Friday, March 23, 2007

Van Ornum, Why Government at All? - Part I, Chapter 2

CHAPTER II.

HENRY GEORGE: HIS ECONOMIC ABSURDITIES AND CONTRADICTIONS.

From the complexity of the facts which enter into the study of economics, people have generally inferred that the laws governing those facts were equally complex; and those who have studied them, after grouping together those which seem to be related, have sought for a different law for each group, and then by applying those assumed laws to social phenomena they have tried to account for every variety of human institution. That these laws were often in hopeless conflict, one with another, has not seemed to shake the confidence of the philosophers, but they have thrown the whole power of their intellects into finely drawn and abstruse arguments in order to harmonize apparent contradictions and support elaborate theories.

This is a characteristic of all economic writers, and especially so of Mr. Henry George, although one of the brightest and clearest of all the thinkers on political and social economy. When attacking injustice and exposing falsehood, or teaching the principles of human freedom, his works are a model of terseness, convincing by their logic, stimulating by their warmth, and inspiring by their hope. But when he attempts to construct a system, or comes to the defense of old institutions, his arguments become labored, his illustrations far fetched, and his conclusions weak. An illustration of this is furnished in his treatment of the subject of interest, in which he devotes twelve pages (Chapter 3, Book 3, “Progress and Poverty”) to a most difficult and fatiguing explanation of its [25] character, and argument in support of its rightfulness. Immediately following that are two more chapters of eleven pages, which are made necessary in order to harmonize it with other parts of his system, and enable him to reach an assumed law which is supposed to govern its action.

He defines interest as “all return paid for the use of capital, including compensation for risk.” But capital being a part of wealth is necessarily subject to the laws which govern wealth. Yet wealth is extremely perishable. From the time of its production it begins immediately to decay. Some forms of it will decay in a few days; some in a few weeks; and comparatively little will endure for a term of years. Now it is ridiculous to claim that it is still used after it has ceased to exist. But does interest cease when the capital, for the use of which it is paid, has perished? Not a bit of it! It remains a perpetual tax upon labor until the original amount of capital, undiminished by waste, has been restored. By what magic can wealth, which is only the product of labor, which cannot increase without labor, and which always decays if not constantly renewed, perpetuate itself as capital and justly absorb the earnings of labor through interest?

Mr. George says: “That I, having a thousand dollars, can certainly let it out at interest, does not arise from the fact that there are others, not having a thousand dollars, who will gladly pay me for the use of it, if they can get it no other way; but from the fact that the capital which my thousand dollars represents has the power of yielding an increase to whoever has it, even though he be a millionaire.” Suppose then, a miser has the thousand dollars, and hoards it, how much increase will it yield him? Or even if invested in those forms which Mr. George assumes will yield a natural increase, such as orchards and vine yards, or herds and flocks, how will he utilize that increase without labor? Admitting the necessity [26] for labor in such cases, he still holds that “there is a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” And so too, in precisely the same way, and to the same extent, when the mechanic utilizes the power of the steam, the waterfall, or of electricity to aid him in his work is “there a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” Where does the product of this “distinguishing force” go to? I think that even Mr. George will not deny that it rightfully constitutes a part of the rewards of labor. If this is true in the case of electricity it is true in that of interest. If not, why not? Again, if interest represents the average natural increase due to the reproductive forces of nature distinguishable from labor, why does it constantly fall? Is this distinguishing force less and less active? If so, may it not ultimately stop altogether? Interest would then abolish itself.

No! The real truth is that one of the appliances, which have been devised to facilitate the exchange of wealth is money; and monopoly has seized upon that just as it has upon everything else which it can control, and by limiting the amount has been able to extort a price for its use. It differs in no respect from taxes and tariffs, or rents and royalties levied upon the production and exchange of wealth, for the benefit of those who do not labor. Interest falls because the number of capitalists, and the aggregate amount of capital seeking borrowers, increases faster than the borrowers do. The competition brings down the price.

Coming to the subject of capital, Mr. George attempts, by the rule of exclusion, to reach a scientific conclusion as to what is, and what is not included in the term. He says, “Land, labor, and capital are the three factors in production. If we remember that [27] capital is thus a term used in contradistinction to land and labor, we at once see that nothing properly included under either one of these terms can be properly classed as capital.” Suppose now, I want a watch. The materials for its construction are in the earth. They are component parts of the land,—several bits of land. Labor is applied, and those bits of land are changed into several kinds of pig metal. But the only real change is that the labor has been impressed upon those bits of land. They have taken on the concrete form of pig metal, but they remain simply land plus labor. Exclude the land, and the labor, and nothing remains. Take another step toward the production of the watch, and we have but repeated the first; and when we have finished the watch, it is still only land plus labor. Exclude these two, and nothing remains; therefore, according to Mr. George’s own formula, capital is nothing. Apply the same process to any other form of wealth, and the result is precisely the same. Capital has not been a factor in its production, and is not entitled to share in the proceeds.

