Henry George - Economic Contributions

Economic Contributions

George developed what he saw as a crucial feature of his own theory of economics in a critique of an illustration used by Frédéric Bastiat in order to explain the nature of interest and profit. Bastiat had asked his readers to consider James and William, both carpenters. James has built himself a plane, and has lent it to William for a year. Would James be satisfied with the return of an equally good plane a year later? Surely not! He'd expect a board along with it, as interest. The basic idea of a theory of interest is to understand why. Bastiat said that James had given William over that year "the power, inherent in the instrument, to increase the productivity of his labor," and wants compensation for that increased productivity.

George did not accept this explanation. He wrote, "I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters—that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes—that interest would be but the robbery of industry, and could not long exist." But some wealth is inherently fruitful, like a pair of breeding cattle, or a vat of grape juice soon to ferment into wine. Planes and other sorts of inert matter (and the most lent item of all—money itself) earn interest indirectly, by being part of the same "circle of exchange" with fruitful forms of wealth such as those, so that tying up these forms of wealth over time incurs an opportunity cost.

George's theory had its share of critiques. Austrian school economist Eugen von Böhm-Bawerk, for example, expressed a negative judgment of George's discussion of the carpenter's plane. In his treatise, Capital and Interest, he wrote:

(T)he separation of production into two groups, in one of which the vital forces of nature form a distinct element in addition to labour, while in the other they do not, is entirely untenable The natural sciences have long ago told us that the cooperation of nature is universal. The muscular movement of the man who planes would be of very little use, if the natural powers and properties of the steel edge of the plane did not come to his assistance.

Later, George argued that the role of time in production is pervasive. In The Science of Political Economy, he writes:

f I go to a builder and say to him, "In what time and at what price will you build me such and such a house?" he would, after thinking, name a time, and a price based on it. This specification of time would be essential.... This I would soon find if, not quarreling with the price, I ask him largely to lessen the time.... I might get the builder somewhat to lessen the time... ; but only by greatly increasing the price, until finally a point would be reached where he would not consent to build the house in less time no matter at what price. He would say .... The importance ... of this principle—that all production of wealth requires time as well as labor—we shall see later on; but the principle that time is a necessary element in all production we must take into account from the very first.

According to Oscar B. Johannsen, "Since the very basis of the Austrian concept of value is subjective, it is apparent that George's understanding of value paralleled theirs. However, he either did not understand or did not appreciate the importance of marginal utility."

Another spirited response came from British biologist T.H. Huxley in his article "Capital—the Mother of Labour," published in 1890 in the journal The Nineteenth Century. Huxley used the principles of energy science to undermine George's theory, arguing that, energetically speaking, labor is unproductive.