Lessons in Fundamental Economics

George A. Briggs

[A summary based on the course in Fundamental Economics,
the Henry George School of Social Science]

1. COMMENT ON HENRY GEORGE'S DEFINITIONS

PURPOSE

Many years ago, when I first read Progress and Poverty, I had a difficult experience, At that time I was working for ten dollars per week. My employer who was about my own age, gave his wife six hundred dollars per month solely for household expenses. I was willing to concede that he was abler than I, but did not believe the difference in our incomes truly measured his superior ability. Someone told me I might find the causes of economic maladjustment explained in Henry George's book. So I tackled it.

I had had no previous experience with closely-knit precise thought except in mathematics, where the symbols used, unlike common words, can have only one meaning for each. Then, too, my mind was full of preconceptions as to the meaning of words. For these reasons, while I followed Henry George's eloquence with delight and shared the enthusiasm of his great .heart, I could not go with him in many of his arguments, nor to his conclusions. It took me a long time to free myself from habit-bound compartmentalized convictions with reference to the processes and instrumentalities of wealth production.

Later, much later, it came to my more-or-less feeble intelligence that, scattered throughout the book there was a series of definitions which covered the field and which when taken separately or together were as definite and as compelling as the axioms of Euclid. Painstakingly I gathered these together and memorized them. "Then," as captions of silent pictures used to say, "came the dawn."

It has occurred to me that others may find themselves in my former predicament. So I present, herewith, nine major definitions, together with what they are not, as well as what they are. It is my hope that they may be as useful to others, who for the first time are studying Henry George's Progress and Poverty, as they were to me.

WEALTH -- All material things produced by labor for the satisfaction of human desires, having exchange value.

Since George treats of the production and distribution of wealth, our first task then is to inquire what he means by wealth. He defines it as being material objects produced by human labor for the satisfaction of human desires and having exchange value. Nothing which lacks any of these four characteristics, according to George, constitutes wealth.

Even if permitted by law, a slave would not be wealth because, although a slave has exchange value, he lacks some of the other characteristics. In like manner stocks, bonds and mortgages are not wealth. They are exchangeable certificates of ownership in something which is supposed to have exchange value. Nor is money to be considered as wealth except for the material of which it is composed. The government imprint which constitutes it as money makes it a measure of, value and a medium of exchange. As such it is indispensable to modern industry. But it is a fiat of government and obviously a fiat of government is not a material object.

When we speak of land we know it is a material object which will satisfy human desires and has exchange value. But we cannot consider it wealth because it is not produced by human labor, improvements on land, however, have all four characteristics and therefore under our definition are wealth.

We must also eliminate human skills and ability from the category of wealth. They satisfy human desires and as in the case of celebrated surgeons or inventors, their services have exchange value, but their services are not material objects. The tools they use, however, have all four characteristics and therefore are wealth. So are houses, factories, industrial building of all kinds, tools, machinery, stocks of merchandise and innumerable other things which are material objects, produced by human labor for the satisfaction of human desires and having exchange value.

There can be no excuse for misunderstanding George when he uses the term of wealth. We may do so because of conscious or unconscious preconceptions. But these are obstacles, not excuses.

PRODUCTION -- All activities necessary to create and to bring wealth from the place of its origin to the ultimate consumer.

Production of wealth is commonly thought of as something that happens in a factory or on a farm. The factory makes, say, automobiles, or the farmer grows wheat. Since automobiles and wheat are wealth, it is easier than not to consider the production complete when the automobile is ready for use or the wheat is harvested. George uses the term in a wider sense. Since wealth is produced to satisfy human desires, it cannot be said to be completely produced until it is used by the ultimate consumer to satisfy his desires.

Take coffee as an example. It may be grown on the highlands of Costa Rica or Panama or in Brazil. But usually it must go far and through many hands before is it prepared and handed to you by a maid, if you are lucky enough to have one, at your table. It has been carried towards you by steamships and railroads. It has been handled by importers, wholesalers, jobbers and retail merchants. All these have been factors in bringing it to the place where, and the time when, it will satisfy your desire for it. It has been wealth all the time, of course, but it has not been produced for you until then.

So far as the steamship company is concerned, for example, coffee has been produced when delivered to the importer to satisfy his desires. But he would have no such desires if it merely piled up in his warehouse and 'had no further use. The cycle of production does not end until the ultimate consumer receives the product. Any and all agencies and instrumentalities in this cycle are factors in production.

