that output falls, even if all labor and capital are re-employed. 52. Progress and Poverty, p. 216. George appears to have made a methodological error at this point. He stated explicitly that when he said that wages fall he meant that the wage share of the total product declines and not that the amount of wages paid decreases. He argued that the amount would not fall if there were to be some improvement in the art of production which increased the productive power of labor. There is no reason to believe that such improvements would necessarily occur at that time. Further, the impact of the extension of the margin should, of course, have been considered ceteris paribus.

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Collier Henry George’s system 81 rise, all of the above factors continue to operate. George used the above ideas to develop a theory of the business cycle. As long as the landlords, who are not producers, continue to evict the capitalists and laborers, who are producers, aggregate output will continue to fall.53 Eventually the system will snap and the economy will be thrown into a depression. George tried to reconcile the facts that speculation in land occurred continuously over years and depressions came on suddenly by using some ideas related to the concept of exchange. Recall that he had said that some accumulation of capital had to precede any exchange. He then asserted, without inquiring into the reasons, that in an exchange, capital was advanced by the more sophisticated industry to the less sophisticated. He said that farmers could sell their crops as soon as they were harvested, while industrialists had to maintain inventories, transport the goods to agents, and often sell goods on an installment basis. Thus they may not realize any gain for a considerable period of time. George concluded that the series of credits and advances made in complex under- takings was responsible for a lag in the response to a change in the conditions affecting production. He compared the series of advances to “an elastic connection, which will give considerably before breaking, but which, when it breaks, will break with a snap.’’54Thus, the impact of the eviction of the producers from the land would be felt immediately in the agricultural and mining sectors; it would be felt, after a lag, in the industrial and commercial sectors. The depression would continue until a situation resulted in which

The normal rent line and the speculative rent line are being brought together: (1) By the fall in speculative land values, which is very evident in the reduction of rents and the shrinkage of real estate values in the principal cities. (2) By the increased efficiency of labor, arising from the growth of population and the utilization of new inventions and discoveries. . . . (3) By the lowering of the habitual standard of interest and wages.55

53. George was so adamant about his classification of the producers and non- producers that he often used the word producer to refer to laborers and capitalists as one group. The word was never applied to landlords. The grouping together of laborers and capitalists was consistent with his view that capital is only “stored up” labor. His failure, or reluctance, to distinguish between laborers and capitalists was a source of criticism, particularly from socialists and those concerned with labor unions. 54. Ibid., p. 279. 55. Ibid., p. 281. The fact that the book was begun in 1877 almost surely means that the use of the present tense was intended to refer to events associated with the end of the depression of 1873. By “rent line” George meant simply the margin of cultivation. See Progress and Poverty, pp. 276-77.

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Once any of the above occurred-either singly or in combination-re-employment of the unemployed factors of production would become feasible. The first remedy would make land more accessible to the “producers,” the second would make labor more productive, hence more desirable, and the third would lower wages and interest and hence increase the quantity demanded of labor and capital. The result would be increased re-employment of the factors of production, increased output, and the return of prosperity. The problem, however, is that the very return of prosperity would make it profitable to speculate in land again. That speculation would inevitably occur, and the stage would be set for the next decline in production. As long as the cure for one depression set in motion the chain of events which led to the next depression, the economy would be unstable and subject to cycles-or “wavelike movements” as George called them. George also felt that the recovery periods were inevitably marred to the extent that “wages and interest will not recover their lost ground. ”56 The situation, however, was not felt to be totally hopeless. The optimistic phrase “The Remedy” appears on the titlepage of George’s major work, implying that he thought he had developed the cure for the major economic and social problems which he discussed. Since the problems appeared to stem from the incentive to speculate in land, the cure appeared to stem from the elimination of that incentive. George proposed to remove that incentive by imposing a 100 percent tax on all rent or land value and thereby to tax away all gains from ownership of or speculation in land. George appeared to have viewed the 100 percent tax on rent as being equivalent to a 100 percent tax on land value. He regularly interchanged terminology. With all the gains taxed away, George felt, speculation would cease, the business cycle would be eliminated, and the problems associated with the cycle would all George actually went a good deal farther than to offer his tax proposal as a cure for depressions. He argued that it would provide all the revenue needed for all of the legitimate activities of government. In short, the tax-which he called the single tax because he felt that it would be the only tax necessary and the only tax which he considered

56. Ibid., p. 281. 57. This article is devoted to the presentation of the Georgian model stripped to its barest essentials. In this light, the prevention of depressions is held to be a sufficient reason for imposing the single tax. George also believed that there was no way to eliminate depressions without imposing the tax. In fact, however, he had a rather extensive list of economic and moral arguments in support of his proposal.

