Economic Theory in Relation
to Henry George's
Progress and Poverty

Karsten K. Larsen

[A paper presented at the Joint Georgist Conference, University of Pennsylvania, Philadelphia, Pennsylvania, 1989]

In 1988 I wrote a thesis on Henry George's economic theory in connection with my study of economics at the University of Copenhagen. I have called the work, "The Economist Henry George," which suggests that I have written within the field of the science called economics. I hold that it is quite necessary to investigate the economic theory contained in Progress and Poverty for reasons which I shall have occasion to explain later.

But first let me make the aim of my work clear.

I have had two goals in connection with my study. First, it was my intention to explain the theory of Progress and Poverty with respect to the theory of income distribution (or, as it is called in Progress and Poverty, "distribution of wealth"), the theory of economic growth and its effect upon the income distribution and the theory of economic crises. I think that these subjects are far the most important parts of Progress and Poverty, but this is of course a choice of mine, which is open for debate and objections.

Second, it was my aim to demonstrate that Henry George is an independent economist, and in no way just a parrot of Ricardo. This position is held by many historians of economic thought. I claim that Henry George has many insights which are new in relation to the Ricardian economics. I do not deny, of course, that there is a relation between Henry George and the classics, but I hold that there is something new in Progress and Poverty in addition to Ricardo and Mill, to which one should pay attention.

My work is within the sub-discipline called history of economic thought, the study of the economic doctrines of earlier times.

Why should one be concerned with history of doctrines? I can give two possible answers.

First, it will very often be emphasized that we need to know the doctrines of earlier times if we want to understand the modern economic theory.

Second, it is sometimes claimed that the old economists still are relevant, that we can apply the statements of f.i. Adam Smith and Karl Marx directly on the modern society.

Of these two reasons for the relevance of history of doctrines, I think that the latter is valid in connection with a study of Henry George. I do not doubt that in his thoughts there is contained a solution to many of the social and economic problems of the world, that land value taxation and free trade is the way forward to justice and freedom, as well as to a sound economy. But these things have not, however, been the explicit object of my study.

Henry George is an extremely obvious example of an economist who took a position towards the problems of his time. Nevertheless, I think that it is possible to distinguish an element from his work which is purely scientific, namely the economic relations. Henry George sets up an economic theory that one, in principle, can recognize as true, even if one does not want to accept the proposal about the full taxation of rent.

I have studied the scientific element in Progress and Poverty. I have endeavoured to treat the economic theory of George. There exists an amazing ignorance about his ideas. But to this I have tried to elucidate what Henry George really said. I have not taken a position towards the question, "for or against," partly because that has not been the subject of my study, and partly because I find it is too primitive a question. But as I already have stated, I have a great sympathy with Progress and Poverty, and therefore I have not pretended any objectivity in connection with my study. I think it is impossible not to be present with one's own attitudes.

We can identify two elements or dimensions in Progress and Poverty. First a comprehensive economic theory, particularly about distribution, and second the land value taxation proposal, which relies upon the economic theory. The former element is the positive dimension, the question about "what ought to be."

These two dimensions of the study of political economy are of equal importance. For instance, if our positive investigation proves that land speculation is a reason for economic crises, we should, because we with our normative mind realize that crises are harmful to human welfare, seek for a remedy which can destroy the land speculation - and I think we could not propose anything better than land value taxation. In this argument is contained both a positive and a normative element, and I think it shows that it is impossible to advocate our remedies without the help of economic theory. How could we advocate free trade, if we did not understand the principles of foreign trade? And how could we advocate taxation of the rent if we did not know what the rent is? But if we have a thorough understanding of economic theory, we will have good arguments for our remedies. Therefor, economic theory is absolutely necessary, we simply cannot do without it.

I have sought for literature which has something to say about Henry George. That was really difficult. Robert Clancy writes in the Georgist Journal (No. 62) about my thesis, "Mr. Larsen noted regretfully that there was very little material that took note of Henry George's economic analysis." And this is correct. I think that it is sad that the economists have not discovered the outstanding quality of Progress and Poverty. But on the other hand I have not felt it as a problem in connection with my study.

I have referenced about 30 books and articles in my thesis, but the only really important source of my work has been Progress and Poverty. I have not in my understanding of Henry George's thoughts relied upon the historians of economic thought. I have read the work of Henry George himself, and thereby I have formed my own ideas of the subject. I have also read others of Henry George's books, f.i., Our Land and Land Policy, but not carefully enough to really make statements about this book. The same is the case for The Science of Political Economy, whereas Protection or Free Trade does not contain many new points compared to the works of Ricardo and Mill. The real value of the book lies more in its polemic against the philosophy of protectionism, and not so much in the advance of a new theory about foreign trade.

Two New Economic Points

In the following I will account for some important points in Progress and Poverty, which are new compared to the classical economic theory. Alfred Marshall said in 1883 in his "Three Lectures on Progress and Poverty" that what is new in the book is not true and what is true is not new. I hold that this is totally wrong. I claim that there are many points in Progress and Poverty, which are new. One example is Henry George's wage-interest theory, which he has written about in Progress and Poverty, Book III, Chapter III-V. His point of view is that capital and labour really is the same factor of production, since capital is created by labour. It is possible to create new capital by means of labour, and that implies, says Henry George, that there must exist an equality between the law of interest and the law of wages, and his final statement of the problem is that there is a fixed relation between interest and wages. Wages and interest are high together and low together. Whether this theory is true or false is an empirical question, but I do not think that it is possible to refuse the theory on its own terms, because it is evidently true that capital is created by labour. From this insight Henry George has based his theory, which, I think, has deserved to be taken seriously by the economists.