Here again it is not difficult to understand George, unless your preconceptions cause misunderstandings, and without understanding you cannot make a valid judgment either for or against George's proposals.

DISTRIBUTION -- The division of wealth among the factors necessary for its production. These include only Land, Labor, and Capital, and they receive, respectively, Rent, Wages and Interest.

When we speak of distributing wealth, most commonly we think of carriers and dealers who handle the product but do not make it. George, as we have seen, considers all these as factors in production. He uses the term distribution in an entirely different sense. To him it means division of the proceeds among the factors of production.

In the case of coffee, the human agencies such as the farmer, the steamship company, the importer, the wholesaler, the jobber and the retailer, are all paid for their share in producing coffee for use. Then, in their business, each of them uses other wealth. The steamship company must have ships. The importer must have warehouses and other equipment. And so on down the line. Then the farmer must have land on which to grow the coffee. Thus we have three factors among which to divide the proceeds. These are the land, the human element, and the wealth used by the latter to promote production.

According to George then, there are three factors in production and only three. These he terms Land, Labor and Capital.

LAND -- All the material universe outside of man and his products.

To the term land, George gives a broader definition than commonly thought of. Always, however, he uses the word in precisely the way he defines it. This is true of his use of all terms. It is this custom which gives such clarity and force to George's writings, once the reader has tentatively suspended his own loose conceptions of meaning and is willing for the time, for the sake of understanding, to accept George's use.

Land, to him, is our entire physical environment, except man and his products. Thus a virgin forest is land. A cultivated forest, on the other hand, is wealth. Unmined ore is land, while mined ore is wealth. Wild animals and birds, while free, are land. Domestic animals are wealth. In the one case we have features of environment as yet free from the manipulations of man. In the other we have features of environment which have been planted, grown, excavated, killed, captured or bred by man for use. One is land, the other is wealth. In like manner water in a stream is land, but when used for irrigation or when a dam obstructs its flow and diverts the water to turn a wheel or a turbine, it becomes wealth. For then it is a material object, produced by man at the place of its use, for the satisfaction of human desires and having exchange value.

In a treatise on wealth production, this wider use of the term land not only is justified but necessary. This is true because from every feature of our physical environment human labor creates wealth. From the ocean it produces salt, iodine, agar and fish; from the air, oxygen, nitrogen and occasionally an edible wild bird; from a virgin forest, lumber. The entire field would not be covered if George limited the meaning of land to dry earth.

LABOR -- All human energy engaged in the production of wealth.

Here again George's definitions is more inclusive than that of common usage. To him labor includes all activities of man for the production of wealth. Thus in addition to skilled and unskilled workers, the executive at his desk, the salesman out after business, the engineer and the technologist, all are laborers, and their activities in producing wealth are labor. All exert human energies, whether mental or muscular, in the productive cycle whereby wealth is gradually moved from the place of its origin to satisfy desires of the ultimate consumer. The term labor thus acquires dignity as well as precision in its use.

CAPITAL -- Wealth used for the production of more wealth.

In modern industry tools and equipment are essential to the production of wealth. These include machinery, power equipment, transportation facilities, warehouses, factories and other industrial buildings, stocks of merchandise and numerous other things. As we have seen, each and all of these are wealth. But now because of their special uses, George feels they deserve a separate category. So he defines capital as being wealth used for the production of more wealth. It cannot be confused with land because land, within the framework of our definitions, is not wealth. It cannot be confused with skills and other human capacities, whether congenital or cultivated, because these when used to produce wealth are labor.

Thus there is no confusion of thought as to the three factors in production. The line of cleavage between them is clear and unmistakable. Any given factor is at once seen to be either land, labor or capital. In the division of wealth among the three factors, a name must be given to the part received by each. These George designates as rent, wages and interest.

RENT -- The short of wealth that is paid for the us* of Land.

George defines rent as the share of production received for the use of land. Amounts paid for the use of buildings, machinery, etc., do not constitute rent because they are not paid for the use of land. Nothing paid for the use of anything except land may be called rent. And nothing paid for the use of land may be called anything except rent. Here again the definition is precise and affords no place for looseness or confusion of thought. Here again the only obstacles to understanding are habitual preconceptions which have no place in logical exposition.

