Economic Theory in Relation
to Henry George's
Progress and Poverty
Karsten K. Larsen
[A paper presented at the Joint Georgist Conference,
University of Pennsylvania, Philadelphia, Pennsylvania, 1989]
In 1988 I wrote a thesis on Henry George's economic theory in
connection with my study of economics at the University of Copenhagen.
I have called the work, "The Economist Henry George," which
suggests that I have written within the field of the science called
economics. I hold that it is quite necessary to investigate the
economic theory contained in Progress and Poverty for reasons
which I shall have occasion to explain later.
But first let me make the aim of my work clear.
I have had two goals in connection with my study. First, it was my
intention to explain the theory of Progress and Poverty with
respect to the theory of income distribution (or, as it is called in
Progress and Poverty, "distribution of wealth"), the
theory of economic growth and its effect upon the income distribution
and the theory of economic crises. I think that these subjects are far
the most important parts of Progress and Poverty, but this is
of course a choice of mine, which is open for debate and objections.
Second, it was my aim to demonstrate that Henry George is an
independent economist, and in no way just a parrot of Ricardo. This
position is held by many historians of economic thought. I claim that
Henry George has many insights which are new in relation to the
Ricardian economics. I do not deny, of course, that there is a
relation between Henry George and the classics, but I hold that there
is something new in Progress and Poverty in addition to
Ricardo and Mill, to which one should pay attention.
My work is within the sub-discipline called history of economic
thought, the study of the economic doctrines of earlier times.
Why should one be concerned with history of doctrines? I can give two
First, it will very often be emphasized that we need to know the
doctrines of earlier times if we want to understand the modern
Second, it is sometimes claimed that the old economists still are
relevant, that we can apply the statements of f.i. Adam Smith and Karl
Marx directly on the modern society.
Of these two reasons for the relevance of history of doctrines, I
think that the latter is valid in connection with a study of Henry
George. I do not doubt that in his thoughts there is contained a
solution to many of the social and economic problems of the world,
that land value taxation and free trade is the way forward to justice
and freedom, as well as to a sound economy. But these things have not,
however, been the explicit object of my study.
Henry George is an extremely obvious example of an economist who took
a position towards the problems of his time. Nevertheless, I think
that it is possible to distinguish an element from his work which is
purely scientific, namely the economic relations. Henry George sets up
an economic theory that one, in principle, can recognize as true, even
if one does not want to accept the proposal about the full taxation of
I have studied the scientific element in Progress and Poverty.
I have endeavoured to treat the economic theory of George. There
exists an amazing ignorance about his ideas. But to this I have tried
to elucidate what Henry George really said. I have not taken a
position towards the question, "for or against," partly
because that has not been the subject of my study, and partly because
I find it is too primitive a question. But as I already have stated, I
have a great sympathy with Progress and Poverty, and therefore
I have not pretended any objectivity in connection with my study. I
think it is impossible not to be present with one's own attitudes.
We can identify two elements or dimensions in Progress and
Poverty. First a comprehensive economic theory, particularly about
distribution, and second the land value taxation proposal, which
relies upon the economic theory. The former element is the positive
dimension, the question about "what ought to be."
These two dimensions of the study of political economy are of equal
importance. For instance, if our positive investigation proves that
land speculation is a reason for economic crises, we should, because
we with our normative mind realize that crises are harmful to human
welfare, seek for a remedy which can destroy the land speculation -
and I think we could not propose anything better than land value
taxation. In this argument is contained both a positive and a
normative element, and I think it shows that it is impossible to
advocate our remedies without the help of economic theory. How could
we advocate free trade, if we did not understand the principles of
foreign trade? And how could we advocate taxation of the rent if we
did not know what the rent is? But if we have a thorough understanding
of economic theory, we will have good arguments for our remedies.
Therefor, economic theory is absolutely necessary, we simply cannot do
I have sought for literature which has something to say about Henry
George. That was really difficult. Robert Clancy writes in the Georgist
Journal (No. 62) about my thesis, "Mr. Larsen noted
regretfully that there was very little material that took note of
Henry George's economic analysis." And this is correct. I think
that it is sad that the economists have not discovered the outstanding
quality of Progress and Poverty. But on the other hand I have
not felt it as a problem in connection with my study.
I have referenced about 30 books and articles in my thesis, but the
only really important source of my work has been Progress and
Poverty. I have not in my understanding of Henry George's thoughts
relied upon the historians of economic thought. I have read the work
of Henry George himself, and thereby I have formed my own ideas of the
subject. I have also read others of Henry George's books, f.i., Our
Land and Land Policy, but not carefully enough to really make
statements about this book. The same is the case for The Science
of Political Economy, whereas Protection or Free Trade does not
contain many new points compared to the works of Ricardo and Mill. The
real value of the book lies more in its polemic against the philosophy
of protectionism, and not so much in the advance of a new theory about
Two New Economic Points
In the following I will account for some important points in
Progress and Poverty, which are new compared to the classical
economic theory. Alfred Marshall said in 1883 in his "Three
Lectures on Progress and Poverty" that what is new in the
book is not true and what is true is not new. I hold that this is
totally wrong. I claim that there are many points in Progress and
Poverty, which are new. One example is Henry George's
wage-interest theory, which he has written about in Progress and
Poverty, Book III, Chapter III-V. His point of view is that
capital and labour really is the same factor of production, since
capital is created by labour. It is possible to create new capital by
means of labour, and that implies, says Henry George, that there must
exist an equality between the law of interest and the law of wages,
and his final statement of the problem is that there is a fixed
relation between interest and wages. Wages and interest are high
together and low together. Whether this theory is true or false is an
empirical question, but I do not think that it is possible to refuse
the theory on its own terms, because it is evidently true that capital
is created by labour. From this insight Henry George has based his
theory, which, I think, has deserved to be taken seriously by the
Did Marshall notice Henry George's wage-interest theory?
