Roger Sandilands has reproduced from Henry George, what I had already
noted as an elementary distinction between capital and land. Alas, he
fails to point out, if he's recognized it, the error into which George
is led by his firm association of capital with only produced goods to be
used in further production. This is the source from which George thinks
that the classical explanation of wages as being paid out of previously
accumulated capital to be just plain nonsense. Instead, George insists
that wages are paid out of current production for which labor is
currently hired.
In short, George failed to recognize the difference between capital as
capital goods from capital as funds, a problem that has afflicted
several other notable analysts in the past. Thus George quotes Adam
Smith's listing of the constituents of capital, which include "money,"
and couldn't appreciate money's rightful place in the definition. This
is how George could feel confident in declaring the classical wages-fund
explanation of wage rates as being erroneous.
George's muddled understanding of the distinction between capital as
funds and capital goods, the latter being a subset of the former, also
shows up clearly in his dispute with classical analysis in chapter 1 of
his famous book. Thus, when it is explained that higher wage rates may
be paid if a larger share of capital were devoted to the wages fund than
if a larger share were devoted to capital goods -- "machinery and
material" -- George considers the explanation a "fundamental error."
That failure on the part of George also prevents him from recognizing
that there is no necessary connection between wage rates and the level
of interest rates. Correctly understood, interest rates are determined
by the supply and demand for capital or savings (funds) while wage rates
are determined by the supply and demand for labor, the wages fund
constituting the demand for labor.
It seems incredible to me that George bases much of his argument for the
single-tax proposal on such a fundamental error, besides the argument
that no one should own land since it is given by nature. Donald Frey
restates this claim by George but without criticism:
"In his attack on the wages-fund, George argued that workers are paid
from _current production_ -- i.e., workers had a legitimate claim on what
they produced, and what they produced was growing, not a static fund. In
this approach George anticipated modern income and product accounts, which
treat wages as charges against production."
How is it that anyone can fail to recognize that most producers borrow
funds (capital) out of which they purchase capital goods, including raw
materials, and rent the services of land and labor (from the wages fund)
before attaining revenue from production? And that such funds had to
have been saved out of previously earned income to be offered on loan?
Otherwise, they have to come up with their own savings or capital (funds).
Indeed, the more I read of George's "Progress and Poverty," the more
faults I find in his work. I get the same incredulous feeling I got in
the summer of 1985 when I stumbled upon the fact that the reason J.M.
Keynes thought that he had found the missing link in classical
macroeconomics was that they didn't have a valid theory of interest.
And in attempting to prove that point in the first footnote to chapter
14 of the General Theory, it is quite clear that Keynes could not
recognize capital in the classical theory of interest as funds. He then
proceeded to declare Marshall restatements of the classical theory of
interest as "nonsensical" and "absurd."
Henry George does about the same thing in chapters 1 and 2 of his book.
I'm almost tempted to do for George what I've been trying to do for
Keynes in macroeconomics. Just as I felt in the case of Keynes, I can't
now believe that the fundamental sources of George's errors have not yet
been published. Besides, I doubt that there is much interest in
economics for explaining how George got it wrong. Just as George
correctly recognizes that the value of land increases as the need to use
it (demand) increases with industrial progress, I would need to know
that there is much demand for such an effort to take up documenting the
sources of George's errors. Perhaps Roger and Warren might help me in
that regard.
James Ahiakpor
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