WAGES -- The share of wealth that constitutes the reward of Labor.

Wages, according to George, constitutes labor's share of wealth. It is the reward of the active factor for its part in producing wealth. Thus, all who are actively engaged in production, physically or mentally, receive wages. In common usage, wages are considered only as the compensation paid to an employee, usually a manual worker. But George's definition of wages is just as inclusive as his definition of labor. It includes all returns to the human factor in the production of wealth. Thus the entrepreneur who is engaged in the production of wealth is receiving wages just as truly as his employees. This is beclouded by the fact that the entrepreneur often receives interest and rent as well. If we keep in mind our basic definitions we can mentally separate the three returns, even though received by the same person. There is no place in fundamental economics for the spurious term "profits".

INTEREST -- The share of wealth that is paid for the use of Capital.

The term interest, according to George, refers exclusively to the share of production that goes to capital, which in turn, as we have seen, consists of wealth used for the production of more wealth. Current usage lends itself to confusion. Sometimes returns for use of capital are referred to as rent, as for example the use of a building. With George, of course, such returns are called interest. Then again, since money is not wealth, it cannot be called capital, and returns for its use cannot be called interest. By its use, however, one kind of wealth may be speedily exchanged for another. Then, too, anything which has exchange value, as for example land, which is not wealth, may be exchanged for money, which in turn may be used to secure anything else which has exchange value. It is a draft on all kinds of things which have exchange value and measures the difference in value between them. Nothing is implied here to denounce payment for the use of money. All that is meant, as stated above, is that since money is not wealth, any payment for its use cannot logically be called interest.

SUMMARY

If the reader has been patient enough to accompany me thus far, and to familiarize himself with the nine primary definitions of Henry George, he will note that there are no gaps between these definitions and no overlapping. Each has a precise, never-varying meaning. At every step in the production and distribution of wealth, the informed reader will have no doubt as to the category to which every factor belongs. He will have a key to understanding, a standpoint from which to view the multiplicity of phenomena involved in production and distribution.

With this clarity of vision, freed from habitual preconceptions and misconceptions, he may, I hope, with zeal and enthusiasm, follow George in his Progress and Poverty to understand how and why in the midst of untold riches, either poverty or near poverty is almost the universal lot of man. He will see how this deplorable condition may be remedied and how achievement of economic security may become the rule, and not the rare exception it now is.

2. THE SOURCE OF WAGES

(The Wages Fund Theory -- Fact or Fancy?)
Popular fallacies are long lived. Many people still believe in the Wages Fund Theory which was advanced in the Eighteenth Century. At that time men assumed wages came from capital. The Wages Fund Theory claimed that the amount of capital limited wages; the mote laborers, the less wages for each. Economists have long since dismissed this theory as false, and we can understand why it is false if we investigate the real source of wages, step by step.

1. Why discuss wages?

Because, says Henry George, "Poverty is the tendency of wages to fall to a minimum which will give but a bare living." The majority of men are laborers and depend wholly on their wages far existence. If all laborers had sufficient wages to furnish adequate food, clothing and shelter there would be no poverty. Therefore, before attempting to solve the problem of poverty, we must understand what wages are and where they come from.

2. What are wages?

Wages are the worker's share of the wealth he has helped produce by his labor. They may be any material thing. If he works in a shoe plant, the part of the shoes he has helped produce will be his wages. If, as is usually the case, the employer pays wages in money, he is merely buying from the worker the shoes which came to the worker as his share of the production. The worker will spend the money as he pleases; his actual wages were in the form of shoes.

3. Where do wages come from?

Well, let's look at the record - way back.

In primitive society each man hunted, fished and cultivated the earth with rude implements to supply his own needs. The game our Grandfather Cave Man caught and the scant harvest he gathered from the land were his reward for his labor. They comprised his wages and his entire wealth. If harvest and hunting were good, he feasted; if poor, he starved.

Had Machine Age Joe met Grandfather Cave Man and asked, "Who pays you?" he'd have been called a dimwit by Grandpa. In basic English, Grandpa would have answered, "I make club. Hunt through forest. Find bear. Kill. Eat meat. Wear skin. Catch own dinner. Catch own wages. No catch, no eat." Grandpa Cave Man didn't have to study economics to know where his wages came from. He went out to nature and by his labor produced his wages - his food, clothing and shelter.

