Henry George's Theory of Value

Jack Schwartzman

[Reprinted from Fragments, Summer/Fall 1997]

[Author's Note: The figures in parentheses refer to the page numbers of Henry George's last -- and unfinished -book, The Science of political Economy (1898; New York: Schalkenbach, 1981.)]

This essay discusses Henry George's theory of value. My worthy colleague and friend, Oscar B. Johannsen, presents, elsewhere in this issue, his own interpretation of the theory of value.

The basic term in economics (called "political economy" in Henry George's time) is "wealth," but "utter confusion" exists concerning what wealth is. Since most economists agree, however, that all wealth has value, it becomes necessary to learn the nature of value in order to know the meaning of wealth. George was determined, therefore, to find the meaning of both value and wealth. (210-13)

There are two "senses" of the word "value" in economics. The first one, called "value in use," is that of utility, as when one speaks of the value of air or water to the human being. The second one, called "value in exchange," is that of exchangeability, as when one speaks of the value of gold being greater than that ofiron.(213-14)

However, George warned, it is "dangerous," in economics, to use "one word to represent two distinct and often contrasted ideas." The use of one of its "senses" has to be abandoned. George, therefore, discarded the employment of "value in use," and restricted the use of the word value, "as an economic term, to the meaning of value in exchange, as was done by Adam Smith." (224-25)

* * *

All numerical qualities, like value, George declared, are measurable. How may one measure value? (226) Before answering the question, George turned his attention to the Austrian School, and attacked its theory of value. Already, toward the end of George's life, this school, which champions individualism and self-interest, was gaining acceptance (as he acknowledged) in "pretty much all the universities and colleges in the English-speaking world." (252)

In spite of its name, the Austrian School is international in its membership and influence. It has been ably represented in the 19th and 20th centuries by economists W. Stanley Jevons, Karl Menger, Friedrich F. von Wieser, Leon Walras, Eugen Bohm-Bawerk, Ludwig von Mises, and Friedrich A. Hayek.

The gist of the Austrian theory of value is as follows:

All action, say the "Austrians," is prompted by desire. The urgency of desire measures the value of any desired commodity. People desire goods because such goods are "of use." Expressed differently, these goods possess "utility." Value (which is subjective and governed by desire) depends upon utility, but the two words are not the same. If one lives near a stream, and has access to it, the desire for water is easily satisfied. Water possesses utility but hardly any value. If one lives in a desert, however, every cup of water is indispensable. Water now possesses both utility and value.

In order for utility to turn into value, the available quantity of the desired objects should be so limited as to compel action.

This, basically, is the value theory of the Austrian School.

George attacked the Austrian School with anger and scorn. He derided the Austrians for their attempt to measure desire, which is, George contended, "incommunicable." There is no material test for subjective value. This fact "is what lies at the bottom of the grotesque confusions . . . of the Austrian School." (252) Value "can have no objective measurement until it passes through action into the field of objective existence." (246-47)

George also accused the Austrians of being "relativistic." There exists no common standard in their philosophy, he claimed, by which value may be measured. Their teaching is "that value is a relation between each exchangeable thing and all other exchangeable things... This view... makes value dependent on value without possibility of measurement... It leaves the idea of value swimming, as it were, in vacancy, without connection or fixed starting-point." (227)

Ridiculing the Austrians' derivation of value of goods according to various complex formulas, George sarcastically commented, "As coolly as ... Indian jugglers ignore the law of gravitation, do they [the Austrians] ignore that law which to political economy is what gravitation is to physics, the law that men seek to satisfy their desires with the least exertion -- a law from which proceeds the universal fact that as a matter of exchange no one will pay more for anything than he is obliged to." (237)

"There is no measure of value among men," George declared, "save competition or the higgling of the market." (253)

In spite of George's attack on the Austrian School, a number of Georgists today accept the Austrian theory of value because: (1) they (the Georgists) find the theory logical; (2) many Austrians advocate freedom and individualism, subjects which are very dear to these Georgists; and (3) George's theory of value (see below) appears confusing and unconvincing to them.