Is there then no such thing as capital? I answer, yes, and no. In the sense of something that exists independently of, or apart from land and labor, which performs a part in production, and which is entitled to share in the product, I say, no. In the sense of the stock in trade which the merchant sells, or the materials which the manufacturer uses in his work, I say, yes. But these are only land, with such additions of labor as they may have already received, and which await the further additions of the merchant, or the manufacturer, before reaching the consumer. There is no objection to calling this capital if it is desired. But it is always passive. It does nothing, and is entitled to no reward. We may also speak of capital in the sense of tools, or appliances used to aid labor, and make it more productive. But even then, these tools are but land and labor, and are entitled to no share in the production. Men do not set aside a part of their [28] product as a reward for their tools. Money is one of the tools of trade. It greatly facilitates exchanges, and if men were allowed to do so would provide just as much of this kind of tools as they could use to advantage, just as they do when free in any other department of industry. But the monopoly of money has the same effect as the monopoly of anything else. It lays the industrious under tribute; and we call that tribute interest. In the light of all this, what shall we say to Mr. George’s statement that “interest and wages must rise and fall together, and that interest cannot be increased without increasing wages; nor wages lowered without depressing interest? “I should say that, with all his learning and ability, Mr. George has some things yet to learn in what passes as political economy.

Again, all through Mr. George’s works, he speaks of the inequalities of fortunes as “the unequal distribution of wealth.” But is it true? Is there really any such thing as a distribution of wealth which produces inequalities? At the moment when wealth is produced,—when labor is impressed upon the material, and it takes on the form which we call wealth, then it is distributed; and equitably so, for it is in the hands of its producers. There is a circulation of wealth, and if that circulation is free, the distribution will remain unchanged, because the producer will insist upon getting an equivalent before he will part with it. The thing that does take place is a concentration; and it begins at the moment when the product passes from the hands of the laborer to the employer. The laborer is not free. He has been compelled to enter into a contract of employment by which he must give up his product for a stipulated price, which is inadequate. The concentration begins there. The circulation is not free. The inequalities here set up are further increased by every law or regulation which interferes with the freedom of that circulation. Is this too nice a distinction? I think not. To speak of the distribution [29] of wealth, when we mean a concentration, is to lay the foundation for serious errors. From this come all the arbitrary schemes for effecting an enforced equality of distribution, instead of simply clearing away the obstructions to the freedom of that circulation.

After our very brief, but as I think full analysis of production in its relation to interest, it is scarcely necessary to go over it again in its relation to rent, in order to point out the fallacies of Mr. George’s position; or perhaps I should say, his positions, for he seems to hold several; at one time speaking of rent as “the price of monopoly, arising from the reduction to individual ownership of the natural elements which human exertion can neither produce or increase,” (the land); and at another, as the necessary result of “the great law which alone makes any science of political economy possible,—the all-compelling law that is as inseparable from the human mind as attraction is inseparable from matter, and without which it would be impossible to previse or calculate upon any human action, the most trivial or the most important.” And further, “this fundamental law that men seek to gratify their desires with the least exertion, becomes when viewed in its relation to one of the factors of production, the law of rent; in relation to another, the law of interest; and in relation to the third, the law of wages.” Now, if he holds that monopoly is a perfectly natural and inevitable condition, the result of an “all-compelling law,” then I can understand how he can reconcile these two positions; but this would raise other difficulties still more formidable. If rent is “the price of monopoly,” and monopoly is the result of an ‘all-compelling” and inevitable law, then why should Mr. George waste his energies in attacking it? His tilt at monopoly through 400 pages of his book may well be classed with the exploits of Don Quixote in his attack upon the windmill. [30-31 missing, or mis-paginated in photocopy; book requested][32]

But his own statement of the basis of the right of property excludes both rent and interest. If labor is the only basis of the right of property, how can a man who does not labor make labor the basis of his claim to rent or interest? And if individuals cannot properly do it, how can the community do it as a whole? The community is only an aggregation of individuals. It has no rights or powers which any one of its members does not have. If one man cannot justly collect rent, no more can one hundred, or a thousand, or a majority of all of them. Mr. George’s distinction between private property in land and public property in land is a distinction without a difference. The public has no rights, and can obtain no rights, that are not enjoyed by its private members. The only source from which they can come is its members; and those members cannot confer a right which they do not possess.

Then, as to free trade: No man insists more vehemently than Mr. George that trade should be free. By free he means without restriction; and yet, according to his own statements and definitions, he is not a free trader. If you ask him if he is in favor of absolute free trade in money, he will tell you frankly that he is not. Money is simply a tool, or implement of trade, and how can trade be free as long as the tools necessary to carry it on are restricted: are not free? I leave Mr. George to figure that out.