4. But wasn't primitive man poor?

Yes. Very poor indeed. He produced little, therefore his wages were low. He had to do everything himself. Naturally, his production was limited to necessities - no luxuries.

5. How did men learn to produce more?

As men associated, they soon discovered they could produce more if each specialized in some branch of industry and then exchanged his product. The colorful life of the market place arose. Here Farmer Tom brought his melons and corn; Shepherd David his wool, meat and furs; Weaver Bill his cloth. Others became woodcutters and stonemasons, building better homes in exchange for Tom's and David's and Bill's surplus food and clothing.

Men developed new techniques, better instruments - chisels, plows, needles, looms, harness. These first tools - rude capital - and specialization of labor, enabled all to draw greater abundance and comfort from nature. Men became civilized and wealthier by living and working in a cooperative society.

6. When men exchanged did each laborer's wages still come from his own production?

Yes. The system was the same as in primitive society - only the method changed. Farmer Tom grew more corn than he needed because, by so doing, he knew he could trade it for David's wool to clothe himself. When Tom exchanged his extra corn for David's extra wool he was really producing wool as well as corn, because, had there been no market place, neither would have produced a surplus. No one could go to the market place empty handed. Each laborer still produced his own wages before he bartered or consumed them.

7. But where do wages come from now that laborers are paid in money?

From the laborers' own production. Invention of money greatly facilitated exchange, but could not change the system. Now laborers each ply a specialized trade. Often, however, they use an employer's tools. Good old nature still supplies the raw materials (wood, oil, minerals, land to cultivate, ocean fishing grounds). Laborers and employers must always depend on nature for the basic materials they need.

Let's watch today's laborers. Taking iron ore, laborers use furnaces, cranes, rolling mills belonging to employers, and produce steel girders for new apartment houses. Instead of taking to market a couple of girders each Saturday night as his part of the week's production, the steel worker sells his share to his employer. "How much will you pay me for forty hours of steel girder making?" He exchanges his own production for money right at the steel mill and then goes to market and buys other laborer's production of milk, meat, shoes, chairs. It's the same old system streamlined.

8. Isn't the employer's capital reduced when he pays wages in money?

No. Certainly not. The employer, Mr. Capital, hires laborers to produce for him a certain form of wealth -shoes, let's say. Mr. C. starts the week with capital (a factory, machines, bank balance*, and leather) and labor (employees). Using Mr. C's machines, the laborers skillfully work up the leather into a more valuable product - shoes. Friday, Mr. C. pays wages and takes inventory. In place of raw leather and money* he finds he has a stock of finished shoes ready for market. Labor has added to his capital stock before being paid. Mr. C has merely changed his capital into another form. If wages were paid from capital, the employers would have less capital. Yet at no time during the week has capital been lessened. (*Figurative use of "money" as capital.)

9. But some claim wages come from capital. Is this true?

No. Labor produces wealth before being paid. Production need not depend on capital or money. Labor only needs access to land (natural resources) to produce all forms of wealth, including capital.

Now some capitalists who desire to accumulate wealth or capital in a certain form - freighters, let's say, will hire laborers to produce the ships. These ships will not be ready for months; yet laborers are paid each week. Don't wages come from capital there? No. Every week the ships grow bigger before the laborers are paid. The capitalist is gradually changing his form of capital into more and more ship. The laborers are gradually adding to the general stock of wealth and capital before being paid. Wages are still coming from labor's production.

10. O.K. But we know we need capital. What for?

To facilitate production. A plow is capital. A farmer can produce a far larger crop with a plow than if he cultivated the ground with bare hands.

Although capital isn't used to pay wages, its functions in the production of wealth should not be dismissed lightly. The use of tools and machines (capital) makes labor more effective. Capital in the form of stored seeds and breeding animals enables us to utilize the reproductive forces of nature. Because of its exchangeability, capital permits the division and specialization of labor, thereby enhancing production considerably. It is, in reality, labor's third arm in the production of wealth.

Interestingly enough, capital prospers or languishes as laborers prosper or suffer. For example, the late 1920s were considered good times. Then the wages of labor and the interest on capital were both high. During the 1930s, in what we call "depression years," wages and the returns on capital were low.

11. What, then, is the only source of wages in any form of society?

Labor production is the only source of wages in any society.