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Collier - Henry George’s system 83 justifiable-was said to be the necessary and sufficient condition for a healthy economy.

IV. Diagrammatic Representation of the Dynamic Models8 It is possible to offer a diagrammatic representation (Fig. 1) of the dynamic model in which all elements are visible at the same time. In the graph the horizontal axis can represent population or the labor force since these are assumed to grow proportionately. If it is assumed that population grows at a constant annual rate the axis could be given a logarithmic scale and designated “time.” This is of interest because despite all of his protestations to the contrary, George’s model implicitly assumes an almost Malthusian population increase.s9

Fig. 1. Diagrammatic representation of Henry George’s system of political economy.

58. There is not one single diagram in any of George’s books. Hence what follows is strictly an interpretation of his system. 59. It is important to note that George’s assumption about population increase was, in fact, implicit. George always considered himself to have been an extreme anti-Malthusian. At times he argued that Malthusian ideas about the tendency of population to rise were simply wrong (see Progress and Poverty, pp. 103 ff.). Yet in all of George’s works there is the idea that population does constantly increase and that this is indeed the source of many problems. Recall, to cite only one instance, that the primary element in pushing the margin of cultivation and building downward and

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The vertical axis shows that amount of wealth produced and the amounts paid to the factors of production. By comparing the amount of each factor payment with the total amount of wealth produced, it is possible to derive conclusions about factor shakes. There are really two concepts of wages inI the Georgian model. There is the subsistence wage, defined in standard fashion, and the wage which is actually paid, whether equal to the subsistence wage or not. With the individual subsistence wage assumed constant and the size of the group of employed laborers growing at a constant rate, the aggregate subsistence wage bill is represented by the ray W,. The wage which is actually paid, WA, follows a more complex path through time. In the earliest stages of society labor was the only factor of production paid, and wage payments exhausted the entire product. There was no doubt in George’s mind that the product was more than enough to provide for the subsistence of the laborers. Accordingly, WA lies above Ws in the early stage of the diagram. Technological advance is assumed to occur at time tS. The advance represented is of the kind which improves the productivity of labor at the margin. Hence, it raises the general rate of wages. Diagram- matically, the slope of the segment above the points from t3to t4 is greater than that of the segment above the points from to to t:3.When speculation begins, at time tq, the margin is artificially extended and wages stop rising at the former rate. The graph, drawn to illustrate the case in which “the elastic connection” prevails and provides a mechanism to delay the impact of the effect of speculation, shows aggregate wages continuing to rise, but at a lower rate.60 At t6 the elastic connection snaps and a recession begins. The amount of wages paid now falls. The trough of the depression occurs at t, when the various possible cures operate either singly or in combination. The period from t7 to t8 is one of recovery and prosperity. Wages rise, but do not achieve levels which would have been achieved by extending the segment of WA through its earliest segments. The peak of prosperity is t8. Thereafter, wages fall and rise according to the cyclical outward is the ever-increasing populat,i”on. The contradiction which this presents is best viewed as a contradiction between George’s ethics and his analysis. George’s belief in a beneficent creator was unquestioning, as was his denial that such a creator could ever have intended to create the property and misery which Malthus forecast. On ethical grounds, therefore, George was almost compelled to oppose Malthusian population theory. But when George applied his classical-Ricardian analysis to economics, he was almost compelled to accept Malthusian population theory. It was, in fact, Malthusian ideas which were central to George’s analysis. 60. Alternatively, the graph could be drawn to illustrate the case in which the effects of speculation snap the connection immediately. In such a case, the segment of WA from t4 to r, would be negatively sloped.

