The Case Stated

From Henry George versus Henry George


The problem which Mr. George sets for himself, in this work, is to find the cause of poverty in the midst of abundance. The question in “its most compact form” is put thus:

“Why, in spite of increase in productive power, do wages tend to a minimum which will give but a bare living?” (P. 15.)

He has already told us that the cause of poverty is the same as that which lowers wages. (P. 15.)

Mr. George arraigns the current political economy with failure to answer this question, restates it in italics, as if it were a profound problem, as if he did not see that it answers itself—that any schoolboy could answer it, if it were put in terms of arithmetic, as in a certain sense it may be. Mr. George might as well have asked—for there is nothing more abstruse or difficult in it—why it is that, if twelve apples be divided among twelve boys each will get fewer than if they were divided among six, four, or two?

Given so much wood to be pitched into the cellar, and given so many apples with which to pay the boys for pitching it in, why is it that if twelve boys do the task, each will get a smaller share of the apples than if two boys had performed it? Is there anything labyrinthian or mysterious about that? And yet that is all, absolutely all that is involved in Mr. George’s problem from a purely politicoeconomical point of view, as will abundantly appear if we substitute for “productive power” its equivalent, laboring hands “Why, in spite of increase of laborers, do wages tend to a minimum which will give but a bare living?”

The answer of the current political economy to this question, namely, “that wages are fixed by the ratio between the number of laborers and the amount of capital devoted to the employment of labor,” or the amount of work to be done, is peremptorily repudiated by Mr. George, although he admits that it “holds all but undisputed sway” and has “the endorsement of the very highest names among the cultivators of political economy.”[1]

Whether we are to admire Mr. George for the audacity with which he assails these highest names, or are to stand amazed at his hardihood, will depend upon the success of his onslaught upon them. Mr. George moves to the assault with the declaration that the fundamental error of the old system is the assumption, that “Wages are drawn from capital” and stakes his case upon his ability to prove the proposition: “That wages, instead of being drawn from capital, are in reality drawn from the product of the labor for which they are paid? (Page 20.)

The motive and magnitude of his task, and the sweeping consequences of its successful performance, he thus sets forth:

“In short, all the teachings of the current political economy, in the widest and most important part of its domain, are based more or less directly upon the assumption that labor is maintained and paid out of existing capital before the product which constitutes the ultimate object is secured. If it be shown that this is an error, and that on the contrary the maintenance and payment of labor do not even temporarily trench on capital, but are directly drawn from the product of the labor, then all this vast superstructure is left without support and must fall. And so likewise must fall the vulgar theories which also have their base in the belief that the sum to be distributed in wages is a fixed one, the individual shares in which must be necessarily decreased by an increase in the number of laborers.” (P. 21.)

It is far easier to demonstrate the insufficiency of Mr. George’s arguments, than it is to present a synopsis of them, for he himself furnishes the matter of their own refutation.

He abounds in assertion, and generally it is only necessary to offset one assertion against another to invalidate his conclusions.

Mr. George, on page 23, affects to have refuted the doctrine that “wages are drawn from preexisting capital” by a “reductio ad absurdum” of the proposition that “labor cannot be employed till the results of labor are saved.”

Leaving out the quibble, based upon the double meaning of the word “employed” where is the absurdity? To employ, in the sense of use, and to employ, in its economic sense, are two quite different things. Does Mr. George mean to impute to any writer the utterance of the proposition that “labor cannot be used, exerted, applied, till the results of labor are saved”? He must convict them of that, or retract his fling about absurdity. For it is not absurd—however untrue it may be—to say that the “laborer cannot be hired” until the results of labor have been saved. Employment, as used in political economy, implies an employer and an employee; and the above posited proposition can be made to appear absurd only in the fog of Mr. George’s ill-considered utterances about a man hiring or “employing himself,” and paying “wages” to himself.

On page 61 Mr. George says:

“Nor even then shall I need capital, if I can make a partial or tentative exchange by borrowing on my wood.”

