Mr. Henry George:

An Examination of Mr George's position as a
Systematic Economist and a Review of the
Competitive and Socialistic Schools of Economy

Robert Scott Moffat

[Book V / Chapter IV / 1885]


Profit, with which we have now to deal, is a remuneration earned by the owners, or: at all events, by the holders, of capital. It is, as we have seen, dependent on the use of capital. Like the owners of land, the owners of capital, even as mere lenders, are not without an active part in the pursuits of industry. Mr. George rightly rejects John Stuart Mill's definition that the remuneration of capital is the reward of abstinence; but his own definition differs from this very immaterially, for he too excludes from the remuneration of capital any element pertinent to labour. In this he only follows out the principle of Ricardo, who makes a similar exclusion in relation to rent.

The share in industrial enterprise of the owners of land and capital is that of organizing and providing means; the share of hired labourers is that of conducting operations. This is the distinction Mr. George has missed. Of the two functions first named, the former, in organized industry, is exclusively the function of the holders, whether owners or borrowers, of capital; while the latter, primarily the function of the landowner, is shared between the two. To this complete ascendency of capital in the organization of industry there is no exception. The landlord in improving land uses capital and acts as a capitalist. Organized industry formally begins when the functions of the capitalist are separated from those of the landlord. With regard to the ascendency of capital there is a difference between Mr. George and his orthodox predecessors, which, as will be seen, however, does not affect their ultimate conclusions, as the liberty which Mr. George claims for labour turns out to be entirely illusory.

If it is necessary with reasoners like Mr. George to go back to the origin of things, the historical lesson of industry is easily written; and it will be seen from it that Mr. George condescends to talk nonsense when he speaks of the identity of the principles involved in organized with those of unorganized industry. Industry must everywhere have begun with the occupation, temporary or permanent, of land by a family group, gradually expanding into a tribal one. The industry would be directed by the head of the family, and the proceeds used by its members without exchange. Capital must have come into existence as soon as industry was applied, and there would be private property in certain family and personal belongings; but exchange could not arise until the group became large enough for separation of industrial interests. Different groups might then be formed similar to the first, and when negotiations began between them, a class would arise separate from the directors of agrarian enterprises, by whom these negotiations would be carried on.

Then capital first appeared as an organizer of industry. Until this time individual property in land could hardly have existed in a distinct form; but it must sooner or later have arisen from the new condition which rendered everything exchangeable a source of wealth to its possessor. With the increase of the number of merchants competition would arise, and when the producers of material and commodities were taken into their pay as hired labourers, their ascendency over the industrial organization became complete. So complete is it at present that economists have commonly overlooked the necessity for a continued co-operation on the part of landlords, and have virtually, whatever they may think, treated labourers as the mere slaves of capital. We have seen, however, that capital is itself the slave of industrial motives, and how these impel it to act is what we have now to consider.

We have seen that under an organized system of industry production is not pushed forward by the wants of labourers. Demand, not want, is what competitive industry undertakes to supply. But, on the other hand, all demand is alike acceptable to it. The demand of a labourer is as effective as that of a lord; the wants of a coal-heaver, in as far as they are covered by purchasing power, are as carefully catered for as the wants of a duke. We have seen also that what capital is compelled to cater for is not realized, but prospective demand.

Now the impelling power of competitive industry is individual ambition. The promoter or director of industrial enterprises desires means not to satisfy his wants, but to increase his power. If there are ten competitors for the supply of a given demand, each wishes to supply not a tenth of the demand, but the whole of it. If he succeeds in ousting his competitors, he immediately begins to organize the supply of a new demand, and if he becomes a monopolist in that, he proceeds to a third. Thus he goes on till his physical energy decays, or till the enterprise becomes too great for his organizing powers.

It is thus evident that there is no limit to the extension of production except the endurance of labourers; the utter failure of profit, or the utter crushing of competitors. The second limit is that which has, as I have already noticed, given rise to Ricardo's theory of the gradual decline of profits; the last is that upon which I base the doctrine of the differential character of profits.