"Production is the mother of wages" is a true adage. In primitive times the laborer produced all his food, clothing and shelter directly from nature. In early exchange society he bartered his surplus production for other wealth in the market place. In today's complex money-exchange system he produces wealth in a special form for an employer who pays him in money and markets the product. It's all the same system. We always find labor increasing the general stock of wealth before receiving wages. His production is his sole source of wages; his only method of feeding, clothing and sheltering himself.

3. TOO MANY PEOPLE ?

(A Look at the Malthusian Theory)

In 1798 Dr. Thomas Malthus, an English clergyman, gained fame by advancing a theory as to the cause of poverty. "Poverty appears as increase in population necessitates a more minute division of subsistence," he stated. He thought that every generation increased the world's population geometrically; as 2, 4, 8, 16, 32: while subsistence only increased arithmetically; as 1, 2, 3, 4, 5.

Such reasoning comforted men of affluence and helped them to believe it impossible to better the condition of the poor. They joined Dr. Malthus in saying that unless the masses restricted their numbers by late marriage or birth control, nature would take action through wars, plagues and famines to eliminate surplus population.

1. Was Dr. Malthus scientific in his reasoning?

No. Later economists pointed to the lack of any scientific data to substantiate his geometric and arithmetic ratios.

To justify his assumption that nature could not provide sufficient subsistence, he would have to prove (1) Nature was used to the fullest extent; (2) No other cause for poverty was possible. He made no attempt to prove either of the above conditions, nor could he have done so.

2. Are all natural resources used fully?

No. In reality, in every known period of history, large areas of arable land are unused; held as game preserves, forests, or idle and uncultivated tracts by private owners; closed to possible exploitation by the thousands in need of food. Wherever these conditions prevail men cannot claim nature miserly; must realize instead that man-made laws restrict full production of food.

3. Are there other man-made handicaps to full production?

Yes. Unjust laws restricting exchange and production, or forceful levying of heavy tolls on producers are evident in many countries. China's endless history of robber bands seizing peasants' crops each harvest is one instance; Ireland exporting food to pay absentee landlords during her famine is another. Destructive warfare, involving scorched earth policies and slaughtering of livestock, caused millions to starve in past wars. Crushing taxes keep laborers poor and prevent them from accumulating capital to aid in production. These reasons keep "backward" countries like India "backward." Ignorance, too, retards production.

4. But aren't some nations too heavily populated?

No. Population is dense in many countries where the standard of living is relatively high. Belgium has 710 inhabitants per square mile; the Netherlands 690. India which is commonly considered "overpopulated," has only 200 per square mile; and China only 100. (World Almanac 1941, Page 850.) History tells us the Middle East, the Nile Valley, Northern Africa, Mexico, supported dense populations in former centuries.

5. Can densely populated countries be wealthy?

Yes. Concentrated population, we know, increases per capita ability to produce. Working together, ten men can build a house more than ten times as quickly as if each worked alone. Division of labor, specialization and use of inventions permit far greater production per capita than in self-sustaining primitive economies.

Today our farms are "factories in the fields," producing with machinery and fewer men food for all; leaving cities free to manufacture other goods; thus raising total productive capacity immensely.

U.S. Yearbook of Agriculture, 1940, states: "Up to 1820 more than 90% of workers were engaged in agriculture. With the rise of factory production and the growth of industrial-agricultural inventions, the proportion of the total working population engaged in agriculture began to decline. …By 100 only 42% were engaged in agriculture; by 1930 only 20%. This may be taken as a rough measure of the increase in efficiency in agriculture, keeping pace with increased efficiency in urban industries."

Farms, cities, countries, hemispheres exchange their products, making possible a varied plenty undreamed of in the past primitive isolated economies.

Steady advances in science and invention prove that productive ability increases faster than population. Conclusion:

Considering that denser population increases per capita ability to produce, more men should mean more wealth.

An overcrowded world? No country has yet made full use of its material resources. We ourselves know that in times of depression, when wages are low and poverty is rampant, our resources are only partly used. Instead of nature being miserly, its bounties remain untapped. Farms, oil wells and mines are abandoned and production is curtailed on the land and in factories.

No. The theory of "overpopulation" does not explain why poverty persists in the midst of advancing wealth. We must look further for a valid reason for poverty.