Progress and Poverty by Henry George

The notes and questions in this study guide are based on lectures developed by economist Mason Gaffney of the University of California, Riverside. Gaffney writes:

You should be able to follow George's argument without a lot of help. This book is considered a masterwork of exposition because it hews to an outline that defines an issue, sticks with it, and builds a coherent, articulated thesis. It makes a good model to help you organize your own writing, from exams to reports and dissertations. That is true whether or not you agree with George's thesis. The point is, you can follow it. If you disagree, you can say exactly why, and where you depart from the carefully constructed thesis.

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Introductory: "The Problem"

1. From what evidence does George infer there is a common cause for unemployment in various countries? 6

It is found where tariffs are high, or low; where governments are autocratic, or democratic; where armies are strong, or weak; where money is paper, or gold. Those differences do not seem to matter. It is found in all advanced nations.

2. Why does George associate said common cause with material progress? 6-7

Depressions, which accentuate the problem, "are but intensifications of phenomena which always accompany material progress."

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Book I: "Wages and Capital"

Chapter 1: "The Current Doctrine of Wages-Its Insufficiency"

1. What is the central question George addresses? 17

"Why, in spite of increase in productive power, do wages tend to a minimum which will give but a bare living?"

Is George right about the tendency of wage levels? Has the question been resolved? What social questions are more important?

In good times, the tendency is strong for optimists and defenders of the status quo simply to deny the premise, and read no further. However, since 1975 or so, real wage rates in the USA have been falling in absolute terms. For several years before that, they were falling behind several nations we used to consider backward or oppressive, like Germany and Japan. Today we are enjoying a technology-driven economic boom that has raised property values and lowered unemployment. Whether that translates into a higher wage level is unclear. Whether a future crash will reverse much of the gain remains to be seen.

2. What is the "Wages-fund Theory" (WFT) answer, as seen by George? 17

Wages are fixed by the amount of capital, the "wages fund," devoted to employing labor, per head (i.e. divided by the number of workers employed.)

He goes on to say that the theory includes this element: that any increase of capital will be followed by an increase of heads, nullifying its effect. That, of course, makes the WFT just a variant of the Malthusian theory, which is how George treats it, and why he is so hard on it. No doubt some people were using it that way at that time. If we remove the Malthusian element, we might find some elements of truth in the pure WFT. (See Knut Wicksell on capital theory.) Meantime, George has some telling points to make.

3. What facts does George cite to refute WFT?

a. Interregional comparisons (some say "cross-sectional analysis") 19-20

Wage and interest rates in fact vary together, not inversely as implied by the WFT. He cites the western USA, where wage and interest rates are both higher than in the east, and Europe. He attributes this to greater abundance of land per head in frontier areas. He faults WFT champions for thinking in terms of just two factors, when there are three.

b. Intertemporal comparisons (some say "time-series analysis") 21-22

Wage and interest rates are both lower in slumps than in boom times. He allows for the interesting exception that interest rates are high during "panics," but he attributes this to a high rate of insurance against risk, rather than to interest per se.

4. Does the complexity and advanced technology of modern economies free them from dependence on land or nature? 26-28

Absolutely not. Land is "limitational," meaning some of is needed for all production, for all human life and activity of any kind. It is true that there are land-saving techniques that let some production occur with very little land, but never with none. There are also labor-saving techniques that vastly raise the land coefficient of labor. Of the two, labor-saving techniques seem to be pulling ahead of the land-saving kind.

In cities, activities take less land area per head, but more land value, because the price of city land is hundreds, sometimes thousands of times higher than the price of rural land, per unit area. George sees city land as our most valuable natural resource.

Radio and TV communications use the radio spectrum, a limited natural resource. George conceives and defines land broadly, to include "all the material universe outside man and his products."

Thus, George is leading us into a tripartite economic world consisting of Land, Labor, and Capital. Although three is a small number, this poses problems for the human mind and comprehension. Most thinking is dualistic: Yin and Yang, Good and Evil, East and West, God and the Devil, Friend and Enemy, Them and Us, Ordinate and Abscissa, Female and Male, Black and White, Liberal and Conservative, Left and Right, Believers and Infidels, Republicans and Democrats, Haves and Have-nots, Right and Wrong, Orthodox and Heterodox, etc.

Dualistic thinking limits most economists. Behind the facade of advanced methodology, elaborate models, and the trappings of mathematics, there is an incorrigible simple-mindedness. Their world consists of only two factors, Labor and Capital. George challenges us to stretch our minds and rise above that.

The point of having three factors is this: all production requires some of each; they are mutually exclusive; and they are not convertible into each other, so the returns of each factor are determined by common forces, but separately from returns to the other factors.

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Chapter 2: "The Meaning of the Terms"

George defines his terms carefully in advance, and sticks consistently with his definitions. It is all too common for economists to muddy the waters by not defining their terms, then by using them in shifting, and too often shifty, ways.

1. What are the three factors of production, according to George? 38

Land, Labor, and Capital. This was standard among classical economists. It never occurred to them that anyone could be allowed to define land out of existence, or subsume it under "capital," as too many economists do routinely today.

2. What are their respective incomes called?

They work together to produce a "pie" that George calls "wealth." (Today we would say "the product," including goods and services.) From this, Land gets Rent; Labor gets Wages; and Capital gets Interest. It is not Land itself that gets rent, of course, but the landowners. It is not Capital itself that gets interest, but the owners of capital. If a person owns both, and manages them himself, he gets an income, called "profit," which contains all three elements: rent, interest, and wages-of-management. The job of functional distribution, which George is approaching, is to break profit down into its components, and to apportion it among the three factors that account for it.

Businesses do not earn profits just for being in business, but for selling goods and services. To do so requires the use of inputs, which account for the sales. Those inputs they do not own they hire as they go, paying them about as much as they add to sales. "Profit" comes from the inputs they do own. Apportioning profit among the owned inputs is called "imputing." Remember that word, and its meaning.

How about profit, then? After imputing away profit to the inputs that account for it, there is none left. This method, introduced by George, has become standard (without credit) in micro theory today. The easiest way to grasp that is to picture the manager as hiring all the inputs, including himself. Alternatively, think of the firm as a corporation that hires and pays all its managers, deducting their salaries from profit. Then it rents all its space and equipment. It borrows to finance its inventories, 100%. In financial terms, it has no equity. It is a "disembodied spirit." Under competitive conditions it will have no profit, either.

Distinct from accounting profit is economic profit, which economists today define pretty much as George did-revenues minus ALL costs, including the implicit costs of resources owned by the producer. In competitive conditions economic profit tends to zero-a basic result in Economics 102. Positive economic profit can persist only under monopoly conditions, that is, when some barrier prevents entry of competitors into a lucrative market. Often the barrier is an artificial, legal one-a license, patent, or tariff enforced by government. Sometimes the barrier is a natural one, but with a legal dimension-as when the producer is granted title to most of all of the known deposits of some natural resource.

"Profit" in the accounting sense is a concept that belongs in the study of personal distribution, not functional distribution. Land as such may yield a high ground rent, but no personal profit, if the owner has borrowed heavily on it. Then she pays out all the ground rent to the bank as interest, leaving no profit to herself. That does not mean there is no rent; it just means the bank gets it. Indeed, most real estate is held this way, and pays little or no income tax as a result. (Mortgage interest is deductible as a cost of production in the US tax code. Businesses pay income tax on the amount by which revenues exceed costs.)

The purpose of studying functional distribution, as we will see, is to determine the forces that make rent, interest, and wages, rise and fall. That is doable. On the other hand, the level of "profits" rises with the ratio of businesses' net worth to their total assets (NW/TA), and falls when that ratio falls, telling us nothing useful about the levels of interest or rent. Profits may actually rise, from a rise of rents, while marginal returns on investing in new capital are falling.

3. How does George define land? 38

"All the material universe outside man and his products." That includes a lot more than what is colloquially called land. It includes all the forces, forms, and materials provided by nature: soils, topography, city lots and acreage, wild fish and game and their habitat, dump sites, virgin and volunteer timber, the natural environment, the gene pool, the ecology, natural grasses, the climate, water in all its forms, aquifers, reservoir sites, watersheds, beaches, ores and gravels and minerals, the air, air space, take-off and landing slots, routes and rights-of-way, parking spaces, the radio spectrum, sunshine, the power in the atom, harbors, power drops, riverbeds, lakebeds, seabeds, etc. (Cf. M. Gaffney, "Land as a Distinctive Factor of Production.")

4. How does George define "wealth?" 39-41

Note that capital is subsumed under wealth (42, 48). We can overlook his effort to cut consumer capital from other capital. It plays no role in his later reasoning. In fact, we will see that he presently has consumer capital easily convertible into other capital.

a. How does George distinguish land from wealth? 42.

He defines wealth as human products, thus excluding land. Since he defines capital as a form of wealth, that distinguishes capital from land.

b. What does George say about bonds, stocks, etc.? 39-41

George leans hard on distinguishing material wealth from mere paper claims on wealth. Today we would say he distinguishing social accounting from private accounting, and warns against double counting. Again, he is a pioneer (without credit) in what is now routine wisdom in the better studies toting up national wealth. In social accounting, one person's claim is another person's liability, and they cancel out.

When you think about it, it is obvious. No economist would disagree today, overtly. However, he warns us that other economists often forget to think about it. They slide back into the careless metaphors and metonymy of private accounting, where paper claims to wealth are wealth to individuals, and misapply them to counting up social wealth. This still happens. An example is when some economists fault the American property tax because the tax base does not including corporate shares, and bonds. Some say it does not tax corporate wealth, therefore. They forget that corporate assets themselves are taxable property. In most cities, in fact, the largest 20 or so property taxpayers are all corporations.

He does not say, but it is true, that some economists fall into the converse fallacy: they count up debts, and view with alarm the growth of debt per se, forgetting that one person's debt is another's credit. That is not to say the growth of debt is meaningless, but the reasons are subtler.

5. How does George define capital? 48

Wealth used to produce more wealth; alternatively, wealth in the course of exchange. As a practical matter, he might as well just say all wealth is capital for, we will see, he finds all the forms are mutually convertible. So just think of wealth and capital as the same; you may overlook the fine distinctions he discusses. They are important in capital theory, but George makes no further use of them.

6. How does George define labor? 32

"Human effort devoted to the production of wealth."

George also sees capital as "stored-up labor," and sometimes tends toward dualism himself. Where other dualists (following J.B. Clark and Karl Marx) are prone to fuse capital with land (in distinction to labor), George is inclined to fuse capital with labor, (in distinction to land). In treating capital and labor as partly interchangeable, George in a way anticipates those economists of today who make much of "human capital." However, they focus on the capital embodied in labor, while George points to the labor embodied in capital. With George, labor is always primary and uppermost.

7. How does the meaning of "wages" in political economy differ from common usage? 72

Wages include all returns to human effort, not just the pay of hired hands. They also include salaries, commissions, fees, etc. They include most of the "profit" of small businesses (assuming they are labor-intensive).

8. Does increased land value represent an increase in the common wealth? 40

No, it is just redistributive.

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Chapter 3: " Wages Not Drawn from Capital, But Produced by the Labor"

1. How does George proceed to prove that wages are not drawn from capital? 51-56

Beginning with the simplest case, and tracing first principles through successively more complex cases.

2. What is the metayer system? 52, 53

The tenant farmer gets a share of the produce; the landlord provides the land and capital (tools, seeds), and receives the remainder of the produce.

