Chapter 1: "The Dynamics of the Problem
Yet to Seek"
Chapter 2: "The Effect of Increase
of Population upon the Distribution of Wealth"
Chapter 3: "The Effect of Improvements
in the Arts
upon the Distribution of Wealth"
Chapter 4: "The Effect of the Expectation Raised by Material
Progress"
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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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.
Top
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:
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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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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