The theory of a continuous decline of profits is capable, as I have formerly demonstrated, of an a priori logical refutation. Capital and profit form together a joint and reciprocally sustaining interest, and as an organized industry cannot exist without capital, so profit is indestructible. Profit is the normal, constant, and inalienable source of capital. If capital is adventitiously supplied, say from the savings of wages, then the contributions to it from profit may, and will, fall off; but let this gratuitous aid be withdrawn, and what will happen? First, capital will fall too low to be able to meet the whole of the remunerative demand for it; but as the demand will continue to be produced, or rather will be increased by the diminution of saving, an immediate rise of prices attended with a fall of wages and a rise of profits will ensue. The means of accumulation in the hands of the earners of profits will be increased, and the motives to accumulation raised to the highest point. Thus the rate of interest determines the general accumulation of capital up to the full demand of industry, and the rate of profit determines the appropriation to each industry of the full amount of capital it requires; while the same conditions prevent the permanent formation of accumulations beyond the general or particular demand. It is thus impossible that anything can cause a permanent decline of profit except a permanent excess of capital, and nothing can sustain a permanent excess of capital without a permanent surplus of profit.

Besides the tendency, already noticed, of industry to over-competition, there is another thing that has given plausibility to the theory of a continuous decline of profit, the fact that as industrial organization advances, and the area of competition expands, particular industries can be conducted remuneratively at a smaller rate of profit. Upon this it is only necessary to make two observations: first a decline in the rates of profit owing to an expansion of the industrial organization does not indicate any decline in the adequacy of profit; secondly, any actual decline of profits relatively to rent or wages incident upon the development of industrial organization is apparent, not real. That which attends the progress of industrial organization is exactly the reverse. Profit is the element that relatively increases; rent and wages the elements that relatively decline. That which distinguishes the growth of organization is not only an exhaustive division of labour into successive processes upon each of which profit maybe earned, but a higher elaboration and complexity in completed products; so that a commodity which in an earlier stage of development might have borne two or three profits may now bear twelve or twenty, and will certainly cost less labour relatively to the value of the result than before. Although each of the successive layers of profit is thinner than the preceding ones, yet their aggregate proportion to the entire labour goes on increasing. It has already been shown that the tendency of wages is to increase relatively to rent. The manner in which over-production affects profits is already apparent from what has been said as to the effect of profits on the accumulation of capital. When production, whether particular or general, exceeds demand, profits fall until an enforced suspension of producing energy takes place, and lasts long enough to allow the surplus produce to be consumed, when the race of production is resumed on the same conditions and with the same result as before.

To those who witness the wide-spread devastation among commercial and industrial interests inflicted by a commercial crisis it seems almost incredible that they should pass away with the slight effect upon industrial progress that they do. In any case progress would be restored by the indestructibility of profit; but that which mitigates the immediate effects to the organizing power is what I have already noticed, the differential nature of profit.

The struggles of competition for ascendency and virtual monopoly are always successful up to a certain point. Such, indeed, are the advantages of the stronger competitors that, as I have formerly said, it is only the decline of physical and mental vigour that sets limits to their success. If a dozen men of organizing genius could be rendered immortal, it is difficult to see how they could be prevented from absorbing the whole capital of the world in their hands. As it is, energetic organizers seldom find adequate successors, and when an industrial enterprise has reached a certain age and magnitude, it begins to show symptoms of decline. Thus, although old competitors may be crushed, new ones can never be prevented from arising and the eternal struggle begins on the same terms and with the same result as before. As it proceeds all the world glorifies the conquerors, and condemns the vanquished; although the success of the one depends upon the failure of the other. Clergymen write sanctified biographies of the former, and the latter are held up by utilitarian moralists as examples to be shunned. This explains why mercantile men, as sarcastically observed by Adam Smith, so habitually complain of the badness of trade. While, through the inordinate and uncontrolled ambition which forms the general guiding principle of all, a large proportion of them are continually in process of being crushed, trade can seldom be good enough to satisfy the desires even of the more prosperous. At any time there are thus in existence in each particular industry a series of establishments in all stages of advancement from infancy to decrepitude. To suppose that there can be any tendency to equality of profits among industries so situated is as absurd as to imagine an equality of productiveness between "the land last entered on" and the richest soil in England. The theory of equality of profits, as propounded by Ricardo, is not only one of the most stupendous blunders ever committed in systematic economy, prolific as it is in blunders, but, perhaps, the most stupendous blunder ever committed in any science. It could not have occurred but for the method of elimination, the baneful effects of which have been already exposed. When a commercial crisis occurs it strikes severely the immature and decrepit. The more vigorous competitors suffer temporarily only to gain a greater advantage from the suppression of their rivals. If profits were really equal, every crisis would prostrate, if not crush, nearly the whole existing organization of industry.