The implication is that labor can be had without capital, because it can be obtained on credit. But even this is a delusion. The maintenance of labor, while waiting for its final wages, is capital. The credit itself rests on capital, real or presupposed. It is immaterial whether you have saved the wherewithal to pay for labor, are going to save it, or are believed to be going to save it; the expectation is the ground of the credit. Something that stands for capital is a necessary condition of hire and payment of labor. The thing with which the payment is made was capital—”value in the course of exchange;”—is wages, and may be, an hour after, capital again. The question as to how the thing was produced—though unquestionably produced by labor, even so little as the picking up of a diamond or a nugget of gold—cuts no figure whatever in the problem, either as cause or effect, so the thing but have the “purchasing power.”

We have his authority (p. 23) for saying that the factors in the first instance of any transaction represent the real elements of the case in all succeeding instances—no matter how numerous or complicated.

Let us apply this rule to the act of production. The thing to be produced is A. The producing agency is B. The thing with which to pay for the production of A is C. That the more there is of B, the more thinly will C be distributed, is apparent to the commonest understanding. And that is the reason why decrease of wages (C) follows increase of productive power (B). Not decrease absolutely, but relatively to B. Twelve apples are twelve apples, whether distributed among twelve or two boys. It is the obviousness of this truth that has, not only caused it to be “accepted by a succession of economists, from the time of Adam Smith to the present day” (p. 19), and also to be “accepted as axiomatic by all the great thinkers who have devoted their powers to the elucidation of the science” (p. 20), but also the reason why “it is now rapidly permeating the general mind.” (P. 16.)

It is this obvious truth that Mr. George denies and sets himself to disprove. And it is on the disproof of this, that he rests his hope of revolutionizing the whole science of Political Economy.

His presentment of the case, epitomized, is as follows:

The thing to be produced is A, and the thing with which to pay for the production of A is also A; that is, the producing agency, B, is paid directly from A, the thing produced.

But A is not capital, nor can it be, until it is produced, therefore B is not paid from “capital” but from A, the product of Bs own labor—which may, or may not, become capital, according to the use to which it is put. (P. 40.)

Admitting that all this is something more than a mere prestidigitation of words, can it be pretended that the producing agency B (the laborer) is “maintained” while producing A, from the product A? How can he live, while at his task, but by drawing upon something previously “stored up”? And if that something stored up be not capital, what is it? And if B s living—”maintenance”—be not a part of his wages, what is it? Indeed, is it not the whole of them, when “wages are reduced to a minimum which give but a bare living”—especially when his wages go into the till of the baker, butcher and grocer as soon as received? The meat of the butcher, the bread of the baker, the sugar, tea and coffee of the grocer, are “unhesitatingly set down as capital” by Mr. George. (P. 41.) Does not the laborer “trench on [this] capital” (p. 22) while employed in producing A, and thus draw his wages “in advance”? Or are we to be told that the bread, meat and groceries are capital on the shelves of the sellers, but cease to be capital when they come to the trencher of the laborer?

We should not be surprised to be told so, for much of Mr. George’s logic is of this type.

“Capital is that portion of wealth which is [not may be] devoted to production” (P. 42.)

The demand for production will determine the amount of wealth converted into capital—devoted to production. The wages, absolutely, are the amount paid to the laborers, whether in the form of money or maintenance.

Working energy is “productive power”—whether it be laboring hands or labor-saving (labormultiplying) machinery. The laboring capacity of John Jones’s two hands is limited. But if John Jones does all the work, he gets all the allotted pay. When the two hands of Charles Henry are added to those of John Jones, there is increase of productive power, and a corresponding decrease of John Jones’s wages for that job—a division of the wages fund between John Jones and Charles Henry. What one got before, is now divided by two. One goes into twelve twelve times. Two go into twelve six times. Is there anything sophistical or casuistic about that? Is it worth while to write a book to show that there is no necessary relation between the dividend 12, the divisor 6, and the quotient 2?

