Henry George's influence
on John Bates Clark:
The Concept of Rent was Pivotal to Equating Wages
with the Marginal Product of Labor
Donald R. Stabile
[Reprinted from the American Journal of Economics
and Sociology, July 1995]
Historians of economic thought usually teach that John Bates Clark
based his formulation of the marginal productivity theory of income
distribution on "a generalization of Ricardo's theory of rent."
(Rima 1978, 252) Scholars interested in the writings of Henry George,
however, have often pointed out that Clark attributed his conception
of the marginal product of labor to George's theory of rent. (Teilhac
1936, 172; Geiger 1941, 98; Bruchy 1972, 115; Dwyer 1982, 363;
Genovese 1984, 133; Yeager 1984, 196-97) Despite this interest,
George's influence on Clark has been analyzed only briefly. (Collier
Because Clark and George had different objectives in mind when it
came to explaining the distribution of income, Clark's indication of
George's influence needs to be explained with greater detail. After
all, Clark has a reputation as a pioneer in neoclassical economics,
being "a central figure in the emergence of the marginal
productivity analysis of distribution." (Baumol 1985, 2) George
on the other hand anticipated many arguments of institutional
economics and had little use for the marginalist school. (Horner 1993,
248-50) Nevertheless, George and Clark had common interests. Clark
employed a socioeconomic perspective before his discovery of
marginalism and based it on a populist frame of mind similar to
George's. (Henry 1982, 175-77) He shared George's sympathy for the
goals of labor unions and distaste for socialism. (Clark 1886, 37 and
68; Henry 1983, 377; Genovese 1991, 113 and 123) Clark was also
willing to adopt good ideas whatever their source. This article traces
out that adaptation with respect to George, starting with the problem
Clark needed to solve.
II. Clark's Theory of Distribution
Clark's socioeconomic perspective formed an important component of
his first major treatise on economic theory, The Philosophy of Wealth.
(Clark 1886) Its premises resembled institutional economics,
(Jalladeau 1975, 213) for it stressed the need of envisioning society
as a social organism:
It is not merely man as an individual that needs to be
considered. A man is not independent. So close is the relationship
between him and others of his race that his conduct is dictated and
his nature transformed by it. Though a self-directing being of the
highest organization, he is made by his relations to others, to be
an atomic part of a higher organism - society. (Clark 1886, 37)
George shared Clark's appreciation for the usefulness of treating
society as an organism and both recognized, as did Austrian economics,
that analysis of the individual units of that organism were as
important as analysis of the total picture. (Yeager 1954, 188)
As part of ongoing social change, Clark perceived a trend toward the
consolidation of capital, which was replacing the individualist
competition that previously existed. This trend altered the balance of
power between capital and labor. (Clark 1886, 65-73) According to
Clark, the "solidarity of capital" was being countered by "a
solidarity of labor." (Clark 1886, 68) This opposed solidarity,
however, fostered social strife, with each party claiming justice was
on its side. At this point, Clark set forth the need for a standard
regarding income distribution.
If it is humanly possible to thus settle the questions at the basis
of the law of wages, no scientific work can be more immediately and
widely beneficent. These questions tend, if rightly answered, to
public order; if wrongly answered, to communism; and if unanswered, to
agitation and peril. (Clark 1886, 109)
Clark eventually settled on the marginal productivity theory of wages
as providing a standard of justice to which labor and capital could
both comply. Royall Brandis characterizes Clark's analysis of income
as a factor return on the basis of fairness in no uncertain terms, "The
return measured the contribution to production, the contribution to
production measured desert, and, thus, reward and desert were equated
and justice was done." (Brandis 1985, 873)
In his classic statement of marginal productivity theory in The
Distribution of Wealth (1989), Clark made this equation quite clear, "It
is the purpose of this work to show that the distribution of the
income of society is controlled by a natural law, and that this law,
if it worked without friction, would give to every agent of production
the amount of wealth which that agent creates." Regarding wages,
he added, "However wages may be adjusted by bargains freely made
between individual men, the rates of pay that result from such
transactions tend, it is here claimed, to equal the product of
industry which is traceable to the labor itself . . ." The same
rule applied to interest and profit. (Clark 1965, v) (The words
italicized here presaged important work by other economists
Clark devoted most of the book to explaining, justifying and applying
this natural law. With some changes, Clark's version of marginal
productivity theory has become standardized in modern economic theory
when it uses the concept of an aggregate production function to
explain the distribution of income. (Tobin 1985, 31-32) Clark defined
this aggregation approach as follows, "The pay of labor in each
industry tends to conform to the marginal product of social labor
employed in connection with a fixed amount of social capital, as such."