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pattern outlined above. Over the course of time, WA tends to converge to W,. The time path of interest is essentially similar to that of wages. That is not surprising, because in this model interest is merely some direct function of wages. The line I,, which is referenced ordinately to W,, represents the minimum amount of interest compatible with continued capital formation. The line I,, again referenced ordinatel y to W,, shows the amount of interest which is actually paid. I, is wholly analogous to W,, and 1, is analogous to WA. Those similarities explain why 1, converges to I, as WA converges to W,. There are, however, three noteworthy features about interest. First, the interest curves do not emanate from the origin; rather, they begin at t,. This represents George’s idea that capital was not an original factor of production, but one which arose only at some time after the dawn of history. Second, in some passages, George explicitly discussed the possibility of a zero rate of interest and of no payments to capital at all. Such passages, however, deal with excep- tional cases and are not intended to refer to economies which are likely to exist in the foreseeable future. The diagram represents, with no loss of generality, the case in which interest rates and payments to capital are strictly positive.61 Third, and in many ways most important, capital accumulation continues even after 1, has coverged to 1,. This fact, and the fact that capital does not have to be advanced to maintain labor, make the Georgian model different from its classical antecedents. The facts that capital can be continuously accumulated and that population can and will continuously-but independently- increase insure that this model never arrives at a stationary state. In the Georgian view of history, rent was the last factor payment to arise, because labor and capital had been used before land became private property. Hence, rental payments begin only at tZ,well after the dawn of history. In the diagram rent is measured by the distance between the curve showing the amount produced and I,. (Since I, was referenced to W,, I, shows the total amount paid to laborers and capitalists when it is referenced to the horizontal axis.) George claimed that rent increased as both an amount and as a share, except in times of depression. For that to occur, the slopes of several lines associated with the aggregate product, .to be discussed below, would have to be greater than the slope of I, when 1, is referred to the horizontal axis. (Given the convergence theorems discussed above,

61. George, The Lund Questiori, p. 79. See also Progress and Poverty, pp. 252-53. If there were no payments to capital, I, would converge to W,,.

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86 History of Political Economy I1:I (1979) the slope of I, becomes an increasingly good estimator of the average slope of 1, when I, is referred to the horizontal axis.) Speculation in land begins at time t4. At that time, land begins to be held idle. The margin of cultivation is artificially extended and wages and interest cease to rise as rapidly or actually Further, the withholding of intramarginal land from production either causes unemployment or extends the margin to less fertile or less favorably located land. In either event the amount of wealth which is actually produced is less than the maximum producible amount. The gap between W, and W, represents the amount of wealth forgone. The amount of wealth actually produced oscillates cyclically. George, like many other model builders, believed that the amount of wealth which was potentially producible would steadily increase if the appropriate policies were followed. In Fig. 1 technological advance has been shown explicitly only once, at time t,.63 That is purely for expository convenience. There is nothing in the model to prevent technological advance from occurring repeatedly or continuously. The point is that when it does occur, the slope of the aggregate output curve increases. Diminishing returns set in at t5. George’s ideas on this topic are quite interesting. In Progress and Poverty he explicitly denied the validity of the concept.64 In The Science, however, he accepted the concept. More important than that, though, is the fact that he extended the law beyond agriculture, to which it was usually confined, to all productive activity. He argued that classicists and neoclassicists who confined the law to agriculture had missed the point. There was nothing at all unique about agriculture in this regard according to George. The point was really that diminishing returns occurred when additional doses of a variable factor were applied to another factor fixed in space. Thus it was really space which was the key to the whole matter. And since all productive activity occurred in space, George reasoned that all productive activity should eventually be sub-

62. See the point made in conjunction with note 60 above. 63. It is also shown, implicitly, at t, when capital is introduced. The first use of capital constitutes a technological advance over the state in which no capital is used. In both cases the slope of the curve representing aggregate output increases. 64. P. 234. It would seem that the best explanation for George’s rejection of the concept would rely upon the fact that George was very passionate in his arguments. Whenever he disagreed with a writer he felt that it was not sufficient to refute the writer’s ideas; he felt compelled to assert that the reverse of the arguments was true. It has been seen that his theological convictions caused him to reject Malthusian ideas. Since he identified the concept of diminishing returns to the factors of production with Malthusian concepts, he felt compelled to reject it and to assert that increased doses of the factors would lead to increased returns.

