Book I:
"Wages and Capital"

Chapter 1: "The Current Doctrine of Wages—Its Insufficiency"
Chapter 2: "The Meaning of the Terms"
Chapter 3: " Wages Not Drawn from Capital, But Produced by the Labor”
Chapter 4: "The Maintenance of Laborers Not Drawn from Capital"
Chapter 5: "The Real Functions of 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