(Clark 1965, 116) At any time, society had a fixed amount of labor. It
was the additional contribution made to total production by an
individual unit of that social labor that determined wages.
Clark used his theory to provide the basis for a fair distribution of
income. He could counter claims by socialists that workers were not
getting all they produced. (Henry 1983, 376-78) His point was that
while workers were paid in line with what they produced, "the
whole product of industry does not go to the worker." Capital
added to production and deserved a share of total output. (Clark 1965,
To make his approach operational, Clark needed to describe how the
marginal product of labor could be identified and measured as a social
outcome. His solution to this aggregate measurement problem came from
George. Starting from Adam Smith's notion that in a early state of
society a person working without capital, or any payment of rent,
would earn all of what was produced, Clark added, "Mr. Henry
George has advanced an interesting theory which makes the gains of men
who are in this condition set the standard of general wages."
(Clark 1965, 84) Clark's basis for wage determination reflected
George's thinking on the topic. Since George did not find the economic
system to be fair, his thinking with regard to income distribution
needs to be explained before Clark's use of it can be considered.
III. Henry George on Income Distribution
Clark supplied no citations to George's writings in The Distribution
of Wealth but in his earlier book, The Philosophy of Wealth, he
specifically referred to the third chapter of Progress and Poverty.
Clark's appreciation for George's theory of wages at this time was
clearly stated: "Certain opponents of Mr. Henry George have
committed the strategic error of attacking his system at an
impregnable point, namely, his theory of the origin of wages."
Although he found problems with George's theory, as will be described
below, Clark remarked, "On the single point, . . . that products
are the source from which labor derives its maintenance, Mr. George's
reasoning is as conclusive as anything in mathematics." (Clark
Clark's praise for George's theory of wages did not extend to all of
his work. In his overall appraisal of that work, Clark "referred
to George's theory 'with all its absurdity'." (Bruchey 1972, 105)
Very likely, Clark would have found it objectionable that George
wanted to explain why "widespread want is found in the midst of
the greatest abundance" and that he placed the burden for "the
cause of want and misery" on "the injustice of society."
(George 1954, 7 and 141) As noted above, Clark employed marginal
productivity theory to explain how the distribution of income under
ideal conditions was socially just. He wanted to refute theories which
claimed the distribution was unjust and occasionally singled out
George as one of his targets. (Collier 1979, 267)
As is well known, George found the root of injustice in rent on land.
He defined rent not simply as the amount paid to superior land, but as
an ownership return. As long as good land was abundant, no one would
pay a premium for it. When all the good land was taken up, however,
superior land earned a rent in comparison to inferior land. The
natural productiveness of land led to the differential output that
created rent, but ownership determined who received it. As George
concluded, "Rent, in short, is the price of monopoly, arising
from the reduction to individual ownership of natural elements which
human exertion can neither produce nor increase." (George 1954,
When land was privately owned and not reproducible, the other factors
had to pay a premium for its use. As a result, "the law of rent
is necessarily the law of wages and interest taken together, for it is
the assertion, that no matter what the production which results from
the application of labor and capital, these two factors will receive
in wages and interest only such part of the produce as they could have
produced on land free to them . . ." Thus, in terms of a theory
of distribution, George claimed that rent was a payment of the
monopoly price of land and that this had harmful consequences for
Rent was a deduction from total output before wages and interest were
paid. George described this outcome with blunt detail, "Produce -
Rent = Wages + Interest." Wages and interest were not a function
of the output of labor and capital, but were based "upon what is
left after rent is taken out." No matter how productive labor and
capital became, as long as rent kept pace with their productivity
growth, "neither wages nor interest can increase." (George
With the owners of the natural powers of land able to secure a
premium merely for their ownership, the distribution of income could
hardly be called fair. Instead, there would be "progress and
poverty." For this reason, George saw the single tax on land rent
as a solution for poverty. Few of his reputable contemporary
economists subscribed to this tax. Clark several times opposed
treating land as a special resource. (Collier 1979, 269)
Moreover, Clark was interested in the emerging issue of his day, the
distribution of income between labor and capital. Rent on land
scarcely figured in his writings, even though he admitted that any
division of output "between capitalists and laborers, must, if
the traditional theory of rent be tacitly accepted, be regarded as
what remains to the producing classes after rent has been paid."