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Collier Henry George’s system 87 ject to the law.65Although George finally realized the validity of “the law of diminishing returns in the use of limited natural agents,” as he preferred to call it,66 the remainder of his system dictates that there was a limit to how small the increments to total output could become. He repeatedly wrote of rent increasing as both an amount and as a share of the total product, except in times of depression. That would occur if and only if the distance between W, (and W,) and 1, continuously increased. Accordingly, the slope of W,, and the slope of the trend line about which Wa oscillates are greater than the slope of 1, when I, is referred to the horizontal axis. Obviously, that imposed a limit upon the slope of W,. That, in turn imposed a limit upon how small increments to total product can become. The graph is drawn to show the combination of slopes which most faithfully represents the spirit of George’s works. The curve W,, indicating the maximum amount of producible wealth, follows a fairly standard S-curve path. That is compatible with the ideas of rapid initial growth and perhaps increasing returns to the factors of production, economies of scale, better organization, and technological advance, followed by diminishing returns after some point. The curve Wa, representing the wealth which is actually produced, oscillates cyclically according to the pattern discussed above. George’s idea that depressions are cured when anything occurs which draws the “normal rent line” and the “speculative rent line” to- get he^-^^ is shown diagrammatically by the fact that during the recovery period, from t7 to t8, W, approaches W,. Whether Wa or W, applies to any society, the curve indicating total output is the vertical summation of the curves indicating the several factor payments. It follows that the entire product is always distributed. Finally, George’s proposal for the single tax was designed to eliminate speculative holding of land and to take the rent payments in taxes. The elimination of speculation was supposed to cause Wa to coincide with W,. The maximum possible amount of wealth was to be produced and there were to be no further cycles. It was maintained that the revenue generated by the tax, the amount designated by the distance between 1, and W,, would be sufficient to provide for all legitimate expenditures of government.68 It was claimed that the

65. The Science, Book 111, ch. 4. 66. Ibid., p. 360. 67. Progress and Poverty, p. 281. 68. In many ways the most common argument against the tax-that it would not generate enough revenue for large, expensive governments misses the point. George, who was always individualistic and conservative, was an advocate of laissez-faire. In an important sense it is unreasonable to criticize an advocate of laissez-faire for failing

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single tax was the necessary and sufficient condition for a healthy economy. V. Conclusion It is hoped that the main conclusion of this article now seems slightly trivial when stated explicitly. Henry George did attempt to make a formal, systematic inquiry into the subject of political economy. The system which he constructed is found primarily, if not exclusively, in his first book and his last; the other four books, the articles, the newspaper columns and editorials and the speeches do little, if anything, to contribute to the development of the formal system of analysis. And it is true that the components of the system are mixed in with his critique of classical economics, his polemics against the Austrian-inspired version of marginal utility, his pleas for his fiscal policy, and his outright preaching about individual and social morality. It is further true that the system has serious-indeed, fatal-flaws, but the system is there nevertheless. Of course, it is impossible to state with certainty the reasons why the system remained undiscovered for so long. Still, it is possible to offer a plausible hypothesis. Several reputable authorities have noted that George has not been treated fairly by professional economists. Joseph Schumpeter wrote, “Professional economists who focused attention on the single-tax proposal and condemned Henry George’s teaching root and branch, were hardly just to him.”69 Commenting upon George’s career, Mark Blaug stated, “the story is one of persis- tent misunderstanding, misrepresentation and downright evasion of issues by the leading members of the economics profe~sion.”~~In-

terestingly, however, ’ neither Schumpeter nor Blaug devotes much attention to George. If one accepts the premise that economists have not treated George fairly, it would be reasonable to suppose that they have not given his work the study which it deserved. It would seem to follow that the system, which is not obvious to the reader, would remain undiscovered. It must be said that George surely hurt his own cause with his to provide the revenue for a government which violates the principle. More important, he maintained that government would simply have to learn to live within its budget. George believed that the single tax was the only legitimate source of revenue for the government. He concluded, therefore, that any expenditure which was not provided for by the single rax was on thut account inappropriate. The tax then becomes adequate almost tautologically. 69. Joseph A. Schumpeter, History of Ecoriomic Anulysis (New York, 1954), p. 865. 70. Mark Blaug, Ecoriomic Theory in Retrospect (Homewood, Ill., 1968), p. 91.