3. What are wages in kind? 53

Wages paid in the form of a part of the wealth that the labor produces.

4. What is saer-and-daer stock tenancy? 53

Unclear. Evidently a form of cattle ranching involving wages in kind.

5. How does George analyze cases in which the laborer gets his wages even when a disaster forces the employer to take a loss? 56

The employer accepts the risk of the enterprise, and in return for this security the workers accept somewhat lower wages, so that the employer is compensated for risk.

6. How does the use of the term "capital" in two senses lead to the fallacy that industry is limited by capital? 58

Major premise: Capital is necessary to the exertion of productive labor.

Capital is broadly defined to include all food, clothing, shelter, etc.

Deductions: Capital limits industry. Wages = [Capital/Laborers].

Capital is narrowly defined as wealth in the hands of employers.

7. Why does the habit of estimated capital in money cause confusion? 62

Because the capitalist typically lays out capital in the form of money to pay wages while the work proceeds, exchanging money for capital in the form of partly finished goods.

8. In what branch of production are "the confusions of thought which arise from the habit of estimating capital in money" least likely to occur? Why? 62-63

In gold mining, because gold is money, so it is clear that the laborer produces his own wages, even when wages are paid in money.

9. If labor is hired to build a ship, does the employer lay out capital in order to pay wages during the many months of labor required to complete the ship? 67

No. Each day, the laborers add value to the partly finished product, increasing the employers capital before a part of that increase is paid out in wages.

10. If an employer does not need capital to pay labor, then why does he need capital? 70

In order to be a merchant or speculator in, or an accumulator of, the products of labor.

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Chapter 4: "The Maintenance of Laborers Not Drawn from Capital"

1. Why is it absurd to suppose that the maintenance of laborers is drawn from capital? 72

It involves the idea that labor cannot be exerted until the products of labor are saved-thus putting the product before the producer.

2. How does George answer Mill's assertion that laborers are maintained from the produce of past labor, and thus from capital? 71 ff.

Laborers are maintained from the produce of contemporaneous labor. Also, capital is wealth in the hands of the employer; his food in the hands of the worker/consumer.

3. How does labor "virtually" produce the things on which he expends his wages? 76

His purchase sends a market signal that directs the production of replacement supplies of the item he buys.

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Chapter 5: "The Real Functions of Capital"

1. How does capital increase the power of labor to produce wealth? 80

(1) By enabling labor to apply itself in more effective ways.

(2) By enabling labor to avail itself of the reproductive forces of nature.

(3) By permitting the division of labor, and thus

a. increasing the efficiency of labor, and

b. increasing the efficiency of utilization of land.

2. Does capital supply materials? 80

3. Does capital supply or advance wages, or maintain laborers during the progress of their work? 81

4. Does capital limit industry? What does this phrase mean? 81

5. What, then, does limit industry? 81

6. And what, then, can be limited by capital? 81

7. Does lack of capital limit productivity in Mexico or Tunis? 83

8. What evidence suggests that "the social organism secretes, as it were, the necessary amount of capital just as the human organism in a healthy condition secretes the requisite fat?" 83-87

9. The wages-fund and Malthusian theories imply that wages fall as the number of laborers increases, other things being equal. George suggests that, on the contrary, wages rise as the number of laborers increases, other things being equal.

a. Why should wages rise as population grows? 88

b. What is one reason why other things might not be equal? 88

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Book II: "Population and Subsistence"

Chapter 1: "The Malthusian Theory, Its Genesis and Support

1. To what does George attribute the sustained support for Malthus' theory? 99

It stills the conscience of the rich, and discourages reformers, by attributing poverty and want to unavoidable natural causes. It "parries the demand for reform, and shelters selfishness from question and from conscience by the interposition of an inevitable necessity."

2. How does Ricardo's rent law support Malthus? 97

It presumes that rising population forces recourse to less and less productive lands, lowering wage rates. It contains and reinforces the same grim premise as Malthus, that rising population crowds onto fixed resources and lowers living standards. Do not think that George is repudiating Ricardo's Law of Rent: later he will generalize it, and base much of his analysis on it.

3. How do Darwin's theories support and extend Malthus? 100-02

Darwin wrote that Malthus inspired him, that the struggle for existence is simply the doctrine of Malthus applied to other organisms. McCulloch says the very cause of progress is the struggle for existence engendered by poverty. Darwin gave to Malthus the prestige of Science.

4. How did Alfred Russel Wallace diverge from Darwin?

Wallace published the principle of natural selection simultaneously with Darwin, at the very same meeting in 1857. Darwin may even have cribbed from Wallace, an historical mystery still being unraveled. Wallace rebelled against the reactionary social implications that many, like Huxley, and Herbert Spencer, were drawing from natural selection, and disavowed them.

Wallace, having become an international celebrity, and financially independent, dropped biology and became a land reformer. He and George came up with parallel ideas and proposals at the same time. Wallace did not just repudiate Malthusianism, he sponsored George when George visited England.

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Chapter 2: "Inferences from Facts"

1. Under what conditions do human populations increase fastest? 103

Where human life is occupied with the physical necessities of existence, and "where the perpetuity of the race is threatened by the mortality induced by adverse conditions." George surmises that birthrates will fall with higher incomes, and peace. Later experience and research roughly confirm that, although there are anomalies like the low birthrate of the Great Depression. The postwar baby boom is an apparent anomaly, in purely economic terms, but not in terms of "threats to the perpetuity of the race." Wars always raise the birthrate.

2. To what does George attribute poverty in India? 113 ff.

Suppression and ruthless exploitation of the working classes by various conquerors, not least the English.

3. Why did Ireland export food during its famines? 125

To pay rent to absentee landlords, resident in England. These landlords had acquired their estates not through purchase, but conquest and appropriation.

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Chapter 3: "Inferences from Analogy"

1. How and why do prey populations respond differently to growth of human population than to growth of animal predator populations? 130

Man controls the reproductive powers of the species on which he feeds. He saves the seed corn; he pastures the bull with the cow, and the rooster with the hen. "No other species can make that statement." Thus, "... the more jay-hawks the fewer chickens, while the more men the more chickens."

2. What limits the population of food-importing cities? 132; 142

The physical limit of the globe, because to produce one thing is to produce all the things for which it will exchange.

3. How do human and animal populations differ in their response to increased subsistence? 134-35

The only use that animals make of increased subsistence is to multiply. Man's desires expand beyond reproduction: he raises his standard of living. At first these added desires are material, but as man evolves they grow more intellectual, social, public-spirited, and spiritual, requiring fewer resources.

At this point George's idealism swells beyond his evidence, but he may be right. What do you think?

4. How does George use the law of conservation of matter and energy? 133

Nature recycles everything; nothing is lost.

What about the "Second Law of Thermodynamics," the law of entropy? George says nothing about that; it was hardly known in his day, and he lived on a frontier with abundant untapped resources. It doesn't hurt to review this notion of resource abundance periodically, especially as we draw down the energy resources stored up by nature over millions of years past. That would not necessarily conflict with George, whose basic message is that we should economize on natural resources more conscientiously.

5. What are Malthus' "positive" and "prudential" checks on population? What third check does George identify? 138

Malthus' "positive" checks do not sound very positive. They are vice and misery, with their various subdivisions like the Four Horsemen of the Apocalypse: fire, warfare, disease, starvation. His "prudential" check is abstinence, which he favored, hair-shirt puritan that he was. Modern technology, uncoupling procreation and recreation, has brought prudence within reach of all but the most insouciant.

George's check is rise of the standard of comfort, and development of the intellect.

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Chapter 4: "Disproof of the Malthusian Theory"

1. What does George mean by "Disproof of the Malthusian Theory." 143-47; 149-50; Cf. 230-43.

Nations that increase in population increase in wealth per head. Densely populated countries support more people in idleness, and export capital. They have the greatest surplus to devote to warfare. The denser the population, the more the specialization, or subdivision of labor. He develops this last theme at greater length in Book IV, Chapter 2, "The effect of increase of population on the distribution of wealth."

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Book III: "The Laws of Distribution"

Chapter 1: "The Inquiry Narrowed to the Laws of Distribution-the Necessary Relation of These Laws."

1. What is "distribution"? 154-55

Is it part of modern micro, macro, or something else? (No page reference.)

Distribution is the division of economic values among parties, or, for short, "cutting the pie." George here deals with "functional" distribution of output. That is the division of the product among the functional factors of production: land, labor and capital. Today, the process of determining how much each input adds to output, and how much of the pie should be its portion, is called "imputing." Misimputing, which is all too common, is called "arrogating." Learn and remember the word "arrogating," too. It is one of the deadly sins of economics.

Locke, Quesnay, Smith, Malthus, Ricardo, Mill, etc. al., the pioneers of our discipline, dealt with functional distribution. It was a central concern of classical "political economy." Modern micro and macro neglect distribution. A residual treatment of the tools you need to understand functional distribution is found in the part of micro called "production economics." Some micro texts explain "Euler's Theorem," which helps, once you really understand it. Most economists today downplay the social and distributive implications, however, emphasizing instead the managerial and allocative aspects.

As to macro, early Keynesian macro emphasized functional distribution only as it affected consumption: wages were thought to be more spent on consuming than property incomes are. Keynes of the 1930s took this as an argument for resisting wage cuts. Champions of higher wages have always used this argument, indeed, and still do, but it has boomeranged: today it is used as an argument for raising property income, to increase saving. Most macro theory today pays no attention at all to the division between rent and interest, a glaring weakness in macro that continues to the present. Modern macro rather resembles, in its intellectual structure and reactionary social purpose, the travesty of the wages/fund doctrine that George attacked.

(Some economists classify distribution theory and the like under "meso" economics.)

2. "The problem is not production, but distribution." 154

Does this statement summarize George's position?

George wanted to divide the pie differently, but that was partly in order to make the pie bigger-he was concerned with production, not just distribution. He championed a functional policy of distribution: distribute the pie according to the contributions people make to it, thus maximizing incentives to produce wealth, and allocating resources to their best uses. He shows that workers and savers contribute, but landowners per se do not. It is the last point that differentiates George from ordinary champions of free markets-the ones who modestly call themselves "mainstream."

3. Profits and interest, 156ff.

a. How does George distinguish profits from interest?

Profits are the sum of three parts: interest proper (which is "pure" interest, something like the risk-free prime rate); risk premium; and wages of superintendence. George does not mention that profits as generally used are net of interest paid out, and the rate of return (ROR) on equity is profit divided by equity capital, where equity capital is total assets less debt.

George stresses that "wages of superintendence" are a large part of profits. That is true for small unincorporated businesses, and the writers he is citing are from the era before corporations were as dominant a form as now. Today in corporations, wages of superintendence are deducted as salaries and bonuses (and some illicit boodling) of managers, before figuring profits.

He only mentions in passing that profits include rent. The omission must be imputed to absent-mindedness when writing late at night, because elsewhere it is clear this is his major point. Actually corporate profits today include large rents, and can be steady or rising even when the marginal rate of return on capital is falling.

b. How does George criticize earlier writers on this? 159

George criticizes other writers for regressing from their own definitions, and using profit to mean the return to capital. They contract the meaning of "wages" to its narrow colloquial sense, and put wages of superintendence in with profits. The result is to blur the distinction between returns to labor and those to capital.

It would be more characteristically Georgist to fault them for arrogating the returns of land to the credit of management or capital. That is what they do. Managers entrusted with valuable lands love to understate the lands' value, arrogating its productive contribution to themselves, making themselves look good and justifying raising their salaries.

