Chapter 1: "The Primary Cause of
Recurring Paroxysms
of Industrial Depression"
Chapter 2: "The Persistence of Poverty
amid Advancing Wealth"
:
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.
Top
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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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