Throughout Mr. George’s whole “inquiry into the cause of industrial depressions, and of increase of want, with increase of wealth,” he has endeavored to trace the evil to one only of the effects of monopoly, the private monopoly of land, and to substitute for it a public monopoly, which we will consider in the following chapter. At this point he has stopped. He proposes to do this by law, and through political methods, which we will further consider when we come to examine the nature of government and the workings of law.

2 comments:

Edward Miller said...

He defines interest as “all return paid for the use of capital, including compensation for risk.” But capital being a part of wealth is necessarily subject to the laws which govern wealth. Yet wealth is extremely perishable. From the time of its production it begins immediately to decay. Some forms of it will decay in a few days; some in a few weeks; and comparatively little will endure for a term of years. Now it is ridiculous to claim that it is still used after it has ceased to exist. But does interest cease when the capital, for the use of which it is paid, has perished? Not a bit of it! It remains a perpetual tax upon labor until the original amount of capital, undiminished by waste, has been restored.

By the definition of political economy, interest is simply the return from capital, regardless of the payment schedule. If it is all paid in a lump sum, then one doesn’t have to factor in the time value of money, but if the payment schedule to the producer is longer, then you are simply doing the same thing as paying in a lump sum but as if you had taken out a loan to pay it.

Mr. George says: “That I, having a thousand dollars, can certainly let it out at interest, does not arise from the fact that there are others, not having a thousand dollars, who will gladly pay me for the use of it, if they can get it no other way; but from the fact that the capital which my thousand dollars represents has the power of yielding an increase to whoever has it, even though he be a millionaire.” Suppose then, a miser has the thousand dollars, and hoards it, how much increase will it yield him? Or even if invested in those forms which Mr. George assumes will yield a natural increase, such as orchards and vine yards, or herds and flocks, how will he utilize that increase without labor? Admitting the necessity [26] for labor in such cases, he still holds that “there is a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” And so too, in precisely the same way, and to the same extent, when the mechanic utilizes the power of the steam, the waterfall, or of electricity to aid him in his work is “there a distinguishing force co-operating with that of labor, which makes it impossible to measure the result solely by the amount of labor expended.” Where does the product of this “distinguishing force” go to?

Everything is a part of nature, including humans, but it is access rights which we must be concerned with, not the question of whether something is natural. If we ask, “is this natural” to any phenomenon, the answer will virtually always be yes. Human labor directs the power of nature in ways useful to humans, and what George is asking is why one human is allowed to direct that power and another not allowed.

If all of the economic rent of a given location is paid out, then all of the forces of nature in addition to the community-generated wealth of the region would be factored in, and all production would have the rent fully accounted for… and as Ricardo showed, that recapture of the rent could not be “passed on to other classes of consumers.”

That recapture of the rent is often mislabeled as a “tax” in the same way that internalization of externalities is often misleadingly labeled as a “tax.” Just as externalities could be internalized in any number of ways, so could rent be re-captured. Fred Foldvary put forth a model of geo-anarchism that does so via means not unfamiliar to mutualists.

Edward Miller said...

I think that even Mr. George will not deny that it rightfully constitutes a part of the rewards of labor. If this is true in the case of electricity it is true in that of interest. If not, why not? Again, if interest represents the average natural increase due to the reproductive forces of nature distinguishable from labor, why does it constantly fall? Is this distinguishing force less and less active? If so, may it not ultimately stop altogether? Interest would then abolish itself.

George explains why interest constantly seems to be falling under our current political-economic paradigm in the chapter titled The Law of Interest. The reason for this apparent contradiction (which is a theme he returns to often… why progress and poverty seem to go hand in hand) is that rent is eating up such a large share of total production, and that share actually increases as we see gains in efficiency, as per Ricardo’s Law of Rent.

What is left over after rent takes its slice is Wages and Interest, and, ceterus paribus, they tend to approximate one another since if wages are higher than interest we will tend to see an increase in the number of people choosing labor over entrepreneurship… which really gets at another fundamental point of George which is that capital is merely stored-up labor and there really are only two fundamental factors of production… nature and human action.


No! The real truth is that one of the appliances, which have been devised to facilitate the exchange of wealth is money; and monopoly has seized upon that just as it has upon everything else which it can control, and by limiting the amount has been able to extort a price for its use. It differs in no respect from taxes and tariffs, or rents and royalties levied upon the production and exchange of wealth, for the benefit of those who do not labor.

It seems to be the idea of loans which mutualists object to, yet the need for loans is not a result of the Money Monopoly or any such thing, it is a result of the time value of money, differing needs and wants, and differences in the distribution of capital.

There is such a thing as seigniorage, which is a means of “extoring a price” for the use of money, though it is a rather trivial issue today. Some have classified this as economic rent, and as such could be subject to georgist taxation, but there are bigger fish to fry.