4. Why does it matter how we define interest? 158

We are on the job of "assigning causes that fix the general rate of interest." Profit is an amalgam of various elements, including rent. Rent varies inversely with interest. In addition, profits go down when debt rises, even though the returns to capital and land remain the same. Changes in profits, as the term is generally used, therefore do not tell us what is happening to the MROR on capital proper. That is important for policy, because it is the MROR that motivates and stimulates the investing that makes jobs and incomes.

"Profits," as usually measured and defined, may actually rise while MROR falls, and it is rents that rise. Occasionally some smart economist figures this out. Rarely, some constructive economist comes into power and takes appropriate action: Walter Heller is a prime example, with his Investment Tax Credit (ITC). The ITC is a tax preference that is limited to investing to create new capital, thus raising the MROR without raising rents. Keynes, who stressed the importance of raising the MROR, would have approved. The mass of ordinary "mainstream" economists, meantime, mill around ineffectually, clueless and unavailing, silent and apparently in darkness on this vital point.

If Land were convertible into Capital, and vice versa, their returns would rise and fall together. However, they are not mutually convertible: that is why George and the classics defined the elements of economics as they did.

5. What does George mean, "The laws of the distribution of wealth are obviously laws of proportion,..." 160

The shares must add up to 100%, so the whole system must be explained together, not just one part at a time. George was system-minded, and was pushing for a unified theory whose parts all harmonized. In this he was ahead of his times. His contemporaries who developed the unified theory more elegantly and academically were a man he had inspired, Philip Wicksteed, and another man he had challenged, J.B. Clark. Wicksteed and Clark both produced comprehensive marginal productivity theories showing how the total product is "exhausted" when all factors are paid their marginal products.

6. What is the law of rent? 161

"Rent is determined by the margin of cultivation; all lands yielding as rent that part of their produce which exceeds what an equal application of labor and capital could procure from the poorest land in use."

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Chapter 2: "Rent and the Law of Rent"

1. Is there rent when the landholder and the user are the same? 165-66.

Yes, there is what we now call "implicit," or tacit, rent. Tacit rent is also called "imputed" rent because its quantity has to be imputed. A large share of business profit is imputed rent today. For some businesses it is nearly all of profit. How else would you impute the profit of a parking lot, for example? The operator likes to arrogate it to the credit of his efficiency or productivity. The efforts of managers to do so cause much confusion on this point, and much understatement of true rent.

Logically George should extend this to the imputed rent of land under and around owner-occupied residences. He never addresses this in this book, although he does in later works. Economists today routinely speak of imputed rent on owner-occupied residences. They also, unfortunately, underestimate its amount, and vastly underestimate the share of it that imputes to land, especially in the residences of the rich.

The importance of this question may be seen by noting that credit secured by residential property is considerably more than the national debt today. [See figures in the data sections of the Federal Reserve Bulletin, the Survey of Current Business, the Statistical Abstract, some Almanac, of wherever you can find data on mortgage debt.]

2. How is ground rent related to the price of land? 166

Which is cause and which is effect?

Ground rent is capitalized into land value. V=a/i, where V is value, a is annual ground rent, and i is the interest rate (expressed as a decimal, not a percentage). When rents are expected to change over time, more complex formulae are required. [See M. Gaffney, "Land as a Distinctive Factor of Production."]

3. How is rent related to the "productiveness" of land? 166

Rent is from the excess productiveness over marginal (rent-free) land. There is no point in paying for what you can get free.

4. What is the law of rent? 168

168 has it; also 161 above.

5. Is George's statement of the rent law adequate? 168

Not on p. 168. Here, he refers only to "the same application" of labor and capital. That does not account for additional rent rising from additional application of labor and capital to better land.

Seizing on this partial statement, captious critics have accused George of understanding only the "extensive" margin, not the "intensive" one. A hasty reader might get that impression, from George's frequent references to the placer gold fields, the frontier, free land, etc. This criticism is not really supportable. On p. 169 we find that when wages fall, labor resorts "... to inferior lands, or to inferior points on the same lands ..." This phraseology, repeated elsewhere, clearly refers to an intensive as well as an extensive margin.

If George were writing a text, 40 years after others had discovered and developed the point, it would be fair to criticize his statement as unclear and incomplete. Judging him as the pioneer that he was, however, he seems to have the elements of a correct statement in place. Remember, he was aiming at (and hit) a wide popular audience who would have had little patience with fine points. Even some economics students today have trouble understanding the intensive margin of production, incredible as that may seem.

6. As to uniformity, how does rent differ from wages and interest? 170

Wages and interest tend to a common level through the interflow and competition of mobile factors. Rent differs from place to place.

7. Is rent purely agricultural, or does urban land also yield rent? 170

Ricardo treated rent as a product of diminishing returns, which he associated with farming. Manufactures he supposed to evince increasing returns, hence to yield no rent. Marx followed that idea, too. George pioneered the application of diminishing returns to cities. One cannot explain urban rent without it.

As George's movement evolved it became primarily focused on taxing city land, whose values were rocketing up with rapid industrialization, commercialization, and urbanization. Some modern writers, like Jeffrey Lustig of CSU Sacramento, persist in labeling George an "agrarian" reformer, because of the common threads in him and Jefferson, Lincoln, and the populists. Vague as the term "agrarian" is, it comes far from describing the versatility of George's thinking, and the reform proposal it led to. It also overlooks George's personal life and background, which were intensely urban.

8. How does George coordinate the laws of distribution? 171

Wages and interest get what is left after rent is taken out. The sum of the shares is 100%, so each law implies the others.

George always makes rent the first claimant, with others getting the leavings, or the "residual," as it is put. Other economists using the residual method give labor/capital their marginal products, with rent getting the residual. George's approach makes the landholder less passive and reactive, more importunate and demanding. George's approach has a lot to be said for it in terms of realism. Landholders are paid first when: a) they are paid up front by selling title to the user; b) they charge a cash rent; c) appraisers and tax assessors separate land from building values by using the "building-residual" approach; d) urban speculators buy old junkers and tear them down for the land underneath them. Rent takes priority over other claims on the product because landlords have the power to evict for non-payment. Few can survive eviction, so rent comes first.

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Chapter 3: "Interest and the Cause of Interest"

1. What is George's procedure, calculated to produce a unified theory? 173

We will seek each law separately: the laws of wages, interest, and rent. Then we will see if they "correlate," meaning "add up to 100%." Cf. p. 216, and Chapter 7, where George recaps and wraps this up. This book is well articulated and hangs together.

We are witnessing here the conception, if not the birth of the unified marginal productivity theory of distribution. J. B. Clark and Philip Wicksteed picked up from here. This is what Marx never did get.

2. What does George mean by "interest"? 173

As we saw earlier under "The Meaning of the Terms," George means the rate of return on capital proper, net of land. Keynes called this the "Marginal Efficiency of Capital" (MEC). Today we call this the "Marginal Rate of Return" (MROR), as against the Average ROR (AROR), which includes land rent.

3. How does George's use of "interest" differ from that used in today's published national income accounts? 173

George's interest includes all marginal returns for the use of capital and not merely those that pass from borrower to lender. (Today we say it includes tacit as well as explicit interest.) Thus it includes the return on all owned capital. It excludes, however, the rent of land. It excludes most interest paid on loans, for that would be double counting: the return to owned capital is what he means by interest.

George is not trying to measure interest, but identify the forces that determine interest rates and the MROR on investing. Today we say there is a "structure" of rates that rises and falls together, subject to common forces, and we take the "prime rate," virtually risk-free, as the index to the whole structure. George is saying, let's see what determines this prime rate. Thus he, like modern economists, is not denying risk, but abstracting from it, to focus on other matters.

It strikes us strangely today to read George's usage where "interest" includes the net yield of owned capital. To avoid confusion, from here on I will use the following terminology. NROK means the Net Return on Capital (George's "interest.") MROR means the Marginal Rate of Return on Capital (MNROK/MK).

4. What happens to interest rates as society progresses? 174

They fall. George is here reflecting the teaching of 19th century classical economics, reinforced by his direct observation as a San Francisco journalist. Malthus, Ricardo, Mill, and Marx all saw advanced countries as creating more capital than could be absorbed at positive interest rates. Malthus, Ricardo, and Mill attributed this to diminishing returns, i.e., applying more and more capital to a fixed base of land. Marx attributed it to under-consumption. George's analysis here is addressed to the Malthus-Ricardo-Mill view. Later, p. 266, he discusses under-consumptionism, which he calls the "over-production" theory, as was done in his day (same idea, different name).George observed what was lately called the "continental tilt" of interest rates, with higher rates in growth areas like California. The "tilt" is the lure by which they import capital from stable or declining areas in the east.

The existence of a prime rate at 20% in 1981, 102 years after George's prediction, and 120 years after Mill's and Marx's, makes one wonder, though, if zero-interest is our destiny after all. Capital shortage seems to be the lot of most economies, most of the time. The potholes in our streets display a huge need for more capital now, and continually.

George is on stronger ground when he scolds Mill for assuming always an opposition of wage rates and interest rates. Too bad he didn't quote Mill more, but he could have, for Mill, generally so brilliant, is guilty on this point.

5. What is the relationship between interest rates and the "productiveness" (evidently meaning average product) of capital? 174

Inverse. This is hard to measure directly, but he has in mind that rents are very high in London, and high rents imply a high average product of capital, and a high average rate of return (AROR). But the interest rate (MROR) is low there.

6. Is capital rewarded because of inventions and technology? 179, 195

George says no, here and elsewhere. Inventions are one thing; saving is another. There is no reason why the productivity of the tool should inure to savers in general. To be sure, a swarm of capital-using inventions would raise the demand for capital; but many inventions are capital-saving (a recent such invention is fiber-optic cable).

He also observes that interest rates do not rise with the "march of invention," but are very low in the cradle of invention, England. What are high there are land values.

7. To what does George attribute interest? 180 ff.

To the productivity of capital. He exemplifies this by the generative powers of nature, or life, that work while man sleeps.

George correctly associates interest with time, and says time is productive because life grows. Capital is interchangeable and exchangeable, so if it yields an increase in living forms, then no one will invest capital in other forms without requiring an increase there, too. He invokes the principle of arbitrage, as he does so often.

8. What besides biological growth is a productive use of capital? 185

On p. 185, George allows that capital yields an increase when used in exchange. Recalling that he has defined capital as wealth in the course of exchange, this could be construed as covering everything, but that is evidently not how he means it. He writes on p. 186 that "adapting" is also productive, without reference to exchange (and on p. 73-74 he treats Robinson Crusoe's canoe as capital, with no possibility of exchange). What he is leading towards is a more general definition of capital as everything that man has produced, but not yet consumed. The reason he has not consumed it immediately must be because it yields, in some sense, an increase.

è The details of George's interest theory are poorly developed, but this chapter contains the elements of a sound productivity theory of interest. Like the Physiocrats, George stresses the productivity of living capital. Like his contemporaries Wicksell, Boehm-Bawerk, and Jevons, he stresses the role of capital in carrying goods over time. Like a modern Chicago economist, he leans hard on the role of arbitrage, which tends to equalize MRORs in all alternative uses of capital.

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Chapter 4: "Of Spurious Capital and of Profits Often Mistaken for Interest"

1. What does "spurious" mean?

False; pretended.

2. Are land values capital? 189

No. See Gaffney, "Land as a Distinctive Factor of Production." Land and capital are mutually exclusive, and each is "limitational" (meaning some amount, however small, is required for all production).