Now let us apply this theory of capital and its remuneration to Ricardo's theory of the limit of production. According to Ricardo, it will be remembered, the necessities of labourers determine when production shall proceed to poorer soil; the margin of profit on the land last entered on determines all profits; and the adequacy of profit determines the extent to which labour shall be applied. This series has a transparent aspect of circularity about it, and Mr. George renders it more consistent by making the productiveness of the land last entered upon the limit both of profit and wages. But it has been already shown that in an organized system the necessities of labourers determine nothing but the extent to which they shall be compelled to accept of employment on any terms. With regard to the second member of the series, Ricardo makes an assumption without any evidence whatsoever. He has been led to do so simply by misplacing the theory of equality of profits. The only place where such a tendency occurs is at the outside margin of all kinds of industry. In particular industries the differential range of profits is more or less extended according to the extent of the industry. Cultivation, like any other industry, only progresses when on its outside margin it offers more advantages to the capitalist than other industries do on theirs, and the permanent entrance upon any land is determined by its giving effectual remuneration to capital. But this margin does not, as Ricardo imagines, determine the limit of the profit of cultivation on other land, much less the limits of the profits of industry generally. The farmer who cultivates outside land is commonly an outsider. He would not be there if he could get better land to cultivate, and the landlord who has good land to let pays no heed to the cost of production at the outside margin. He wants not merely a tenant, but a skilful cultivator, and in order to secure him he allows him a differential profit corresponding to the importance of his charge.

Ricardo, in following up this generalization, has committed an oversight singular even for him, and in which he has been followed by Mr. George. He has not only, as we have seen, made rent gradually absorb profit and arrest the increase of wages, while Mr. George, more consistent than Ricardo, makes it crush out wages also; but both of them having eliminated rent from cost of production, keep it out of sight to the extent of forgetting it as an element of the wealth of the community.

Agricultural rent, with which, as we have seen, all other rents agree in principle, is only a share of the gross profit of raw material. If it is paid in money it is already commuted; but it must be still farther commuted before it can be of any use to its receivers. The whole of it must, sooner or later, be expended on the production of commodities, and so distributed between capital and labour. To talk of rent extinguishing profit and wages is thus like going about lamenting that there is no longer any oxygen to breathe, because it is all absorbed in atmospheric air.

Mr. George makes, as I have already pointed out, a similar oversight in regard to speculative profits, the existence of which he admits. The only thing that effectually raises rent is the growth of population, and the only thing that could cause rent to rise in a ratio to profit and wages so high as to be oppressive would be a growth of population in excess of the development of resources. In an organized system of industry this cannot happen; but the evil is that it is arrested not by preventive, but by destructive means; not by prudence and foresight, but by the incessant collision of the warring elements of industrial life. The form in which these elements reach the crisis of their strife, and the illusory nature of the tranquillity resulting from their exhaustion have already been shown.