Mr. George is not fortunate in the choice of his words in formulating his question. He conjures up a witness against his own candor when he adopts a form of speech which would seem to be used as a subtle device to secure the advantage of a false bias through a false implication. The “question to be asked” is: Why does increase of productive power tend to diminish wages? What, in fairness, has the little word “spite” (p. 15) to do with the question, if straightforwardness is to be the plan of the discussion? What does it mean here, and what honest purpose does it serve? “Why” says Mr. George, “in spite of increase in productive power, do wages tend to a minimum?” That is, why, contrary to all expectation and the reason of things, does increase of productive power tend to lower wages? If “in spite of” means anything, it means that. If it means that, it is a disingenuous attempt to forestall the judgment by begging the whole question. If it means nothing, it has no business there. The great thinkers—”all the great thinkers who have devoted their powers to the elucidation of the science”—tell us that “increase of productive power (multiplication of laborers) necessarily tends to diminish wages,” and they think that this may be postulated as an axiom, having the force of a law. Then Mr. George rises and asks us: “Why, in spite of the law, do events occur in accordance with the law?” Imagine Mr. George asking Sir Isaac Newton: “Why is it that, contrary to all expectation,—that is to say, in spite of the law of gravitation—all terrestrial bodies tend to the center of the earth?” What would Mr. George think if some one should ask him: “Why is it that, in spite of the increase of the divisor, the quotient tends to diminish?”

Yet this is precisely, in substance, what Mr. George asks us; it is the “compact form” of the momentous problem he proposes to investigate—the answer to which is to constitute the foundation of the “vast superstructure” of the new system of political economy which he proposes to erect.

But, supposing the question to be both fair and fairly put, why does not Mr. George go straight forward with his answer? After stopping to berate the shortcomings of the old systems, and the “great thinkers,” he says:

“For, if wages depend upon the ratio between the amount of labor seeking employment, and the amount of capital devoted to its employment, the relative scarcity or abundance of one factor, must mean the relative abundance or scarcity of the other. Thus, capital must be relatively abundant where wages are high, and relatively scarce, where wages arc low. Now, as the capital used in paying wages must largely consist of the capital constantly seeking investment, the current rate of interest must be the measure of its relative abundance or scarcity. For, if it be true that wages depend upon the ratio between the amount of labor seeking employment and the capital devoted to its employment, then high wages (the mark of the relative scarcity of labor) must be accompanied by low interest (the mark of the relative abundance of capital), and reversely, low wages must be accompanied by high interest. This is not the fact but the contrary” (P. 16.)

If Mr. Georges proposition be true, it would seem easy to prove it without trotting off after a doubtful argument based upon “interest”. Then why does he thus turn aside, at the very outset, to complicate the matter by introducing the element of “interest,” when interest may, or may not have anything to do with it—is a “mark” even, only under conditions not necessarily involved in the question; primarily has nothing to do with the question, either as a constituent element or as a “mark.”

In other words, Capital, Labor and Wages can, and often do, execute their full and perfect functions without the intervention of Interest in any manner whatever Mr. George tells us, “and wisely too” (p. 23), that the simplest conditions of a fact, are the law and essence of its modes and nature in whatever complications. His example of the primitive man (p. 24) digging his daily rations of roots, is to the point. That is living from ground to hand, and from hand to mouth. If he digs to-day more roots than he needs, saves the surplus and with it hires Richard Doe to dig for him to-morrow while he basks in the sun, or lounges in the saloon, he performs and illustrates the perfect function and philosophy of Capital, Labor and Wages. There is no question of interest here as a “mark” or anything else. Nor will it come in till he wants to borrow some other digger’s roots either to eat himself, or to pay out to another—nor even then, if the other digger be willing to lend without reward. In either case, what figure it may cut, as a “mark,” will depend on circumstances that have no vital or necessary connection with wages, labor or capital.

It is a long way from digging roots with the finger-nails, to the McCormick Reaper. And yet, not one step on that way could have been taken without “Division of Labor.” Nor was that division of labor possible without capital. Drawing still upon Mr. George’s example: While each man digs his own bait, cuts his own poles, make his own lines, or nets, bobs, sinkers and hooks, and catches his own fish, there is no division of labor, no progress, no advance toward civilization.