3. Do government bonds represent capital? There are two answers, depending on how the bonds are used.

a. Page 190, not if the money was wasted. George's example of waste is military spending. This is closely paraphrased from Mill, whom George studied closely and for whom he held a love-hate fascination. Mill hedged by saying that sometimes military spending is justified; George omits that part. Other passages and works, however, as well as his personal history, indicate he did regard some military spending as productive.

George notes in Book VII that military spending is mainly to acquire, retain, and police land, so the land is what the bonds represent. This of course justifies taxing the land to pay off the bonds, even if the land receives no other public services. On p. 384 George notes this, citing Andrew Bisset, The Strength of Nations. This book describes the military finances of Wm. The Conqueror and his successors. George's biographers tell us that reading Bisset's book is what crystallized George's thinking on land taxation.

In the present passage, George seems to imply that the taxes in question will come from wages and interest, not rent. Later, however, in Protection or Free Trade? (1886), George clarified his position, saying that all taxes ultimately come out of rent, no matter what their original impact. This is another tenet that he shares with Francois Quesnay, the leading Physiocrat. It is called "The Physiocratic Theory of Tax Incidence," and is used by many modern economists. It is valid in respect to "open economies," meaning small jurisdictions with open borders for the movement of labor and capital.

b. Page 191, public works are a "productive" use of capital. Bonds issued to build them represent that capital. He gives this point only half a paragraph, but it is there.

In 1887, eight years after George published Progress and Poverty in California, and one year after he had run for Mayor of New York City, Assemblyman C.C. Wright of Modesto, California, carried legislation to let small farmers form and control Irrigation Districts that could issue bonds to finance irrigation works. They could and did tax real estate in the districts to pay off the bonds. In 1907 a new law let them exempt all improvements and assess land only. Most of them promptly did so. In 1917, exempting improvements was made mandatory. Many of these California districts are premier practical demonstrations of George's land tax, at least at a local level. They are, of course, rural, although George's main influence was in cities. They display the versatility of his brand of "land reform": it applies to land per se, whether rural or urban.

The bonds are not liens on the capital in the works, but on the lands the works serve.

4. How do corporations pay dividends on stock issued in excess of capital received? ("Watered" stock is the common term.) 191

By acquiring and exploiting a monopoly, so that profits are much greater than a return on the real capital used. On these monopoly profits "certificates" are issued, and "interest and dividends paid." That means the promoters who created the monopoly turn it into immediate cash by selling part of the company to new shareholders, and/or by borrowing on it by selling bonds.

George at this point attributes these monopolies simply to the power of massed capital. One wonders why George, the land reformer, does not associate the railroad monopolies with their vast land grants, and their valuable rights-of-way. Probably it is because he was already well known for making that point in his earlier work, Our Land and Land Policy (1871). That book was a pioneering expose of the railroad land grant scandal and its excesses. It is still cited today by historians as a path-breaker. One suspects that he was holding in reserve his big guns about land monopoly, to maintain the attention of readers who had been conditioned to think in more conventional terms. At this time he was reaching out to the European-trained socialists.

Note the big dig at Western Union, p. 193. George's San Francisco newspaper had suffered losses when WU, the big news monopoly of the time, had given preferential treatment to his competitors. George had launched an expensive, unsuccessful attack on the WU monopoly.

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Chapter 5: "The Law of Interest"

1. How can capital be increased? 195

a. By saving, which George describes as reallocating labor to produce capital instead of immediately consumable goods.

b. By converting wealth into capital. See also p. 200.

Here he clarifies the relationship between consumer capital and capital-in-exchange: they are mutually convertible. Mill had said the same thing. You can live on your household capital while producing exchangeable capital, turning one kind into another.

Ricardo and Mill had written also of a conversion of capital between forms. They distinguished circulating and fixed capital. Only circulating capital, consisting of "subsistence," constituted the wages fund, but this fund was augmentable by converting fixed into circulating capital. Ricardo is explicit that this black/white distinction is only an expository convenience: the two forms shade into each other, and are mutually convertible. Thus Ricardo's wages-fund was augmentable by converting fixed capital back into circulating form.

In George, the same mutability of capital is accomplished by converting consumer capital into exchangeable capital. So George and the wages-fund theorists are not so different in substance, they just use different figures of speech to get at the same phenomenon: capital is malleable, unlike land. It is too bad that George never got around to reconciling his views with those of the wages-fund theorists: it could be done.

Still, George focuses attention here on a point neglected by others. In World War II (the big one) we drew down accumulated consumer capital like prewar cars, houses and furniture to pour capital into war plants. There is a reservoir of consumer capital that can be converted to other uses in time of need. This has the same effect as an elastic supply of Circulating Capital (CK).

That kind of thinking is needed today. Now, most economists lean exclusively on net capital formation as a way to supply needs for capital. They leave out two elements of flexibility in economic life. a) They leave out the mutability, convertibility, and versatility of the given stock of capital. b) They leave out the evolution of technology. Inventors respond to economic needs. When capital is scarce, we get capital-saving technology. It is embodied in the capital stock just as quickly, or as slowly, as the stock turns over.

Once we appreciate the role of capital turnover and convertibility in the macro-economy, we can also appreciate the trouble caused when turnover is blocked. Fixed capital (FK) can be converted to CK only at a rate limited by the built-in ability of the FK to yield Capital Consumption Allowances (CCAs). Extremely durable capital usually yields CCAs only very slowly. Land-saving capital is extremely durable. Overpricing of land leads to an excess of land-saving capital. This can lead to a liquidity jam or glitch in the macro-economy. We develop this theme later, as something needed to round out George's theory of depressions.

2. What is the relation of capital to labor? 198

Capital is stored-up labor. His point is that capital is augmentable, and therefore does not put a cap on employment, as land may.

Today we would add that capital may also be stored-up land services, as when land is used to grow timber. It may also be stored up services of capital itself, as when a tree adds another layer of wood to itself. That simply fortifies the basic point, however, that capital is augmentable.

3. How can capital get more without labor's getting less? 199

By adding more to output. Neither takes from the other: "each gets only what he adds to the common fund." Note the word "adds." This is marginal analysis being born.

George does not say it here, but his point is that the presence of more and better land raises the marginal product of both labor and capital, so each adds more to the common fund.

4. Are capitalists a separate class from laborers? 200

The classes "shade off into each other by imperceptible gradations." Here is the western American speaking, and reacting against the English assumptions of Mill. Those irritated him and help account for his attack on the WFT of Mill, whom he otherwise greatly admired. Mill sympathized with the plight of the "working classes," and sought to elevate them, but it never occurred to him they were other than a separate class. He viewed them with Pavlovian British condescension. There is a lot of class built into "classical" economics.

The class model offends George: he aspires to make capitalism democratic. His models are Jefferson, Lincoln, Greeley of the New York Tribune, McClatchy of the Sacramento Bee, and George W. Julian, the principled, egalitarian Senator from Indiana. Marx, by contrast, seizes and insists on the class model. He would not want capitalism any other way: it is his foil to condemn it. George rejects the assumption of rigid class structure also because it restricts economic mobility.

5. What determines the interest rate? 201

The interest rate is determined, like wages, by the productivity of capital on marginal land. Modern economists would phrase it "at the margin." It is standard investment analysis to rank investments, and all their incremental parts and dimensions, in diminishing order of RORs. The idea is to accept only those that equal or surpass the "hurdle rate." Marginal land is where the ROR = the hurdle rate, so nothing remains for rent. It is also where AROR = MROR.

6. What happens to the yield of investments in excess of the common interest rate? 201

Excess yields are caused by use of superior land, and are captured by the differentially high rents of that land. Interest rates tend to a common level, through the action of arbitrage; rents remain highly differentiated from site to site. Land value depends on "three factors: location, location, and location." Interest rates are the same from location to location.

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Chapter 6: "Wages and the Law of Wages"

1. What causes the variation in wages between different employments? 206-08

George says Adam Smith covered it well. Maybe so, but he left out a lot that is considered important today. Labor markets are more sharply divided than the classicals may have allowed. Admission to the class who receive wages of management is restricted by a permanent economic factor that virtually guarantees the permanence of a dual labor market.

The factor is this. Wages of superintendence are generally higher for those who have more assets to superintend. There being no substitute for an owner's care and concern, the law of diminishing returns tells us that unequal distribution of wealth leads to unequal wages of superintendence at the margin. Ross Perot's decisions over his billions are much more consequential than yours or mine over our mites, yet we all have all the time there is, no more and no less.

By comparison, the points more frequently heard, while important as symptoms, seem secondary. Social class, and the class content of education, are the results of unequal distribution of property. For example, you might learn just as much law at Citrus Belt night school as at Stanford Law School, the most expensive one in the USA, but the contacts and references aren't the same.

Financing expensive education is called "creating human capital." The word "creating" is a little misleading, because it is more often a matter of converting existing wealth into a new form. In this modern "certification society" some occupations are closed off by licensure. You have to spend time and money to get the license. Thus, there is a class structure within labor that reflects in part the prior distribution of property.

There are non-property factors, too. Within licensed groups, cliquishness and old-boy networks and politicking guarantee that neither ability nor prior wealth gets all the rewards. Labor markets are not totally blocked-after all, Lee Iacocca made it, and this nation has a long tradition of melting in immigrants. Within bureaucracies, employers often actually prefer immigrants, as well as native-born Americans from poorer backgrounds, because their lesser degree of security makes them more docile and complaisant. They are so glad to get into the American system, they take more abuse, and feel less shame about polishing the apple.

So George may be overstating things a bit to assume so much mobility among all forms of labor, but he would probably allow as much. The exceptions really do little damage to his case, and even strengthen it. In his limited time he could not get around to developing every point. Later writers in his tradition, like Thorstein Veblen, have done so at length.

2. Where do wages equal the average product of labor? 206

On marginal land (and, tacitly, using little or no capital). We teach this in production economics today.

3. What would George say about Say's Law? 208

The passage on 208 supports it, but elsewhere we find hints of underconsumptionism in George. He did not see a conflict between demand side and supply side economics: he proposed to raise both supply and demand. As a supply-side economist, he represents an ultimate: no economist ever devised a program more thoroughly geared to increasing production.

4. On what wages do all other wages depend? 212

All wages depend on wages in the lowest stratum. It would be more defensible to say that the whole structure tends to rise and fall together, subject to common influences, and that is substantially what George means. Here, as in his interest theory, his MO (modus operandi) is to take one part of an interdependent whole as the determinant, and let it govern all the rest. It is an expository device, not a fixed dogma.

5. How are wages affected by locking up superior land? 212-13

Wages are forced down, along with the margin of production. Here, George foreshadows his major thesis, much as a composer prepares the ear by dropping fragments of his major themes and melodies in his introductions.

6. What determines wages? 213

What labor can earn at the margin of production. It would be better to say that wage rates and the margin of production are mutually determined by the supply and demand of labor. Here, as elsewhere, George's MO is to take one piece of a large, interdependent whole, and make it the determinant, relying on arbitrage or other market forces to adjust everything else. This should be regarded as a mannerism, more than a substantive matter. It does not really invalidate his points.

7. Of what law is the law of wages a corollary? 216

Of the law of rent. It is obvious, but earlier writers have not seen it, although "if it were a dog it would bite them." Winston Churchill, in his youth a crusader for Georgist policies in Britain, commented on this. Quoth Sir Winston, "Many a man stumbles over the truth only to pick himself up and hurry along as though nothing had happened."

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Chapter 7: "The Correlation and Coordination of these Laws"

Recaps the laws of distribution, showing their correlation as George promised.