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Collier * Henry George’s system 89

almost single-minded devotion to the single tax. The phenomenal suc- cess of Progress and Poverty led to several round-the-world speaking tours. In the speeches delivered, George focused almost exclusively on the virtues of his tax proposal and all but ignored the analytical framework from which it was derived. And it hardly needs to be stated that many of the claims advanced by the principal advocate of the single tax were so extravagant that they were not conducive to a serious treatment of George. The single tax was believed to be the universal panacea, the one cure for any conceivable social problem; it was to be the necessary and sufficient condition for peace and prosperity. Such extravagant claims have surely hurt his reputation. Turning attention to the general nature of the system itself, one might observe that George’s efforts were surely doomed to failure from the beginning. George was trying to resurrect classical political economy in the era of neoclassical economics. That is much more than a matter of semantics. Despite all of George’s protestations to the contrary, the new school-which he never reaffyunderstood-did have a great deal to offer. George was powerless to stem the tide of the analytical advance. Further, George’s system was anachronistic to the extent that it was based in an essential way upon “wealth” at the time in which economists were abandoning the concept as obso- lete. The fact that George attempted to redefine the concept ultimately counted for nothing. The attempt was futile from the beginning. There were, in addition, fatal flaws in the basic structure of the system on its own terms. First, as has been shown, the entire system was built upon the existence of an apparent causal relation between material progress and poverty. The problem, quite simply, is that George never firmly established the correlation between those phenomena, let alone a causal relation. Instead, he assumed the causal relation as true and built his whole system upon it. It is not clear -and it is certainly not intuitively obvious-that material progress and poverty are related in the way in which George postulated. Surely the connection deserved far more attention than he paid it. The practical relevance, if not the internal logical consistence, of a model is called into question when it is noted that the problem which it is designed to answer may well be specious. Second, there is a fatal flaw in an important behavioral assumption of the model. Almost all of the dynamic properties of the system rely in an essential way upon the premise that all land held by speculators is held completely idle.71The

71. The whole theory of depressions rests upon this assumed behavior. Unless the

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problem is simply that there is absolutely no reason why speculators would necessarily hold all of their land out of use. There is a wide array of circumstances under which land can be profitably used while speculators wait for its value to increase. Under any of these circumstances there would be no reason for landlords to evict tenants, and hence no reason for output to fall and for recessions to begin. Most of the dynamic properties-and virtually all of the dire predictions of the model-would be severely impaired or destroyed. As the above indicates, the dynamic properties of the system rest upon some dubious postulates. But it is still interesting that George did try to formulate a theory of cyclical growth within the framework of classical political economy. Specifically, the Georgian model never reached a stationary state; the economy without the single tax was felt to be doomed to continuous cycles, and the economy with the single tax was promised unlimited progress over time. That offered an interesting contrast with the more classical model, which was to arrive at a stationary state compatible only with subsistence standards of living, George’s contributions to wage theory were fundamentally sound. The wages-fund theory, which he criticized, was ultimately rejected for reasons similar to those advanced by George and others. His positive theory of wages-that wages tend to be equal to the value of the marginal product of labor unaided by other factors of production-was a great step toward marginal productivity theory. John Bates Clark, often viewed as the discoverer of the theory, explicitly stated: It was the claim advanced by Mr. Henry George, that wages are fixed by the product which a man can create by tilling rentless land, that first led me to seek a method by which the product of labor everywhere may be disentangled from the product of cooperating agents and separately identified; and it was this quest which led to the attainment of the law that is here presented, according to which the wages of all labor tend, under perfectly free competition, to equal the product that is separately attributable to labor. The product of the “final unit” of labor is the same as that of every unit separately considered, and if normal tenden- cies could work in perfection, it would be true not only of each unit, but of the working force as a whol’e, that its product and pay are identical.’* landlords evicted the tenants and their capital, there would be no reason for hitherto submarginal land to be substituted for intramarginal land. There would be no reason for output to fall. Remarkably, only one of George’s numerous critics appears to have seen this flaw. See Francis A. Walker, Land and Zrs Rent (Boston, 1891), p. 165. 72. J. B. Clark, Distribufion, p. xiii.