Nor can Andrew dig worms while Peter catches fish (and so divide their labor) without capital. Enough fish, or its equivalent, must first be caught, and “stored up,” to sustain Andrew while he digs, or he must leave digging to go and catch his dinner. Without so much advance accumulation for Andrew’s subsistence while digging worms, even so simple a division of labor is impossible—though it should be a provision but for a single day. The principle is, as Mr. George insists, precisely the same, whether the stock in store be one loaf and two fishes for Andrew, or bread and meat for a hundred men during the construction of a Corliss Engine. (P. 23)

The small stock of fish saved—laid up for such a purpose—is as truly capital, as the large sum of money advanced for the building of the steam engine. Nor is it material whether Andrew alone, or Peter alone, or both together, accumulate the store, the stock in trade, the fund of fish—it is capital, a magazine on which to draw while the hands are employed in work that does not give an immediate return of food.[2]

It does not seem possible that anything can be plainer than this. And yet the denial of it and the assertion of the contrary, are the foundation of Mr. George’s new theory of political economy.

He says it is the misconception of the fact in this regard, and a false assumption, that have led to the fundamental and all-pervading errors of the system he sets out to overthrow.

And yet, is it not already clear that there is no need to go beyond his first chapter, to show that so far as it turns upon this fundamental principle—this main proposition—his book is not worth a straw? If it has been shown that the “maintenance and payment of labor,” all labor if you please, that is not addressed to the direct or immediate satisfaction of the individual wants of the laborer, “do trench on capital,” “are directly drawn from capital,” and only indirectly from the product of labor—the stored up products which are in the strictest sense capital,—”then all this vast superstructure [of Mr. George’s] is left without a support and goes to the ground.”

But recurring to the passage quoted on, pp. 11-12, and conceding the right of Mr. George to complicate, or elucidate, the question with the element of interest, let us see what he accomplishes by his attempt to do so. He will certainly not deny that, “if wages depend upon the ratio between the amount of labor ’employed’ and the amount of capital devoted to its employment, the relative scarcity or abundance of one factor must mean the relative abundance or scarcity of the other.” And “thus, capital must be relatively abundant where wages are high, and relatively scarce where wages are low.” Undoubtedly, and, if interest, or the rate of interest, be the mark of anything to the contrary, it must make a false mark, or Mr. George has made a false use of it. Let us see which. He goes on:

“Now, as the capital used in paying wages must largely consist of the capital constantly seeking investment, the current rate of interest must be the measure of its relative abundance or scarcity.”

By what compulsion must it? If there were nothing else to affect the current rate of interest but the proportion between capital and labor, this would be true; otherwise not. But there is something else. So it is not true, and all that Mr. George has built upon it, “goes to the ground.” The simple fact, that there are times among all peoples when wages are low and interest high together, that in some countries this relation is constant, as in India, where, by the Institutes of Menu interest is permitted to range from 75 to 60 per cent., while wages touch the lowest, living mark, are proofs sufficient to quite dispose of Mr. George’s “this is not the fact.” But Mr. George may say that it is the “element of insurance” that so exaggerates the rate of interest. Very true, and it is equally true, though Mr. George seems to overlook the fact, that the amount left after “eliminating the element of insurance” does not denote the “current rate of interest.” It is only by “eliminating” and interpolating to meet the exigencies of the argument, that Mr. George makes out even a plausible case. But he shall have the benefit of his own statement. Respecting the proposition, that “low wages must be accompanied by higher interest,” he says:

“This is not the fact, but the contrary. Eliminating from interest the element of insurance, and regarding only interest proper, or the return for the use of capital, is it not a general truth that interest is high where and when wages are high? Both wages and interest have been higher in the United States than in England, and in the Pacific than in the Atlantic States. Is it not a notorious fact that where labor flows for higher wages, capital also flows for higher interest? Is it not true that whenever there has been a general rise or fall in wages there has been at the same time a similar rise or fall in interest? In California, for instance, when wages were higher than anywhere else in the world, so also was interest higher. Wages and interest have in California gone down together. When common wages were $5 a day, the ordinary bank rate of interest was twenty-four per cent, per annum. Now that common wages are $2 or $2.50 a day, the ordinary bank rate is from ten to twelve per cent. (P. 17.)