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Chapter 8: "The Statics of the Problem Thus Explained"

1. What keeps wages and interest from rising as their average products rise? 222

The landholders' share rises and soaks up much of the gains of material progress.

Today, economists express this by saying "excess profits are imputed away." They mean by this that they inure to the fixed factor in production, land. In terms of conventional cost curves, Rent = [P - AVC] x Q, where P is the price of the product, Q is the quantity, and all factors but land are included in AVC. Land is the FC. AFC magically rises to soak up all profits above cost. That magic is how land rents arise.

On 223, just as on 171, he has rent taken out first; wages and interest get the leavings.

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Book IV: "The Effect of Material Progress on the Distribution of Wealth"

Chapter 1: "The Dynamics of the Problem Yet to Seek"

1. What question will George address here? 227

What makes rent rise with progress? Here is an interesting writer. He doesn't stop with statics, or relations of coexistence, as modern micro does. He moves right on to ask whence we came, and whither go.

2. How does Ricardo explain it? 227

By increasing population. Mill says the same. Both are following Malthus. Darwin, by the way, also followed Malthus. Darwin published in 1857 and, by the time George wrote, had become a new Holy Writ. Herbert Spencer had somewhat twisted Darwin's meaning into the idea that human life, too, was a struggle for "survival of the fittest" in a world of people who continually spawn more fry than resources can support.

3. How will George approach the question? 229

First suppose population to increase, with "the arts" constant; next suppose the arts to progress with population constant. The method is patterned after Mill's Principles, the expository model followed by George-but with opposite findings.

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Chapter 2: "The Effect of Increase of Population upon the Distribution of Wealth"

1. Mill says added population always pushes down marginal returns, while progress in the arts may raise them. How does George differ from Mill? 231-32

George says the reverse. He rather understates here the degree of difference, which by reading further, and comparing Mill, we find is extreme.

Concerning the arts, George had much to learn from Mill; concerning population Mill had much to learn from George. Chapter 2 is one of George's more important and persuasive contributions.

It is not that Mill had never heard such arguments before; he simply rejects them. He rejects them more out of personal preference than observation. He is an English gentleman who cherishes a high degree of privacy and isolation. For all his idealism, he is something of a recluse and misanthrope. He projects his preferences onto the whole society, which he often tells us he doesn't like much. An economist has to submerge his personal preferences when analyzing the whole society.

2. How does added population affect the productivity of labor? 232

Increases it. There is a "more than proportionate increase" in production. Otherwise put, the Average Product (AP) of labor grows as the number of workers grows. A modern writer taking a similar position is Julian Simon, author of The Ultimate Resource (which turns out to be mankind). That, of course, is anathema to neo-Malthusians, and even worse because Simon is an able debater. I have not read Simon, and am not sure how many ideas he shares with George.

3. How does added population affect the productivity of land? 234-35

Increases it, but the increase is localized on particular sites. These are mainly urban sites, because cities are the centers of specialization and exchange.

By associating this increase with city land, George establishes himself as a pioneer urban economist. He was the first to put the spotlight on the hitherto undreamed of rise of city land values. He also resolves a confusion that had befuddled earlier classical economists. They had applied diminishing returns solely to farming, and alleged that the urban factory system was marked by increasing returns. That is easily refuted by a reductio ad absurdum, because if each site really evinced increasing returns, all the population and production in the world would focus at one point, and all land would be free. George attributes increasing returns to cities in the aggregate; to cities as composite organisms. This is compatible with there being diminishing returns on each site considered in isolation. In a later work, The Science of Political Economy, he clarifies and elaborates his position and disposes of the fallacy that individual sites can evince increasing returns at the margin. In the present work he is focusing more on the increasing returns to cities and societies as composite organisms.

4. Is George rejecting the law of diminishing returns? 232-33

George avoids using the term "diminishing returns," because in his contemporary reference group it had become "politically incorrect." Now, 117 years later, he would be clearer if he had used the term. Diminishing returns on particular sites can and do coexist with increasing returns to the whole nation or city. It is clear that there cannot be increasing returns on each parcel, else one parcel would absorb the labor of the whole world. Mill and other pessimists naturally went from that to seeing diminishing returns in the aggregate. Marx, a different kind of pessimist, went from that to seeing increasing returns everywhere.

Mill and others had fallen into a fallacy of composition. They overlooked the synergy among the different parcels, which George describes so fulsomely in his "Story of the Savannah." Marx's error is the reverse, and might be described as a fallacy of decomposition: he assumed what was true of industry as a whole must be true of each part.

5. Some of George's critics have accused him of over-generalizing from a purely agricultural theory, Ricardo's law of rent. Is that fair? 168, 224, 235-43, 246, 257.

It might be a fair shot at Ricardo, but George was among the first to see that diminishing returns applies to urban land use as much as to rural.

6. George has been accused of forecasting a fall of wage rates, a fall that has not occurred. Is that his forecast? 233-34; 241; 253; 255.

Not here. George says that population increase will raise rents most, and raise them as a fraction of the whole. He allows that wage rates may also rise, but not as a fraction of the whole. As a short-run prophet he did all right. The labor-price of land rose to an all time high in the 15 years after he wrote. After that it took a cyclical fall, but that, too, is something he forecast, as we will see. Then it had another big run-up after WW I, from 1918-29, followed by another cyclical collapse. Lately it has again risen to a peak.

As to the effects of the arts, however, in the next chapter, he takes a wild swing that is subject to criticism.

7. Why might George be called the founder of urban economics? 235-43.

The "story of the savannah," as these pages are called, is about the earliest description of the powerful synergy of urban linkages. George and his followers focused the attention of a generation on the high value (and high taxable capacity) of urban land. Some writers call him an "agrarian reformer," but that is sheer carelessness or ignorance. "Urban populist" comes closer to the mark.

8. Was George right about the "coal and iron beds of Wyoming and Montana"? 243

The coal beds came on strong after 70 years, if not 50. The iron beds may have been submarginal.

9. Who originated the concept of Spaceship Earth? Buckminster Fuller? Kenneth Boulding? 243

Read George and you be the judge. He was quite a phrase-maker.

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Chapter 3: "The Effect of Improvements in the Arts upon the Distribution of Wealth"

1. What does George mean by "the arts"? Rembrandt, Beethoven? 229; 244.

Methods of production and exchange. This is the "Progress" referred to in the title. Now we are getting close to the answer to his original question: Why does material progress not alleviate poverty and unemployment?

With progress he includes also knowledge, government, police, manners and morals, which he says have the same effects as improvements in technology. This kind of progress would include even his own influence, which was great.

2. What is the effect of improvements in the arts? 244-45

To save labor, and raise demand for land. His spectre of technological unemployment is much better thought out than the simple perception that "robot replaces man." George thought in terms of three factors: land, labor, and capital. If the landowner could use capital to displace labor from the land, there was no place for labor to go. George teaches us to take "displace" literally: labor is driven from its place, from its land base. Landowners could live without as many workers as before, and dump the rest on the streets. This has obviously happened in farming, for example, forcing displaced people off the farmland into cities.

Now it is happening in cities, on urban land. On industrial land, many blue-collars are displaced by robots, etc. White and pink collars are being displaced by computers, which drive them out of office and retail space. Where shall they go when landowners displace them with machines? George gives more substance to this question than most techno-pessimists do.

Optimists say that new machines create new jobs, too, but in times like these they get awfully vague about specifics. Where, George would say, are these jobs? On whose land? When? Techno-optimists need to answer that question, with specifics. George is holding their feet to the fire. The unemployed can't wait.

Mill, actually, had faced this question head-on, and answered it better than most modern writers. Mill points out that there are also land-saving arts. Anything that increases yields per acre (the average product of land) is land-saving. George gives one such example, p. 241, "thousands of workers to the acre, working tier on tier,..." but he attributes that entirely to increased population. Credit is due rather to the arts of architecture, construction, planning, and engineering that crafted the elevators, ventilators, pumps, central heating, load-bearing supports, plumbing and sanitation, etc.

George unconsciously gives another example, p. 243, in writing of spaceship earth and its hatches. The arts of mining let mineral energy substitute for animal energy, thus releasing the pasture land once used for draft horses. That was 1/3 the land used in farming, thus allowing a 50% increase in land growing food for humans. In addition, tractors can get into wet fields earlier in the spring than horses could; they can pull plows through claypans too tough for horses to handle; and otherwise increase yields per acre.

One point George overlooked, in his doom scenario, was his own influence, and that of people like him. The policies of George himself, applied to finance irrigation in California, are responsible for much of the increased yields that occur when dryland farming gives way to irrigated farming. The high yields of California farms have made fruits and vegetables so cheap in the east as to have taken much eastern land out of horticulture. California cotton has released much eastern land for other uses. All this production comes from what was all desert and swamp before irrigation and drainage changed it.

As an exercise, think of some more land saving arts. Remember that George includes government, police, manners and morals among the arts.

George's model and foil, J.S. Mill, thought of a few, too. Mill's Principles has a chapter on "Influence of the Progress of Industry and Population on Rents, Profits and Wages," in Article 4 of which Mill stresses that progress may be land-saving, not just land-using. George doesn't refer to this, even though he was directly juxtaposing his views with those of Mill. Mill, remember, said that population lowers wages, while progress in the arts is all that may offset this, and may even raise wages.

Mill's treatment is, to be sure, vexingly roundabout and obscure, because he runs all his effects through the cost of food, and its presumed effect on wage rates. (The idea is that if food costs less, the "working classes" will accept lower wages). Still, George would have strengthened his work by giving some heed to Mill's argument. When labor is dear, capital goes into saving labor; when land is dear, capital goes into saving land, and developing new lands. Thus the system is more self-equilibrating than George feared in this apocalyptic chapter. It is ironic that George, who expresses repeatedly his faith in the market's equilibrating powers, should overlook this kind of equilibration.

He might have weakened its immediate impact, because a doom forecast is great for grabbing attention and selling books. The fear of technological unemployment is ever present. He would have silenced some of his later critics, however, who have seized upon his doom forecast and used it to discredit him. Up until about 1975 they could argue that real wages in the United States had been rising; since 1975 they have been falling, however, and George's forecast looks more relevant now than ever.

3. What, rather than increased population, really forces down wage rates? 246

The progress of invention. Here George directly contradicts Mill, who said land-saving invention is all that staves off the Malthusian doom that punishes those who procreate excessively.

4. How is the demand for land affected by higher incomes? 247-49

Higher incomes increase the demand for land. Here George is on firmer ground, and even understates the point. There is a missing link in his argument; he is not explicit that demand for land increases more than demand for labor. But that is what he evidently meant, and he was sensationally right.

Land as a consumer good is what is now called a "superior" one, that is one to which people devote a higher share of their spending as they grow richer. It is reliably estimated, for example, that only 15% of the increased resource use from 1946 to date is due to increased population; the rest is due to increased resource use per capita.

For one example, driving and parking cars is incredibly resource-using, when you add it all up: the oil, fueling the military to secure the oil, the parking space, the interchanges, the freeways, the wider streets, the concrete and blacktop, the rubber, the steel, the paints, the air pollution, and on and on. And why do we have cars? So we can commute out to houses with larger yards, and ski farther from home, and keep vacation homes and country estates.

The richer we get, the larger the estates. Walter Annenberg has his own private golf course in Palm Springs, using enough water for a small town, pumped in from the overdrawn Colorado River. For less wealthy folk there are 100 other golf courses soaking up water in Riverside County, a Southern California desert. More generally, the share of land in residential real estate value rises with wealth, reaching a peak in places like Beverly Hills.