To be sure, Clark hedged on his acceptance of the traditional theory,
feeling that it needed "an extensive supplementing." (Clark
1886, 125n) Nonetheless, the concept of rent did figure into Clark's
theory of wages, and it was here that George had useful insights for
IV. George on Wages
George's views on wages were set forth in two separate parts of
Progress and Poverty, Book I (Wages and Capital) and Book III (The
Laws of Distribution), Chapter 6 (Wages and the Law of Wages). Book I
was primarily concerned with refuting the wages fund doctrine of
classical political economy, which held wages to be determined by the
total amount of capital in the economy at any given time. Since Clark
found the wages fund to be in error at about the same time, (Clark
1886, 20-21 and 126-27) he might be expected to be a sympathetic
reader of Book I.
Although George's argument was quite long, in essence he argued that
wages were based on what labor produced, not on some preexisting stock
of commodities for the maintenance of labor that preceded production.
Moreover, in looking at what a worker produced, George took a
marginalist approach. From the perspective of social production, he
insisted, a worker "receives in return for the addition his labor
has made to the general stock of wealth, a draft upon that general
stock . . ." This result meant that wages represented for the
worker "the wealth, or a portion of the wealth, his labor has
already added to the general stock." (George 1954, 23 and 29)
By thinking of wages in terms of what workers added to total
production, George had something akin to marginal productivity theory
in mind. His statement about labor's addition to the general stock of
wealth resembled Clark's notion of wages as the contribution of a
marginal unit of social labor, and predated it. Because Clark had read
Progress and Poverty before his marginalist revolution, there is
evidence to ascribe Clark's formulation of marginal productivity
theory to George, despite their disagreement on other issues.
The influence was purely stimulative, however, because George never
translated his rudimentary marginalism into a theory of wages. As
Martin Bronfenbrenner has written, George used "marginalist ideas
without marginalist language" and dismissed several early
marginalist writers as perplexing. (Bronfenbrenner 1985, 16; see also
Aslanbeigui and Wick 1991, 241) In his last, incomplete work, The
Science of Political Economy, George characterized marginal utility as
an "elaborate piling of confusion on confusion." His one
reference to Clark lists Clark's definition of wealth with that of
other notable economists, while his critique of a theory of income
distribution refers to John Stuart Mill. (George 1981, 217, 123 and
If George helped devise the marginal productivity theory of
distribution, he never admitted to it. Regardless, in his own
marginalist revolution, Clark did make use of George's law of wages
from Book III, Chapter 6.
George based his law of wages on the notion that humans wanted to
exert themselves as little as possible. With competitive wages, this
meant that equal exertion under similar conditions should generate
equal pay. No worker would supply greater effort than other workers
without higher pay.
When workers determined whether the wages offered them were worth the
effort, they took into account other opportunities available to them.
As a result, George argued, "the terms at which one man can hire
others to work for him . . . will be fixed by what the men could make
in laboring for themselves." (George 1954, 205) At that time in
the U.S., George observed, there was plenty of land on the frontier.
Instead of working for someone else, labor could stake a claim and
earn a livelihood on land. The amount that could be earned on that
land set the minimum amount of wages. If employers offered wages below
this amount, workers would go out and homestead.
The problem was a bit more complicated when there was land of
different quality involved, for in that case the income of the labor
included an implied rent for the land along with wages earned by
labor. (George 1954, 206-07) Rent still had to be deducted from
production to establish wages. Ultimately, however, wages were based
on what labor on the poorest land could earn. Labor on no-rent land
explained the general level of wages.
Supply and demand explained relative wages, but not their general
level. As George put it,
When it is said, as is commonly said, that the general
rate of wages is determined by supply and demand, the words are
meaningless. For supply and demand are but relative terms. The
supply of labor can only mean labor offered in exchange for labor or
the produce of labor, and the demand for labor can only mean labor
or the produce of labor offered in exchange for labor. Supply is
thus demand, and demand supply, and, in the whole community, one
must be coextensive with the other. (George 1954, p. 208-9)
To explain the general wage level, George replaced supply and demand
arguments with a law of wages that rested on no-rent land: "Wages
depend upon the margin of production, or upon the produce which the
laborer can obtain if at the highest point of natural productiveness
open to it without the payment of rent." (George 1954, 213) The
general wage level rose and fell with changes in what could be earned
on no-rent land. It was this postulate that Clark found so helpful.
V. Clark on Wages
Although he found it useful, Clark did not take over George's theory
of wages intact. As a description of what was taking place in the
U.S., Clark objected to George's law of wages on the grounds that even
no-rent land required some capital be used and that it ignored the
part rising land values had played in farmers' incomes in the U.S.