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Collier * Henry George’s system 91

Schumpeter’s claim that those critics who focused exclusively on the single tax missed a great deal would seem to apply here. George’s rent theory was the undiluted Ricardian theory-that pil- lar upon which classical political economy rested. Hence it was not unreasonable for George to rely upon it in his attempt to revitalize that system. The difficulty is that George was not among those who extended and generalized the theory to arrive at full-scale marginal- productivity theory. Further, George was simply wrong in his belief that rent always tended to rise in prosperous times. Even within the Ricardian framework it is quite easy to illustrate cases in which rent will fall as an amount and/or as a share of the It has been said that nobody but the most unquestioning Georgian disciple could accept George’s ideas about interest. In a very real sense there is no independent theory of interest; statements about interest always rely upon some assumed relation with wages. Further, all critics, from the conservative Austrians to the radical socialists, agreed that George’s belief that interest was ultimately derived from the fact that there were natural forces which caused cattle to grow and bees to gather honey was exceedingly naive. The vast majority of arguments for and against the single tax lie outside the purview of this article.74 Attention here is paid only to those points which deal with the formal system of analysis. George argued that the single tax would do more than provide enough revenue for all legitimate expenditures of government; he claimed that it would also benefit laborers and capitalists. He argued that if intramarginal land, assumed to be held idle by speculators, was put into use as a result of the imposition of the tax, the factors of production would gain access to better land. Labor would flow from the margin to the newly released plots. As a result, the margin would actually rise. Since the basic payments to labor depended upon the productivity of labor at the margin, the basic wage rate would rise. The wages of skilled laborers and the payments of interest would also rise, since these were assumed to vary directly with the basic wage rate: A new equilibrium would be established, at which the common rate of wages and interest would be much higher than now. But this new equilibrium established, further advances in productive power, and the tendency in this direction would be greatly accelerated, would result in still increasing rent, not at the expense of wages and interest, but by new gains in production,

73. Charles Collier, “Henry George’s System of Economics: Analysis and Cnti- cism” (Ph.D. dissertation, Duke University, 1975), pp. 248-58. 74. It would be quite easy to fill a good-sized volume with the arguments which have been made concerning the tax’s justice, impact upon society, historical prece- dents, morality, impact upon conservation, etc.

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History of Political Economy I I :I (I979)

which as rent, would be taken by the community for public uses, would accrue to the advantage of every member of the community. Thus as material progress went on, the condition of the masses would constantly accelerate. 75 The claim was supported by some rather extravagant promises that the increased payments to laborers and capitalists would be used to improve their health, education, and morality. George added that these improvements would contribute to continuous innovation and technological advance, which would benefit laborers and capitalists even more and would begin the cycle of improvements again. Apparently, neither George nor his critics realized that the structure of the system would make such a utopia impossible. If the single tax were imposed and if land were assessed according to its value in its best use, the temptation to hold land idle would vanish-or at least be very greatly diminished. Since the tax would have to be paid whether the land was used or not, the landlords would have a great incentive to use the land productively to get the money to pay the taxes. Speculative holding of land would not keep it out of production. The difficulty arises from the point that even if we assumed- contrary to fact-that all land held by speculators is idle, the outcome would not be as George outlined it. If enough land were released to make any great difference, the margin would rise as George predicted. Wages and interest would rise in response, and the payments might even be used to improve the health and mental status of the then- current generation. But that would be the end of it. There would be no significant continuing benefit. As soon as the population increased and demanded more food, or as soon as the demand for natural resources to produce more wealth increased, the margin would extend downward and outward once more. It is true that the extension would begin from the higher level resulting from the imposition of the single tax, but the decline would occur nonetheless. As the margin was extended, wages and interest would begin to fall again; the condition of laborers and capitalists would begin to decline again. There would be no continuous stream of benefits. Since the benefits are associated with the breaking up of speculative holdings, and since speculative holdings can be broken up only once, benefits can accrue only once. It is surely exceedingly naive to believe that the change in fiscal policy and the change in landholding policy would induce the stream of technological innovations which George promised. A tax on land values-as distinct from a single tax of 100 percent of land

75. Progress and Poverty, p. 442.

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Collier * Henry George’s system 93 values-may well have merits. It is simply that continuous increases in wages and interest are not among them. Henry George’s formal analysis was fatally flawed, and his policy prescription has been justly relegated to the museum of colorful but untried ideas. 76 Still, economists who completely overlooked the fact that there was a formal analysis and the fact that it did offer some significant contributions to the development of economic theory have been a good deal less than fair to him. This article is an expanded version of a chapter of the author’s doctoral dissertation at Duke University. Two anonymous referees offered excellent suggestions for the improvement of this version. 76. George’s proposal did influence some tax programs which have been im- plemented, but there has not been any attempt to collect all of the tax revenue from a one hundred percent tax on land value.

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