In George's time the English nobles kept vast country estates in that "overcrowded" country, and in Scotland and Ireland. To get a little more shooting and fishing room they evicted whole villages, who could go press on the means of subsistence somewhere else.

For a doomsday scenario one needs a "positive feedback" effect, a problem that aggravates itself. "Vicious circle" is the popular term. There is a vicious circular element in this increased demand for land. It increases the wealth of those who already have land, and thus increases their effective demand to have more.

Those who got a late start, or have fallen in the race, or devoted their lives and savings to serving others, they get caught on the wrong side of the wedge that is being driven through society. So today we have a growing army of the homeless who cannot afford even to rent a pad for the night. We have hunger in a country with farm surpluses and a program to slaughter one million cows to support milk prices. We have sickness without care. We have teen-age prostitutes exposed to disease and abuse. We have a shortage of prisons. We have armies of people living in underground economies, and another army of policemen chasing them around. We have a nation whose world-rank in every measure of health, education and achievement is slipping dangerously, and whose sense of mutual aid and solidarity is giving way to "every man for himself and the devil take the hindmost."

Considering all that, George had reason to be apocalyptic. We, too, have plenty to worry us today along the same lines he sketched out.

5. What is "the final goal toward which the whole civilized world is hastening"? 253

To "the absolute perfection of labor-saving inventions," making labor redundant and dispensable. This is hyperbole.

We will see that George finally has three reasons why labor gets driven off the land: labor-saving invention; increased demand for land and land-intensive products; and land speculation. Here he puts most weight on the first. The other two are equally potent.

6. What ever happened to the "great machine-worked wheat-fields of California"? 253

They were incorporated into irrigation districts, taxed the way Henry George recommended, and subdivided into small, intensive irrigated farms supporting a large population directly and indirectly. However, this movement peaked around 1930, and has been rolling backwards ever since. Now we have great machine-worked irrigated cotton and barley fields.

7. What is an "unproductive laborer"? 252

This is a throwback to a concept George has previously rejected (p.32), but which Mill kept using and so crept back into George. "Unproductive" here evidently means performing personal services for rich landholders, and is intended more as a poke at the customers, and the servile relationship and mindset, than at the type of service per se.

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Chapter 4: "The Effect of the Expectation Raised by Material Progress"

George is leading into his theory of boom and crash. There was no real study up to this time. There were complaints of "oversupply" (such as constantly come from self-serving combinations of producers), and logical demonstrations from Say and Mill and others that general oversupply was impossible, and could not explain crashes. They did not say, however, what does cause them.

Quesnay, Smith, Say, Ricardo, Mill, and other Greats preceding George, barely touched on this topic of overarching importance. It is hard to say why not: the boom/bust cycle was very evident in France and England. The South Sea Bubble of 1720, in France called the Mississippi Bubble, had been a monster, still remembered today. There were also others in the 18th Century, centered around canal building.

There were crashes in 1819, 1836, and 1857, that should have concerned Mill. Yet, Mill's contribution to the subject is limited to one page in his Principles, Book IV, Chapter IV, Article 5, where it is incidental to explaining the allegedly falling rate of profit. Marx in Capital refers to "crises," and "industrial revulsions," but they are incidental to his general theme about the secular (long-term) crushing of labor by capitalism. There are valuable hints in Marx that the ratio of fixed to circulating capital may rise during an upswing, but only hints. J.B. Clark, George's contemporary and survivor, kept promising to extend his work into "dynamics," but he just shone his readers on and on, never delivering. Ditto with Alfred Marshall. George is the first to face the matter head-on, attempt an analysis, and make it a major, integral part of his work.

1. How does the expectation of rising rents produce the effects of a combination among landowners? 255-56

By causing landowners to withhold land from use, creating an artificial scarcity, just as combinations do. George's thesis is that land speculation, in its manic phase, makes landowners as a group act in concert as though they were one monopolist, withholding supply to raise price.

He might have added that landownership is extremely concentrated; and the non-reproducible nature of land makes it a natural basis for monopolies of all kinds. In local markets, a large landowner who controls a big share of the total supply is conscious of his market power. Markets for land are inherently local, because land is immobile.

2. How has land speculation affected settlement patterns in the USA? 256-57

Scattered them widely over the continent and interfered with economical clustering. This has been heavily documented and is a truism of American economic history. Thorstein Veblen writes brilliantly about it in his Absentee Ownership, "The Independent Farmer," pp. 129-41.

3. How has land speculation affected the settlement of growing cities? 257

Scattered it. George was the first economist to identify and criticize what today we call urban sprawl, a flagrant manifestation of market failure that has today worsened a hundred-fold beyond what George observed. Egregious as it is, we are still afflicted with a plague of "mainstream" economists who ascribe it all to "rational expectations." We should not be surprised at such rationalization, it accompanies boom-times, as predictably as fawners follow kings. In the 1920s their counterparts rationalized it as "ripening." Many a priori theorists are not very good about learning from history; their methodology leaves them little room to adjust to the facts.

4. How has speculation affected timber harvesting? 257-58

Scattered it. It is part of George's genius that when he spots a principle he sees it at work throughout the economic system. He did not write that "theory transcends technology," but he instinctively extends laws derived by observation in one setting to help analyze others. Thus he saw continental sprawl; urban sprawl; timber sprawl; and, on p. 258, mining sprawl. In this sense he, too, is a theorist, but he was a news reporter first. Unlike the more introspective a priori theorist, he induces before he deduces: he begins with facts; then he generalizes from them.

Today, timber sprawl is as bad as then, thanks in part to market failure. Another factor today, especially in the West, is political and bureaucratic failure. The U.S. Forest Service, administering our national forests, cuts too slowly on the good sites. It neglects restocking when it does cut. Most notoriously today, it wastes our money on extending expensive roads to lands of high elevation, steep slopes, little rainfall, and thin timber that should not be cut at all, but reserved for scenery, recreation and watershed protection.

5. Is land speculation episodic or chronic? 259

Both. There is a base level that is bad enough, but it rises to peaks of "mania." Words like "mania" are routinely used by historians and contemporaries observing peaks of land prices, so George has lots of company with this characterization. Today, "mainstream" theorists spin fantastic fibs about markets dominated by "rational expectations." History gives little support to such pretensions. Looking at the record, economic man is manic-depressive, and periodically goes mob-crazy.

There is no room for any rise of rents where workers are already squeezed to the bone, and MRORs are low. But in new countries with higher wages and MRORs, rents can rise by cutting into real wages and MRORs. Periodically rents rise too much, more than the market will bear. This force brings "recurring seasons of industrial paralysis," and to new countries, "seemingly long before their time, the social diseases of older countries; produces 'tramps' on virgin acres, and breeds paupers on half-tilled soil."

6. How does land speculation differ from commodity speculation? 260

Commodities are reproducible; land isn't. Commodity prices are limited by cost of production, both up and down. Land prices start from zero, there being no cost of production, and can rise without limit, there being no competition from new production.

As noted earlier, capital can be land-saving. Land booms induce land-saving investments. These temper possible land price increases. However, they do so only slowly, and too massively, resulting in giant cycles of boom and bust, long in period and high of amplitude. We develop this theme below.

7. What limits the "speculative advance of rent"? 260

The advance in rent is possible because much of the best land is locked up for the rise. In addition, in George's view, rents and land asking-prices keep creeping up whenever there is a period of prosperity and optimism, testing the limits. Landowners have the initiative to drive this process, since land price and land rent are prior claims on production. Labor and capital get what is left over.

What limits this rise is that labor and capital must be paid enough to survive and reproduce. When the landowners' overreaching demands leave them too little for that, many transactions can no longer take place, and production drops: a crash and slump. This in turn finally induces landowners to lower their asking prices to what labor and capital can afford and still survive and reproduce. The period of depression and readjustment is prolonged because land has more holdout power than labor and capital.

George is stingy with details on the mechanics of how this works. It is easy to see how excessive holdout prices for raw land would discourage building, or at least divert it to bad locations. But how about land under existing buildings? It is harder to see how a rise of its value can stifle production there. Let us supply this missing link. By doing so we can complete, and make sense, of this fascinating but elusive theory. What happens is that the rise of land value stops the capital from reproducing itself. This is the missing link.

Consider an existing building, solid, useful, and middle-aged. It is ready to be "milked," as a "cash cow." That means that most of its cash flow from now until tear-down will be regarded as CCAs (Capital Consumption Allowances), rather than income. CCAs are invested elsewhere, to conserve the owner's capital. When the building is finally torn down, the owner (and society) will have as much capital as ever.

Now suppose the price of the land under the building to rise, in a speculative boom, while the cash flow of the building remains the same. Let the land price rise so high it is now worth as much as the land plus building were worth before. Now, the owner does not need to conserve any CCAs to conserve his wealth: the rise of land price has done it for him.

At the same time-viewing the same point from another angle-the cash flow from the land plus building is now imputable to the land alone, to justify the land's higher price. The cash flow is all net income, because land does not depreciate. The owner may spend it all on consumption; being human, he begins to do so. Lenders descend on him and seduce him into borrowing on the land to increase his consumption. "Equity withdrawal" is the current term for it.

From yet a third angle, the building has undergone "locational obsolescence," and lost its economic value. Physically, it may look the same; economically, the land has sucked the reproducible capital out of it.

From a fourth and last angle, capital, to survive, must earn cash flow enough not just to cover interest on the unrecovered value, but also enough above that to reproduce itself. As Mill said, "Capital is kept in existence from age to age, not by preservation, but by continual reproduction." Capital reproduces itself by yielding CCAs. When rising land prices devour capital, and/or rising ground rents arrogate its CCAs, capital stops reproducing itself. This is how rising rent drives capital out of production. It is not that capital sulks; it is drained and consumed by the rise of all-devouring rent.

This ruin occurs without apparent harm to the owners of buildings when, as is the rule, they own the land under them. It is silent and insidious, like a vampire in the night. It would only be contentious and "newsworthy" if the land were owned by a different party than owns the building, and the lease expired. There are such cases-in trailer parks, and on the Irvine Ranch leaseholds in Orange County in the early 1980s-when the sapping of capital is visible and contested. As a rule, though, it passes unnoticed: no one seems to be suffering. No one rebels or can plead injury, even as a big share of the nation's precious capital stock shrivels and dies without reproducing itself.

After that, there ensues a shortage of loanable and investable funds. That, in turn, slowly grinds down land prices and rents. This, I believe, makes sense of George's statement that rising rent cannot permanently force interest "below the point at which capital will be devoted to production." It would be clearer had he said at this juncture "below the point at which capital reproduces itself." Shortage of capital, and tightness of loans, finally force down land prices. Labor, meantime, endures a period of acute suffering after job-making investing dwindles down.

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Book V: "The Problem Solved"

Chapter 1: "The Primary Cause of Recurring Paroxysms of Industrial Depression"

1. What is the main cause of depressions? 263

The speculative rise of land prices cuts into the earnings of labor and capital. Let us see how this might work.

a. If builders must pay too much for building sites, it takes from their profit by raising their costs. Their profit on investing in the building (the MROR) itself is what stimulates investing, which in turn is what makes jobs and incomes.

b. Businesses that rent their premises also get squeezed by rising rents.

c. A merchant goes into a new shopping center with a long term lease. His early rents are often too high, but he pays them to hold his position for the later term when he hopes the rent will be a bargain. Landlords writing long-term leases get used to this, and hold out for high rentals, just as though they were selling the site.

d. Those who already own land that they might improve are squeezed less transparently, but just as effectively, by the higher opportunity cost of the land. They have the option of selling the land to a speculator. Their gain from improving the land is just the excess of the value of the improved site over the vacant site.