* * *

Having "demolished" (at least to his own satisfaction) the Austrian view of value, George felt that he was now ready to present his own theory. "Has not ... the idea of value," he asked, "some fixed starting-point, by which it becomes comprehensible and intelligible, as have all other ideas of relation? ... Clearly it has. What the idea of value springs from, is not the relation of each thing having value to all things having value, but the relation of each thing having value to something which is the source and natural measure of all value -- namely, human exertion." (228)

"The great body of the people in any civilized society," George emphasized, "consist of what we call the working-class, who live almost literally from hand to mouth, and who have in their possession at any one time little, or practically nothing, of value. Yet they are the purchasers of the great body of articles of value. Where does the value which they thus exchange for value which is already in concrete form come from? Does it not come from the conversion of their labor power, through exertion, into value?" (242)

"The fundamental relation of value must be a relation to exertion. But a relation to exertion in what sense? A relation to exertion positively, or a relation to exertion negatively?" (244-45)

George answered his own rhetorical question.

"When I exchange gold for exertion or toil, do I get rid of gold and acquire toil, and does he get rid of toil and acquire gold? Clearly not. No one wants exertion or toil; all of us want to get rid of it. It is not exertion in a positive sense which is the object of exchange, but exertion in a negative sense; not exertion given or imposed, but exertion avoided or saved." (245) "It is not the toil and trouble which a thing has cost that gives it value... It is the toil and trouble that others are now willing" to undertake in order to possess the required object. (246) (Emphasis in original text.)

This, basically, is the value theory of Henry George.

It seems to the author of this essay that George may validly be accused of reintroducing the labor theory of Karl Marx into George's own thought. In Das Kapital, Marx pronounced: "That which determines the magnitude of the value of any article is the amount of labor socially necessary, or the labor-time socially necessary, for its production."

Most critics of Marx, in attacking his theory of value, have long contended that the value of any given marketable commodity is not measured by the time it took to produce it but by the buyer's current evaluation of the commodity's worth. (The critics also rejected the expression "socially necessary" as being meaningless.)

When George stated that "it is the toil and trouble that others are now willing" to undertake in order to possess a commodity, did he not fall into a trap -- because he, too (like Marx), measured value by labor time? George spoke of current, instead of past labor time. Current or past, however, did he not (like Marx) measure value by labor time?

And if George did so measure value -- by labor time -- what should one make of George's previously expressed declaration that "there is no measure of value among men save competition or the higgling of the market"? (253)

* * *

To continue: There are, George conceded, exceptions to his "exertion" theory of value.

For instance, "a particular article ... acquires an exchange value which is not limited by the cost of producing it. Thus, an original picture of a dead master, or an original copy of an old edition of a book, which identically cannot now be produced by any amount of exertion, may have a value not limited by the cost of production, and this may rise to any height to which sentiment or ostentation may carry desire." (255)

George, therefore, named the value of a masterpiece "value from obligation" because it obligates the buyer to labor for hours, or months, or years, or decades -- to obtain the rare treasure, irrespective of the time it took the master to create it.

The value of land also, George pointed out, is an exception to his "exertion" theory of value. "The value that attaches to land ... is an example of the same principle which governs in a case of a picture by a Raphael or Rubens, or an Elgin marble. Land ... is not produced. It was created." (255) The occupants of land which is owned by someone else are obligated to labor for a time beyond count -- in order to survive.

To include these exceptions, George "expanded" his theory. "The various ways in which value may originate," he declared, "embrace (l) the value which comes from the exertion of labor in such a way as to save future exertion [value from production]; and, (2) the value which comes from the acquisition of power on the part of some men to command or compel exertion on the part of others [value from obligation]" (260) -- as when the obliger is a slave, or a prisoner, or an indentured servant, or a serf.

Concluding his discourse on value, George was now prepared to define wealth -- with which stated objective his exposition began.

"I found," he summarized, "that in value were included two absolutely different things, namely the quality of value from production, and the quality of value from obligation... Now, value from production ... consists in application of labor in ... production ... which adds to the common stock of wealth... Thus ... we come to the result that wealth in the politico-economic sense consists in natural substances that have been so secured, moved, combined, or altered by human labor as to fit them for human sarisfaction. Such substances are wealth and always have value." (272) (Emphasis supplied.)

Value from obligation, on the other hand, does "not result in the production of wealth." (272) The most unjust of these values from obligation is land value. It compels human beings to service a monopoly which presently controls most of the main resources of the earth. Only when there is understanding and justice will such a terrible, compulsory "value from obligation" -- land monopoly -- disappear from the face of the earth. There is always hope that -- some day -- it will.