Mr. George is as unfortunate in his examples, as he is in his language. In the economic relations of the parties, there is no difference between the primitive root-diggers, and the primitive gold-diggers. So long as Tom, Dick and Harry dug for themselves there was labor, but no call for capital or “wages.” As soon as Tom hires Dick to dig for him, paying him out of gold saved, Capital and Wages come in, and the relation of labor, capital and wages is complete without any other “element,” and might continue so to the end of their lives. But when Tom borrows gold of Harry, with which to pay Dick, and agrees to pay Harry back his gold with something added for the privilege of using it, then “Interest” comes in with its own laws, which may or may not modify, or “mark,” the conditions of wages and capital; but in no wise can control or repeal them. When wages in California were $5 a day for common labor, there was a maximum demand for labor, with a minimum supply. There was also a proportional demand for capital, as in the nature of the case there must have been. If the employer has enough capital of his own, he has no occasion to borrow, and there is no question of interest. He would borrow only when he could pay the laborer his $5 a day, the lender his twenty-four per cent, and still be a gainer by the transaction. And it is only necessary to bear in mind a fact so simple as this, to understand why it is that “in those alternations known as ‘good times’ and ‘hard times’ a brisk demand for labor and good wages is always accompanied by a brisk demand for capital and stiff rates of interest.” (P. 19.) When people demand commodities at any price, labor will be employed at any price, and money (capital) will be borrowed at any price,—whatever measure of wealth there may be “seeking investment,” (subject to the law of competition only), and however “seemingly scarce” capital may be.

So long as the employer can afford to pay a high price for labor, and a high rate of interest, he will do both sooner than decline either, if the capitalist see the situation, and demand the high rate, whether it be a “mark” or not, of more or less of capital. But the essential thing of the California example—that to which Mr. George does not expressly call the attention of his reader—is, that the “rush” to California, if it did not make all the difference between $5 a day and $2.50 a day, it was at least strikingly coincident with it. And what was that rush but “increase of population”—of “productive power”? And what was the fall from $5 to $2.50 a day, but a tendency of wages to a minimum? Was not that in exact accordance with the “current political economy”? Is it not precisely what the “highest minds who have devoted their powers to the elucidation of the science” would have predicted? And is it pertinent or ingenuous in the propounder of a new theory to ask: “Why, contrary to all expectation,” (for that is precisely what his “in spite of” implies) the event should happen precisely as it was expected to happen?

The fact, that increased private ownership was also coincident with, or even tributary to the decline in wages, is surely no refutation of the accepted doctrine that “wages are determined by the ratio between labor and capital”—a law nowhere more vividly illustrated than by Mr. George’s California example. When he wrote: “Wages and interest have gone down together in California,” he might have added: “and population and productive power have gone up,” even though simple-minded people should infer that the going up of one, had something to do with the going down of the other.

[1] In reference to pp. 16, 17 and 18 of Mr. Georges book it is safe to say: If there be little to be done, and many hands to do it, wages will be low—no matter what the relative amount of capital may be; and, e converso, if there be much to be done, and few hands to do it, wages will be high, independently of the more or less or “seeming scarcity “of capital, rates of interest, rents, or real or speculative value of lands. But this implies both labor and capital, with a mutual dependence, and a law of their relationship, subject to modifications, but yet properly formulated in this general proposition of the “ratio of laborers to capital,” Mr. George to the contrary notwithstanding. Interest depends upon the demand for loans—borrowed capital, directly—indirectly, upon the demand for products—not on the proportion of labor to capital. Demand for products is demand for capital, and the demand for borrowed capital, other things being equal, determines the rate of interest.

[2] It is no answer to say that Andrew would not need to dig a whole day at a time—or long enough to make it necessary to draw upon any laid-up store—that his breakfast would hold out till his task were done and he could take his next meal for a fresh supply—take it if he can get it: if not he must wait and go hungry till it be caught—and possibly starve in the meantime. But it is not a question of time. The principle is the same whether his stock stored up be for a month, or a day, or an hour. It is something saved from former takes to draw upon while he performs his “divided duty.” It may not be the strictly technical sense of the word,: but it is no figure of speech to say that the reserve energy which enables a man to work with both hands instead of feeding himself with one while he works with the other, the force expended in work between meals, is capital, whether stored up in his larder, his stomach, or his blood. Indeed there are political economists who go quite as far as this. I once heard Mr. Emerson remark, in reply to one urging the importance of dividing education into physical and mental training, that the most available store of physical power for the literary man was that laid up for him by his ancestors. Though his speech be that of a poet, it, at least, illustrates a truth of science.

Continued: The Direct Source of Wages