They also get a higher motive to "site-sit" and wait, if they believe future development will be much more gainful than current development for the present market. When the workaday facts of today begin looking dull and prosaic next to the gleaming expectations of tomorrow, look out.

e. Higher land prices and rents down-value and devour the residual value of buildings on the land. The value they devour is real capital. See above.

f. Builders needing land borrow to buy it, even though the price is too high, gambling that future rises in rents will let them repay the loan. If these rents fail to eventuate, they go bankrupt. Their buildings are not destroyed, but the capital they used to build on them was misdirected, so much of it is economically lost.

2. (a) What does "proximate" mean? (b) What "other proximate" causes are cited? 263

a. Immediate and evident, as opposed to initiatory and basic. In a three-car crash, say, A hits B, making B hit C. B is the proximate cause of C's damage, but A is the initiatory cause.

b. Economic interdependency; currencies that contract when most needed; alternations in commercial credit; tariffs. Of these, shrinkage of credit is the most relevant. It destroys part of economic interdependency, which is the source of so much economic productivity. It is a result of the destruction and freezing of capital.

3. How do labor and capital resist advances in land value? 264

By ceasing production; it is their only way of resisting. In practice this means what? Declining to buy or rent land at the high asking prices.

There is room for great elaboration on this simple idea. Some will rent or buy less land, and use it more intensively. Some will sleep on the street, or sell from the sidewalk. Some will retreat to little patches of marginal land. Some will buy as much land as ever, but thus use up funds they otherwise would have used to improve it, becoming withholders themselves. Some will organize and pass counterproductive rent-control laws.

Prior to ceasing production you would think that wages and interest were first forced down to a minimum. History does not support this. In fact, interest rates rise just before major crashes, as George himself notes earlier (p. 21n).

His theory could be modified to incorporate this fact. One way of doing so is very popular and persuasive, but probably incorrect. This is to say that speculating in land diverts capital investing from productive to unproductive uses. Warming to the theme, modern critics of the binge of mergers and acquisitions (M&A) in the Insatiable Eighties often state that the money spent to take over existing firms was diverted from building up new ones.

The trouble with that thesis is that for every buyer there is a seller: these are zero-sum transactions. The power to invest anew is not destroyed, it is transferred to the sellers. These, in turn, are selling off surplus or appreciated assets in order to buy new ones.

To make sense of this thesis we must go two more steps, to disentangle the essential from the incidental.

a. When assets appreciate, the owners regard that as current income, most of which they will consume. Selling the assets may be part of that process. The process also occurs without a sale: they might just borrow on the assets instead. Commonly they let the capital run down without replacement, eating their own seed corn so to speak, letting the rise of the underlying land value serve in lieu of a proper CCA (Capital Consumption Allowance). See above.

b. When land is overpriced, it leads to over-allocation of capital to land-saving investments. This waste of capital leads to a shortage of disposable or "circulating" capital. It is characteristic of land-saving investments that their payout is very slow; the capital in them is locked up for many years or decades. In a word, it "turns over" slowly, if at all. On the point, see Gaffney, "Land as a Distinctive Factor of Production."

The combination of (a), reduced net saving, with (b), waste and freezing of capital, leads to a shortage of disposable capital, and tight lending policies.

There is another factor George hints at. When land is first overpriced, credit is extended farther in order to accommodate it. That is, banks lend on overpriced land, counting on a further rise. When the rise slows, they extend the loans, sometimes even granting new loans for paying interest on old loans. They use political pressure to get governmental agencies (e.g., the World Bank) to extend or underwrite these risky loans (e.g., in Latin America). When the bubble bursts, the loans are not repaid. This destroys capital.

Mill had written earlier of a tendency of lenders, when legitimate demand for loans dries up, to "lower the quality of credit" by accepting high-risk loans they would have spurned before. This is discussed more below.

4. Why don't capitalists needing land simply join in the speculative game? They could buy land at speculative prices and use it while it continues to rise in value, and they get the gain?

Many do. In a sense all do, because no one can justify buying and holding land at today's prices without counting the future advance in price or rent as part of his gain. Thus everyone is hooked, forced by the market to participate in the speculative game, once it gets started. All become implicated and habituated, emotionally and politically, whether they like the principle or not.

So now we have to interpret George's theme in terms of how investors react to a set of incentives where expected changes in land value are made part of the overall return on investment-and land price part of the investment on which return is figured. This has several results:

a. Many are screened out by the increased need for credit.

b. Rising land value becomes part of the incentive to build. It can't go up forever. When it levels off at a high level, it becomes a serious drag. When it starts falling, it is worse.

c. Land value becomes collateral; its wild swings destabilize credit and money.

d. A lot of land is unused (or run down in its present use), as the holder waits for a possible higher use that never materializes. In and after a crash, bid prices for land fall, but asking prices stay high, so sales drop like a stone, as George says, p. 277. This behavior is inconsistent with the premises of the "rational expectations" theorists, but is good history: it has since been extensively documented, over several giant cycles of boom and crash.

5. What lets production resume after a crash? 265

Rents fall; productivity rises with the advance of technology, which has continued in the background; wages and interest fall. Once again the parties, chastened and more reasonable, can make bargains. Production and exchange resume. Page 281, he sees this happening in 1878-79.

6. What is induction? 266

Reasoning from the particular to the general, as opposed to vice versa. A.k.a. a posteriori, as opposed to a priori; or Baconian, as against Aristotelian. Or, loosely, empirical as against theoretical.

What George is doing at this point is shifting gears. He has just been deducing "the actual phenomena as resulting from the principle." Now he is reversing the process. He presents facts showing that depressions are preceded by speculation.

Actually, his overall approach is mainly inductive. He had been a journalist: reporting, editing, and finally publishing. He begins this book by observing a fact, a problem, then seeking its reasons. Only after finding them does he seek to generalize from them. Unlike most reporters, however, he does so with a vengeance. Cf. p. 295, where he says, "...the most diverse phenomena are seen to spring from one great principle." This is Newtonian: gravity applies to all materials, not just the apple that fell on Newton's head.

Philosopher John Dewey said that "an idea is a plan to solve a problem that arises in a social context." He would have liked George's approach: indeed he did like it, and often said so.

7. What two schools of depression-explainers are cited? 266

Overproduction and overconsumption. Nowadays, the "overproduction" theory is called the "underconsumption" theory. That gives you a stark idea of how polar these two schools were, and are. It's underconsumptionism vs. overconsumptionism, plain and simple.

8. What modern doctrines are descended from these two ancient schools? 266

Overproduction is much like underconsumption, which is a main ingredient both of Marxism, and early Keynesianism. It harks back to Mercantilism, when unemployment was blamed on lack of money. It has deep cultural roots in legends of misers, like King Midas. It attributes unemployment and poverty to lack of demand caused by excess of thrift.

Overconsumption is much like undersaving, which is now a main ingredient of supply-side economics.

9. Has there been much progress in economic thought since 1879?

There are those who doubt it. There is advance in specious sophistication, or scientism-model building, number crunching, manipulating symbols on paper and in computers, and all that-but is there much essential philosophical advance? We have seen one instance of retrogression, the retreat from a three-factor analysis of Land, Labor, and Capital, to a dualistic theoretical world of only Labor and Capital. If there are advances, do they make up for the losses? Is there advance in practical policy analysis to advise governors, presidents, and legislatures? If so, why are economists today clueless and unavailing when asked why people can't find jobs, and what to do about it?

10. What might block progress in economic analysis? 295; also Veblen, p. 53.

"And back of these elaborate fallacies and misleading theories is an active, energetic power, a power that in every country ... writes laws and molds thought-the power of a vast and dominant pecuniary interest. ... The great cause of inequality in the distribution of wealth is inequality in the ownership of land. The ownership of land is the great fundamental fact which ultimately determines the social, the political, and consequently the intellectual and moral condition of a people" (emphasis added).

Veblen (p. 53) put it like this. "... the Landed Interest was vested with title by prescription and was a formidable spokesman for absentee ownership, tenacious of its prescriptive rights and full of an habitual conviction of the justice of its cause."

Why might a discipline retrogress? Economics is cursed by its ability to identify and impute unearned income. The same vested interests are still bringing forth the same basic pleas, and they are so well-financed and supported as to suppress, distort, or crowd out whatever might threaten them. Academics have responded by retreating into obscurity and irrelevance, hiding behind impenetrable, ever-shifting techno-babble. They take refuge in, and exploit, the human weakness noted by George in commenting on Malthus: "high-sounding formulas with many people carry far more weight than the clearest reasoning" (95n). They present themselves to the world as technicians, free of values, ready to serve whatever goals "the public" sets. "The public" too often means their paying public, dominated by rent-takers.

11. How does George refute the overproduction theory? 267

Most people still want more than they have. Recall also his earlier axiom that human desires are unlimited (245). By itself, this hardly does the subject justice, and would not persuade a confirmed "overproductionist."

12. How does George refute the overconsumption theory? 267

There is unused capital. In recent times Paul Samuelson has made the same point against those who said there was a capital shortage. Again, by itself, this hardly does the subject justice. Neither George nor Samuelson addressed the point made by Smith, Ricardo, Mill and others: there can be too much fixed capital but too little circulating capital. There is much fixed capital that looks real, but has no economic value because it is obsolete, or stranded for lack of fluid capital to operate or to complete it.

As indicated above, there is a silent, insidious consumption of capital via the re-imputation of its value to the land under it.

13. How does George use the theories against each other? 267

Each is the answer to the other. "... the trouble is that production and consumption cannot meet and satisfy each other. There is an obstacle which prevents labor from producing the things that laborers want."

So simple, so obvious-yet here we are still chasing our tails, 117 years later! We are a discipline that goes around in circles, slowly!

At this point George might well have added Malthus to the overconsumption side. Overproduction and Malthusian doom scenarios obviously answer and refute each other. U.S. farm policy since 1933 has exemplified the point graphically. Farm spokesmen demand subsidies to build up farming so we won't suffer from scarcity, and then more subsidies to cut production so farmers won't suffer from low prices-and they get away with it. Mankind has a high capacity for holding two contradictory ideas at the same time.

George is not buying. Here is his telling statement, p. 270. "For, though custom has dulled us to it, it is a strange and unnatural thing that men who wish to labor, in order to satisfy their wants, cannot find the opportunity ... it is not work that is short while want continues."

George's statement opens the door for him to identify a third force that blocks production and consumption from meeting and satisfying each other. On one hand are hungry, homeless families; on the other hand are people who can't find work. Indeed, they are the same people. They are not overproducing; they are not overconsuming. Something else keeps them from working to fulfill their needs. George seeks that "something else," and finds it in their lockout from land.

14. Did construction and completion of the transcontinental rails, linking California with the East, bring prosperity to California? 274-77

No. California grew slower than other states. That is historically correct. California was a land of "great expectations," but land speculators overpriced land so as to skim off the hoped-for gains in advance of their creation. The first state motto was "Bring me men to snatch my mountains, and plains, too." It soon evolved into "Bring me men to match my mountainous land prices." California was a golden paradise, but mainly for land speculators, not for builders and makers. The coming of the railroad simply raised asking prices for land more-more than warranted.