Even homesteaders on the frontier experienced appreciable gains on
their land in a very short time. In addition, those gains were spent
on further improvements, financed by credit, which transferred
themselves into higher earnings for industrial capitalists and
workers. (Clark 1965, 84-7) The spread of civilization brought
widespread prosperity to labor and capital, not just to the owners of
Given these qualifications, Clark applied George's concept to
industry. There he found that the margin where workers kept everything
that was produced was when they utilized "the poorest instruments
that are kept in action at all." He explained,
To make the existing stock of capital goods available to
the larger number of men, it would be necessary to work the worn
tool, the rickety engine, the unseaworthy ship, etc., somewhat
longer than it would have been used under former conditions. When it
is at the point of abandonment, however, the labor that uses it
creates wages only. (Clark 1965, 97)
Labor working with no-rent capital set the level of wages for the
rest of society. This wage theory was "akin to that of Mr.
George," Clark concluded, if it was amended to read, "all
men must accept what any of them could produce, if they chose to use
marginal land and other valueless instruments." (Clark 1965,
At some level of production, there always were workers whose pay was
low enough that employers were indifferent as to whether they should
be hired and put to work with no-rent capital. Clark thus marked off a
"zone of indifference," a sort of industrial frontier, where
"men may come or go without affecting the employers' pockets."
(Clark 1965, 102) It was in this zone that the natural law of wages
and distribution operated, and the last workers hired in it set the
wage level for all other workers.
This result would not appear to invoke the sense of fairness Clark
sought. For Clark to tell workers that their wage depended on the
addition to total output of workers in the worst case scenario on the
grounds that all workers could be in that zone was not very
inspirational. But Clark was concerned that the process of wage
determination was fair, not whether its level added to the well-being
of workers - another difference from George.
Despite what he gained from George, Clark disliked the notion of
injustice that permeated George's definition of rent. To counter it,
he defined rent in its more popular meaning as payment for the use of
any instrument. (Clark 1965, 123-4) In addition, Clark's theory
operated in a static world, wherein the total amount of labor and
capital were as fixed as the quantity of land, although labor and
capital were more mobile. Given this fixed amount, there were
differential gains to be had for better capital and labor. Rent, in
the differential sense, applied to all factors of production. Skilled
workers could earn a rent above what inferior workers earned. (Clark
1965, 336-42, 350-51, and 360-63) Better capital also commanded a
higher return. An income premium reflected society's willingness to
pay for the use of the greater productiveness of the particular factor
As for differences in wages, they did not alter the marginal
productivity theory either. When the pay difference resulted from
skills, Clark counted higher paid workers as several units of low paid
workers. The marginal productivity theory applied to these units of
labor and not to individual workers. (Clark 1965, 365) Since it was
society that determined which skills were valuable, it followed that
the pay of highly skilled workers was a social phenomenon, just as
George had said of rent on land. For Clark, higher wages for workers
were as much a feature of improved civilization as the increased rent
of land. Clark had indeed extended the theory of rent to all factors
of production and found in it a theory of social justice.
It is clear from the above that Henry George stimulated John Bates
Clark's formulation of marginal productivity theory as applied to
labor. This influence was not sufficiently powerful to accord George
recognition as a member of the marginalist revolution. Instead, we
must agree with Leland Yeager that "George did not understand the
marginalist revolution in value theory that was getting under way in
the last decades of his life." (Yeager 1984, 193) This assessment
does not mean that we must slight George's contribution to economics,
George believed that supply and demand could not explain the general
level of wages. That was why he employed what could be earned on
no-rent land as the basis for aggregate wages, making it a key
variable in determining the distribution of income. From the same
perspective, Clark used rent as basis for explaining the wage
structure, but he retained the marginal productivity theory to explain
the overall distribution of income. It meant that the growth of
capital could increase wages and bring progress and prosperity, but
only under ideal conditions of competition. The idea of rent as a
incremental return to monopoly power did not figure in marginal
On this disagreement, George was the more prescient. As Will and
Dorothy Lissner point out, (Lissner and Lissner, 1991, 179-81) George
understood that free enterprise required government intervention
against business power to remain workable, a view Clark shared. But
George added to this the insight that government itself could confer
rent, skewing the distribution of income in a rent-seeking society, a
point Clark never made. Neoclassical economics might have achieved
better insights into the functioning of the modern economy if Clark
had followed George more closely.
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.... Donald R. Stabile, PhD., is
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