Marshall mentioned the theory in his second lecture, but all he said
was that since "whenever population is plentiful and capital
scarce, interest is high and wages low," then the theory must be
wrong. But that is really a statement beside the point. Henry George
holds that there is a tendency towards and equality between labour and
capital since new capital can be brought to the market if the interest
is too high. It is true that interest is high if capital is scarce,
but capital will not continue being scarce. That is the point which
Marshall did not grasp.
There is no doubt that this wage-interest theory is Henry George's
own theoretical invention. I have never read anything in the works of
other economists which offers a similar theory. It is my impression
that there are different opinions about this theory among Georgists,
but most have a negative attitude, f.i. Charles F. Collier in Chapter
18 of Andelson's Critics of Henry George, who even states that
the theory fails to be consistent with the rest of the distribution
theory of Progress and Poverty.
It should be noticed that the wage-interest theory is perfectly
logical, and in this sense it is a true theory. And, as already
stated, there is absolutely no doubt that the theory was new in 1879.
Another new and true theory in Progress and Poverty is the
theory of land speculation. It is impossible to understand any of
Henry George's statements if one has not grasped this extremely
Henry George mentions the land speculation for the first time in Progress
and Poverty, Book IV, Chapter IV. He writes about the land
speculation that "whether we formulate it as an extension of the
margin of production, or as a carrying of the rent line beyond the
margin of production, the influence of speculation in land in
increasing rent is a great fact which cannot be ignored in any
complete theory of the distribution of wealth in progressive
countries. It is the force, evolved by material progress, which tends
constantly to increase rent in a greater ratio than progress increases
production, and thus constantly tends - as material progress goes on
and productive power increases - to reduce wages, not merely
relatively, but absolutely.
It is really necessary to grasp the theory of land speculation in
order to fully understand Henry George's idea of the land monopoly and
his theory of economic crises.
The crisis theory is explained in Progress and Poverty, Book
V, Chapter I, and I think that it is one of the most important parts
of Henry George's economic theory. And it is obvious that the theory
has relevance also with respect to the modern society. Fred Harrison
has accounted for these things sufficiently in his excellent book,
The Power in the Land.
But the land speculation is also the base for the land monopoly. As
long as labour and capital are denied free access to the land, because
all land is taken by the speculators, wages and interest will tend to
a minimum, much below their productivity. I think that these things
are explained best in Progress and Poverty, Book V, Chapter II
and Book VII, Chapter II.
The most important reason for the land value taxation proposal is
that the confiscation of the rent will do away with the land
speculation, and thus also with the permanent rise of the rent. This
will lead to increased wages and interest, as Henry George has written
about in Progress and Poverty, Book IX, Chapter II.
It is astonishing to see that Marshall has not mentioned the land
speculation at ail in his "Lectures." And he writes about
Henry George's plan that it will not "alter the margin of
cultivation, and therefore its only effect on wages, even on Henry
George's own theory, would be by relieving capital and labour from the
great part of the taxes imposed on them" (Lecture Three). If one
wants to see anything new and true in Progress and Poverty one
must read the book, and I cannot imagine that Marshall did that very
carefully, otherwise he would have discovered the land speculation and
its role in Henry George's theory about crises and distribution.
When I read "Three Lectures" for the first time about a
year ago, I was extremely disappointed, because I have learned at the
university that Marshall was an able and a competent economist. How
could he then be so superficial as he demonstrated in his "Three
Talking about literature on Henry George, it should be mentioned that
there are more interesting remarks on the theories of Progress and
Poverty. Let me just mention John B. Clark (1899), Joseph A.
Schumpeter in "A History of Economic Analysis" (1955) and
Philip Newman in "Development of Economic Thoughts" (1952).
But none of these are of course very comprehensive.
There is, according to my knowledge, only one of Henry George's
critics which is worse than Marshall and that is Robert Heilbroner. I
have mentioned his short passage on Henry George from his book, The
Worldly Philosophers, and I can only say that I find the book
miserable. It will perhaps be funny for you to hear that the book is
translated into Danish. In fact it is the first book about economics I
have ever read. But about a year later I read Progress and Poverty,
and fortunately Henry George has influenced me more than Robert
How should we evaluate
Progress and Poverty today?
First, we should, of course, avoid looking at the book as an
infallible Bible, because such a view is evidently wrong. There are
errors and some points in Henry George's argumentation which are not
very clear, but this is also the case for the principal works of Adam
Smith, David Ricardo, Alfred Marshall and John Maynard Keynes. There
is absolutely no doubt that Henry George is, at least, as competent an
economist as the economists I have mentioned.
Second, we should use Progress and Poverty and the other of
Henry George's books as well when we advocate land value taxation and
free trade. In order to do so, we need to understand economic theory.
Here we can use Henry George, because he has explained the principles
of economics better than any other economist has done.
The more we read Henry George, the better we realize the necessity of
a consistent theory about the social life. There are many things to
learn for those who meet the task with an open mind.
List of references
Andelson, Robert V., 1979: Critics
of Henry George
Clancy, Robert, 1989: "From Denmark," the Georgist
Journal, No. 62.
George, Henry, 1879: Progress and Poverty
Harrison, Fred, 1983: The Power in the Land
Larsen, Karsten, K., 1988: "0konomen Henry George" ("The
Economist Henry George," not published, not translated into
Marshall, Alfred, 1883: "Three Lectures on Progress and