George was molded in a place, San Francisco, and a time, 1852-79, of chronic hostility toward speculators who were slowing the growth of the State and its jobs, and turning a democratic dream into a plutocratic horror.

It is hard to agree with the way George handles every point he advances, pp. 269-78, but the points he raises are the right ones. They should stimulate your interest in studying history.

15. Where do depressions originate? 268

By cessation of production in (and therefore demand from) "the newer countries, where the advance in land values has been greatest." (George is referring to the percentage rise in values, not the absolute dollar rise, which might be higher where values were already higher.) You should interpret "newer countries" broadly to include new regions within all countries, and newer neighborhoods and suburbs in all cities, etc.

Subsequent events and studies have borne this out. Capital flows from older centers to growth areas during booms, and is called back during busts, creating swings of highest amplitude in the growth areas. Remember from history, "In God we trusted, in Kansas we busted"-that was from 1890, during a four-year period when "fully half the people of western Kansas left" to go back east.

The "official" crash happened in 1893, but was preceded by the Kansas and other growth area crashes which, being far removed from the centers of information and opinion formation, made little impact on the "establishment." Likewise in the 1920s there was a farm crash in 1920; a drop in urban building from 1926, and a Florida crash of the same date. But the "official" crash came in 1929. It became real when it hit New York.

16. Why do crashes come suddenly, if the cause is a slowly rising pressure from rising land values? 278-80

The developing areas are supported by credit extended from older areas, until credit is recalled in a panic. Credit is, as George says, like a rubber band that gives before breaking, until suddenly it snaps.

Now here we have something. George, who often chooses such striking examples, understates this point with his example of the English merchant selling gaudy calico and Birmingham idols, and financing his buyers. The heavy credit went from England to the colonies to finance rails and cattle and such substantial developmental items.

J.S. Mill had advanced a related idea in his chapter on the tendency of profits to a minimum (Mill, Principles, Book IV, Chapter IV, Article 5). Mill sees profits driven down to a minimum by the formation of more capital than can find profitable use. Then investors, rather than accept safe, low returns, give a "ready ear" to riskier ventures promising higher gains but risking great losses, which in fact occur.

Modifying Mill with George's idea, profits are driven down, not by a glut of capital, but overpricing of land. Then investors give a "ready ear" to riskier ventures-and more deferred returns, in land-saving and marginal developmental ventures. When the land bubble collapses, these risky ventures in saving and developing land prove to have been ill advised. Land now becomes too cheap to warrant and repay such outlays to have saved it. Thus the capital is lost, and there is little recovery with which to meet the next payrolls. Ricardo pointed this out long ago. Veblen developed a theory somewhat along George's lines, but with "goodwill" substituted for land value as the overpriced siren that leads the sailors on the rocks.

So George's theory is incomplete, and yet contains an essential element on which to build a complete theory.

17.

Who today corresponds to George's English merchant selling trinkets on the West Coast of Africa? 278-79

America's largest banks financing LDCs and iron curtain countries, extending very risky credit, throwing good money after bad, and belatedly pulling back with heavy losses that they try to make the taxpayers eat for them.

18. How was George as an economic forecaster? 281

Not bad. In 1878-79 he forecast a recovery, that in fact did occur, 1880-93. Marx, recall, at a corresponding phase in the preceding great cycle, had forecast a slump after 1867. Marx's slump turned out to be a boom, 1867-73. It may be that George's sharp focus on land prices gave him an edge.

Each man agreed that the secular (long-term) prospect for working men was dark and gloomy, unless his recommended reform were accomplished. In George's case, his reform could be tested incrementally, and a fair movement took place in his direction during the Progressive Era, 1901-20, and it did indeed alleviate the hard lot of labor. In Marx's case it was either/or. His reform was not tested until Russia, 1918-91, along with East Germany, Albania, Maoist China, North Korea, etc. The result is history.

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Chapter 2: "The Persistence of Poverty amid Advancing Wealth"

1. What holds down wages, by George? 282

Rent absorbs the gains of progress.

2. What does the natural man give up in becoming part of an interdependent economy? 285

"...the essential quality of manhood-the godlike power of modifying and controlling conditions. He becomes a slave, a machine, a commodity-a thing, in some respects, lower than the George goes on to describe how workers become cogs in a machine. They "suffer all the privations of the savage, without

his sense of personal freedom." When the assembly-line came along with Henry Ford, in the early 20th Century, the point became even stronger. By 1938 it had become a cliché among the literate. Hollywood turned the cliché into Charlie Chaplin's first talkie, Modern Times, and it was hailed as an original idea! People may have lifted from George without credit, or just seen the point themselves. George, in turn, might have been influenced by Tom Paine. Paine had written, in the 18th Century, that "the life of the Indian is a perpetual holiday compared with the lot of the European worker." Like George, Paine attributed this to the Indian's access to land.

George is like Marx in reminding us from time to time of the desperate lot of the landless, except that George uses a lighter touch, lurid as it may seem to you.

3. How does George express the value of rent relative to wages? 289

He compares land values with the estimated value of the population if they were all slaves.

This mode of comparison has been scrupulously avoided in our national income accounts because it dramatically emphasizes the difference between labor income and land income. The value of a slave is based only on his output net of subsistence and replacement-subsistence including sustenance during the unproductive years of childhood and old age and sickness.

Earlier classical economists agreed with George. When they wrote of "income" they generally meant pure income, and they recognized that common labor didn't have much because most of what workers earned went for subsistence and replacement. Land rent on the other hand was pure income. When the income tax was new, in 19th Century Britain, they taxed land income at a higher rate than labor income, recognizing that most of the latter was not net income in the same sense as land income. Many who voted for the 16th Amendment (the income tax) in 1913 thought they were voting just to tax property income-no one dreamed then that wages were to become the main income tax base.

When modern tax protesters ask why they can't depreciate themselves as they grow old, or claim that wages are not income in the sense of the 16th Amendment, they are not making it all up. But they are fighting a new conventional opinion that is backed by a powerful vested interest, one that operates by ridiculing threatening ideas as crankish and eccentric, and is armed with means of jailing those who seek to implement those threatening ideas.

Let's repeat George's comparison today. What is the value of 231 million Americans as slaves? Are we worth $50k each, net, purely as workers? That seems quite generous when we include all ages and conditions, and deduct all costs of birthing, nursing, doctoring, rearing, educating, transporting, etc., plus

the cost of putting us out to pasture after retirement. It is more than most people leave when they die, and most of that comes from property income anyway, not from labor. At $50k each we would be worth $11.5 trillions. The land of the USA is worth about the same.

The NIPA accounts bury land rent in other headings, and treat the entire gross income of labor as wages, thus giving an impression that rent is a small share of national income. George's method gives a startlingly different perspective. Think about it.

4. Comparing regions, where do you find poverty amid wealth? 288

Where wealth and land values are greatest, as in England.

5. Comparing different centuries, have real wages risen much in the history of England? 289

Not if we believe Hallam and Rogers, as cited. The Gothic cathedrals also stand as evidence that our medieval ancestors were not as hard up as we sometimes are told. The labor-price of land was very low in the 14th and 15th Centuries, not just in England but in France and Germany, too. In spite of The Black Death, and the 100 Years War (or perhaps because of them), the absolute living standards of labor were higher than in 19th Century England. It was the consolidation of central power in the 16th Century that devastated what had been "Merrie England," filled the roads with vagrants, and raised the labor-price of land. Oliver Goldsmith ("The Deserted Village") and Thomas More (Utopia) have told the story in literary form; Hallam and Rogers filled in the numbers. Ireland, Scotland, France, Spain, and Germany suffered the same fate in that same, frightful 16th Century.

6. What does George mean by "land monopoly," a term he throws around freely? There are many landowners.

Adam Smith and J.S. Mill used the term; George is following their lead. Those who criticize them for not using the term as modern texts do are committing an anachronism. Smith, Mill, and George may not be faulted for not following modern texts they never had a chance to read. "Monopoly" to them referred to the fact that land could not be reproduced, so those who held the existing supply would have no new production to compete with. "Monopoly" also connoted what today we call tenure, or private possession, of resources that had earlier been common and open to all.

7. How does George move from the general to the particular? 295

When he says ."..the most diverse phenomena are seen to spring from one great principle." This is deductive reasoning which, if the principle is true, is a great clarifier and work-saving device. "Theory transcends technology" we say today, so a principle like diminishing returns applies to all technologies, just as gravity applies to all materials, not just the apple that fell on Newton's head.

A standard expression for this is "seeing the cat," a reference to the face or figure hidden in the scrollwork (p.295) being that of a cat. Seeing the cat is the flash of recognition, the epiphany on the road to Damascus, the conversion and understanding never lost once gained. Once you see the cat you see it in everything.

This can make one a great bore, of course, especially if one sees cats where there are none, and overlooks giraffes where there are some. But many social facts do indeed "group themselves in an orderly relation" according to George's principle.

Once again, now, what is the principle? That land rent rises to absorb most of the gains of material progress. George's example on 294 is telling. Manhattan Island passed for $24 in the 17th century.

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Book VI: "The Remedy"

Chapter 1: "Insufficiency of Remedies Currently Advocated"

1. Into what six classes does George array proposed remedies for review? 300

Economy in government, education, unions, cooperatives, governmental interference, and wider land distribution.

2. Would labor gain from economy in government? 301.

No. Do you fully agree? Most readers think he overstates the point. Good government should raise the productivity of labor at the margins, and raise wages.

3. How would economy in government affect the margin of production?

Extend it. George likens economy in government to an advance in the arts, which he says is labor-saving. (We have taken issue with that point, in commenting on his chapter on "The effect of advance in the arts," because these advances may also be land- saving.) However, what if government disgorges surplus landholdings, so idle land can be put to use by private people? What if economy in government allows a reduction of destructive payroll taxes, and taxes on buildings, machinery, furniture, and fixtures? These economies in government will raise the margin for labor, and investment too.

4. How was "Boss" Tweed's popularity affected by his prison sentence? 302

He was cheered. The proletarians felt he had not robbed them. He was a Robin Hood to them. Can you think of later such cases? How about Ferdinand and Imelda? There is still the Daley machine in Chicago. In parts of Oklahoma, Arkansas and Tennessee an honest man could be in danger. The Mafia is reputed to control garbage pickup, gambling, trucking, and other things in some cities.

In modern California the main business of plucking cities has gone middle and upper class, and grown more sophisticated, professional, and respectable. It is done now through bond sales, investment bankers, law firms, engineering consultants, construction firms, redevelopment agencies, Chambers of Commerce, civic boards, and land developers. Most of the persons involved are main line Americans: Elks, Kiwanians, Rotarians, Shriners, and patrons and monitors of charities, hospitals, churches and universities.

5. How does George use China to illustrate his point about the effect of education on wage rates? 305, 308

Widespread education simply made employers take education for granted. It did not prevent wages' falling to a subsistence minimum. Cf. Ireland today, where McDonald's in Dublin is staffed entirely by college graduates.

Today we might compare Japan, where the life of students is living hell from an early age. Students are trained to cram for weeks on end with 4-5 hours of sleep a night. Exams are used not so much to encourage learning as to test endurance and docility. Suicide rates are high. The suicide rate is a pretty good index to how people evaluate their own lives. Natural savages may suffer high death rates, but not by their own choice. So far the system "works," in spite of the misery it brings, but who gains? The value of land in Tokyo rises to $10,000 per square foot, about 10 times the maximum found in major American cities. Not much incentive to hara-kiri if you fall into a piece of that action, but quite