Henry George Revisited
Godfrey P. Orleans
[Reprinted from the Henry George News, May,
1971]
There are many who maintain that the economic philosophy or Henry
George would provide a rational basis for solving most of our economic
problems. On the Georgian view, the problems of poverty, inflation,
unemployment, urban deterioration and others might be solved by the
simple act of removing the control of land from the private sector of
the economy. This step would at once deter speculative trading in land
and additionally provide public funds; the latter would permit a
substantial reduction in those taxes which are presently a deterrent
to productive employment.
Attractive as this solution might seem, the reasoning on which it is
based is open to question. One cannot be unsympathetic towards those
economists who have rejected the Georgian theory, and with it the
solution, on logical grounds.
Henry George was a classical economist. Like most of his
contemporaries he regarded money as a mere token of value, a neutral
medium of exchange, having no value in itself. Money as a mere medium
of exchange plays no active part in the economic process. Consequently
on the classical view, any demand for consumer products or capital,
must be equivalent to an offer of labor in an amount sufficient to
replenish the products demanded. Henry George declared his allegiance
to the classical point of view when he affirmed Say's law by stating
that supply and demand are coterminous.
It many seem surprising that the conclusions reached by Henry George
were quite the opposite of those reached by his contemporaries. To the
latter, Say's law meant that since supply was itself an expression of
demand there could never be overproduction. There must therefore
always be a trend towards full employment and maximum production. To
Henry George, Say's law meant that supply was itself an expression of
a demand for less than that which was supplied. Hence there must
always be a trend towards economic depression.
Henry George introduced into his reasoning the idea that, since the
supply of land is fixed, the relative bargaining positions of land,
labor and capital must change to the advantage of land with every
increase in the supply of labor and every increase in the supply of
capital.
The orthodox Ricardo and the unorthodox Karl Marx were aware of the
principle of the unearned increment, but they attributed it to the
general weakness of labor's bargaining position and could see no
disadvantage to the capitalist. What Henry George did was to recognize
that "an unearned increment" could not represent an increase
in total real wealth, but must represent a loss to the capitalist and
the wage earner alike.
Nevertheless there is a fallacy in the argument that the supply of
land is fixed. In an economic sense land quantity cannot be expressed
in terms of area, but must be expressed in terms of the labor that it
will support*. Any increase in the total rental value of land must be
due to an increase in total income, and must therefore correspond to
increases in total wages and total interest. In other words, any
increase in the demand for land, on the classical view, must
correspond to an increase in useful employment and cannot be due to
the withholding of land from productive use. To say that the
bargaining positions of labor and capital must tend to deteriorate
with respect to that of land, merely because the rental value of land
must tend to rise in relation to wages and interest, is a tautology.
I see no reason to disagree with the orthodox classical view that the
relative bargaining positions of land, labor and capital cannot vary,
except spuriously, owing to the intimate interrelation of these
factors.
And yet one fact stands out. Henry George propounded a theory of the
economic cycle when his orthodox contemporaries denied that the
economic cycle could even exist! There is surely something to be said
for the Georgian view.
The first explanation of the economic cycle to be generally accepted,
in principle at least, was put forward by J.M. Keynes in his General
Theory of Employment, Interest and Money. Keynes recognized that
money is not a mere token of wealth but does in fact have a value
attributable to its liquidity. The measure of this value is, crudely
speaking, the interest rate at which individuals may be induced to
convert their cash holdings to investments. Since the real interest
rate, which must vary with the efficiency of capital, may fall below
the generally acceptable interest rate, individuals may at such times
be expected to exercise a liquidity preference, in which case the
quantity of money in circulation must fall. Such a fall will of course
naturally tend to increase the preference for liquidity.
Although Keynes dealt exclusively with money in this regard, he did
express the view that a similar phenomenon might in theory occur with
items other than money, and he mentioned land in particular. Thus he
envisaged the theoretical possibility of a "liquidity preference"
in land. Clearly that would take the form of a demand for land to be
resold, as opposed to a demand for land to be utilized. In other
words, it would appear as a speculative demand.
At the time the "General Theory" was written, in the early
1930's, there was no evidence of speculation in land. Land prices,
like all other prices, were very low because money was in short supply
- that is, the liquidity preference in money was the controlling
factor, Keynes therefore confined his attention to money as it was the
only relevant factor at that particular time.
Since 1945 most western countries have experienced a relatively high
level of employment, a rapidly increasing production level, and
inflation. Moreover, the experience of the last twenty-five years
appears to indicate that inflation is a necessary condition for
economic growth and avoidance of a slump. Indeed, the experience of
North America and Great Britain during 1969 and 1970 suggests not only
that inflation is necessary to prevent a recession, but also that full
employment cannot be maintained unless the rate of inflation exceeds a
critical value. These experiences are quite inexplicable on the
classical view and on the Keynesian view of economics.
What is the evidence for "liquidity preference" in land
today? Have land prices risen more rapidly than other prices since
1945? Have rental costs increased more rapidly than other costs?
If there has been any speculation in land, is there any reason to
suppose that this was analogous to Keynes' "liquidity preference"?
To answer this question it should be pointed out that land, like
money, may be committed to productive use or may be retained as a
store of value. There will be no incentive to withhold land from
productive use unless its market price is rising or is expected to
rise, at a rate sufficient to offset the loss of rental income. Once
the market price begins to rise it will continue to do so, but why
should it rise in the first place?
The answer is that land is normally secured on a relatively long
lease and normally has capital invested in it in a physical sense. Any
change in the pattern of production will therefore be associated with
a redistribution of the labor force but not necessarily with a
corresponding redistribution of land. Thus land which becomes
redundant may be unsuitable for immediate re-employment, but it will
still represent a rental cost. The effect of this must be that any
increase in the level of production through an increase in
productivity must increase the demand for land without increasing the
demand for labor. Therefore rental costs and land prices must rise.
It is important to note that if rental costs rise due to this cause,
they must continue to rise until there is a depression of such
magnitude as to reduce the demand for land. By that time the economy
will have been damaged.
At this point we have completed a circle, for this is the very
problem that concerned Henry George. What is more, the solution which
he proposed was quite analogous to the solution which Keynes proposed
in relation to money. George did not know the welfare state, highly
organized labor, monetary and fiscal controls; it was the combination
of idleness and destitution around him which enabled him to understand
the problem as no one had before. If he failed to express the problem
clearly it was because the problem could not be expressed in the
economic language of his time, and his contemporaries knew no other.
Perhaps therefore the only real criticism that can be made against
Henry George is that his ideas were half a century ahead of their
time. Perhaos. after all, he was not in essence a classical economist.
NOTES
* Henry George probably understood this better than
anyone else, or so it would seem from his refutation of the Malthusian
theory and his very lucid explanation of rent. It is surprising that
he should apparently have ignored one of his basic premises when
establishing another.
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