This is the true problem of population, the great economic problem of the day. When I have propounded a remedy for the evils here shown to exist in relation to it in the actual organization of industry, I have been met on the part of orthodox critics with a flat denial that these evils do exist. When an economist says, as every critic professing orthodox views on competition and capital who has replied to me has done, that it is "impracticable" for labourers to reduce the supply of labour when the demand for it is bad by reducing its duration, without fighting about rates of remuneration, which involves the consent of employers to the reduction, lie says in effect, that no means can be taken to moderate the aggressive action of capital; that labourers will virtually never be better than its slaves; and that the future development of industrial organization will be a growingly absorbing pursuit of the accumulation of material wealth, resulting in misdistribution and unprofitable consumption. The evil is that while the natural tendency of competition is to absorb more and more of the labourer's time in material production or industrial service, the neglect of the natural law of population makes the increase of means go to the growth of numbers, and not to the better maintenance of the community; while excess of production of itself misdistributes both labour and wealth, and thus anticipates the evil of pressure of population. Mr. George knows no more of these evils of the competitive system than his orthodox brethren, and his remedies leave them wholly untouched.

The remedy I have proposed, consists simply in educating the working classes to treat capital according to its real nature, not according to the erroneous notions of it propounded by orthodox economists. As a constituent of the industrial system, the labourer cannot escape the control of capital. As a consumer and creator of demand, he can command it. It is his necessities that give the capitalist power over him; but these necessities are under his own control, and it is by controlling and moderating them that he can limit the control of capital. The part of his time which is beyond the control of the capitalist is his leisure, and he can buy more or less of it by sacrificing more or less of his least valuable material indulgences. The labouring classes generally, and primarily the producing labourers, thus hold in their own consumption the key to the consumption of the community. This power cannot be exercised without organization, and I have shown so that to be effective the organization must be guided by economic law. These conditions complied with, I hold that it is as much the function of the labourers to control consumption as of capitalists to control production. To the question of practicability I have devoted a series of chapters which my reviewers, as is evident from their objections, have by common consent left unread.

It remains here only to inquire how the distribution of wealth affects that of population. As long as the industrial organization lasts, the working classes can never have anything to live upon but wages, and wages can never affect the proportion which the laws of the organization assign to rent and profit. By wages, therefore, and by them only, must the growth of the labouring population be determined. It is certain, however, that wages may be materially lowered by over-competition among labourers for employment, and, relatively to work done, by over-extension of hours. When labourers are led by capitalists on to enterprises on which profits cannot be permanently earned, and then left in the lurch, they must continue to suffer until their labour is re-distributed, or their number reduced, as the case may require. This is the problem of population as it affects the working classes.

But there is, as I have said, a distinct problem of population for each class. The aggregate amount of rent or profit that can be earned in a community at a given time is determined, within certain limits, by the laws of the industrial organization; the number of landlords or capitalists is not. The number of the class may affect the remuneration in some secondary ways, but the general principle is as stated. If there are too many landlords or capitalists, therefore, the remuneration of the individual landlord or capitalist will be reduced.

There is a distinction, however, in the way in which the problem affects these classes from the way in which it affects the labourers. As I have formerly said, the overflow of the upper class falls into the middle; the overflow of the middle into the lower; but the overflow of the lower can fall nowhere but into the grave. While, therefore, the higher classes are concerned only with class problems of population, the evils of the whole pressure fall upon the lower.

Ricardo and Mr. Henry George have both observed certain evil tendencies in the existing industrial organization. Although I do not agree with their diagnosis of these evils, I agree with both authors as to their existence, and I yield to neither in the conviction of their magnitude. Both of these authors have found the source of these evils in the absorbing power of rent. I have endeavoured to show that this theory is alike opposed to sound a priori reasoning and to the whole evidence of experience. Rent, in fact, is not, and under an organised industry cannot become an aggressive and absorbing power. I have also endeavoured to show that both a priori reasoning and experience prove that the source of the evil exists elsewhere. The aggressive power is competition; the absorbing agent is an unregulated consumption, stimulated by competition, and not based upon the spontaneous demand arising from real wants. But "the enemy," as I have already said, is not competition, which is the motive power of industry, but over-competition, which is capable of being both distinguished and prevented. The functions of an organised system are performed by separate organs, not by the entire body, and the control of consumption is the specific function of producing labourers, operating upon it through the organised control of their own.