Did Marshall notice Henry George's wage-interest theory?

Marshall mentioned the theory in his second lecture, but all he said was that since "whenever population is plentiful and capital scarce, interest is high and wages low," then the theory must be wrong. But that is really a statement beside the point. Henry George holds that there is a tendency towards and equality between labour and capital since new capital can be brought to the market if the interest is too high. It is true that interest is high if capital is scarce, but capital will not continue being scarce. That is the point which Marshall did not grasp.

There is no doubt that this wage-interest theory is Henry George's own theoretical invention. I have never read anything in the works of other economists which offers a similar theory. It is my impression that there are different opinions about this theory among Georgists, but most have a negative attitude, f.i. Charles F. Collier in Chapter 18 of Andelson's Critics of Henry George, who even states that the theory fails to be consistent with the rest of the distribution theory of Progress and Poverty.

It should be noticed that the wage-interest theory is perfectly logical, and in this sense it is a true theory. And, as already stated, there is absolutely no doubt that the theory was new in 1879.

Another new and true theory in Progress and Poverty is the theory of land speculation. It is impossible to understand any of Henry George's statements if one has not grasped this extremely important point.

Henry George mentions the land speculation for the first time in Progress and Poverty, Book IV, Chapter IV. He writes about the land speculation that "whether we formulate it as an extension of the margin of production, or as a carrying of the rent line beyond the margin of production, the influence of speculation in land in increasing rent is a great fact which cannot be ignored in any complete theory of the distribution of wealth in progressive countries. It is the force, evolved by material progress, which tends constantly to increase rent in a greater ratio than progress increases production, and thus constantly tends - as material progress goes on and productive power increases - to reduce wages, not merely relatively, but absolutely.

It is really necessary to grasp the theory of land speculation in order to fully understand Henry George's idea of the land monopoly and his theory of economic crises.

The crisis theory is explained in Progress and Poverty, Book V, Chapter I, and I think that it is one of the most important parts of Henry George's economic theory. And it is obvious that the theory has relevance also with respect to the modern society. Fred Harrison has accounted for these things sufficiently in his excellent book, The Power in the Land.

But the land speculation is also the base for the land monopoly. As long as labour and capital are denied free access to the land, because all land is taken by the speculators, wages and interest will tend to a minimum, much below their productivity. I think that these things are explained best in Progress and Poverty, Book V, Chapter II and Book VII, Chapter II.

The most important reason for the land value taxation proposal is that the confiscation of the rent will do away with the land speculation, and thus also with the permanent rise of the rent. This will lead to increased wages and interest, as Henry George has written about in Progress and Poverty, Book IX, Chapter II.

It is astonishing to see that Marshall has not mentioned the land speculation at ail in his "Lectures." And he writes about Henry George's plan that it will not "alter the margin of cultivation, and therefore its only effect on wages, even on Henry George's own theory, would be by relieving capital and labour from the great part of the taxes imposed on them" (Lecture Three). If one wants to see anything new and true in Progress and Poverty one must read the book, and I cannot imagine that Marshall did that very carefully, otherwise he would have discovered the land speculation and its role in Henry George's theory about crises and distribution.

When I read "Three Lectures" for the first time about a year ago, I was extremely disappointed, because I have learned at the university that Marshall was an able and a competent economist. How could he then be so superficial as he demonstrated in his "Three Lectures"?

Talking about literature on Henry George, it should be mentioned that there are more interesting remarks on the theories of Progress and Poverty. Let me just mention John B. Clark (1899), Joseph A. Schumpeter in "A History of Economic Analysis" (1955) and Philip Newman in "Development of Economic Thoughts" (1952). But none of these are of course very comprehensive.

There is, according to my knowledge, only one of Henry George's critics which is worse than Marshall and that is Robert Heilbroner. I have mentioned his short passage on Henry George from his book, The Worldly Philosophers, and I can only say that I find the book miserable. It will perhaps be funny for you to hear that the book is translated into Danish. In fact it is the first book about economics I have ever read. But about a year later I read Progress and Poverty, and fortunately Henry George has influenced me more than Robert Heilbroner.

CONCLUSION

How should we evaluate Progress and Poverty today?

First, we should, of course, avoid looking at the book as an infallible Bible, because such a view is evidently wrong. There are errors and some points in Henry George's argumentation which are not very clear, but this is also the case for the principal works of Adam Smith, David Ricardo, Alfred Marshall and John Maynard Keynes. There is absolutely no doubt that Henry George is, at least, as competent an economist as the economists I have mentioned.

Second, we should use Progress and Poverty and the other of Henry George's books as well when we advocate land value taxation and free trade. In order to do so, we need to understand economic theory. Here we can use Henry George, because he has explained the principles of economics better than any other economist has done.

The more we read Henry George, the better we realize the necessity of a consistent theory about the social life. There are many things to learn for those who meet the task with an open mind.

List of references

Andelson, Robert V., 1979: Critics of Henry George

Clancy, Robert, 1989: "From Denmark," the Georgist Journal, No. 62.

George, Henry, 1879: Progress and Poverty

Harrison, Fred, 1983: The Power in the Land

Larsen, Karsten, K., 1988: "0konomen Henry George" ("The Economist Henry George," not published, not translated into English)

Marshall, Alfred, 1883: "Three Lectures on Progress and Poverty