The Reconstruction of Henry George:

Teaching Economics as a Science

Harry Pollard

[A paper presented at the Fifteenth International Conference on Land-Value Taxation and Free Trade, Utrecht, Holland. 24-31 July, 1982]

PART I: INTRODUCTION

In 1973, at the International Conference on the Isle of Man, I reported on the InterStudent High School Program, pointing out that the courses that we had used for decades in adult instruction showed weaknesses which made them unsuitable for use with young minds. This made necessary heavy revision of School courses, both in teaching style and in content.

During the reappraisal, we found ourselves in conflict with some of the arguments of Henry George. In most instances, the differences were minor and were essentially extensions, not pursued by him, of George's arguments. Some other disagreements were not so minor yet they in no way rebutted, or amended, Henry George's thesis that our advance must be always toward his twin goals of liberty and justice for all.

Happily, we found George read very well in modern setting. Little that he had said a century ago needed to b>e amended. His analysis remained as cogent and contemporary as anything offered by the latest crop of economic writers. In fact, seldom does one nowadays meet the profundity one encounters constantly in the works of Henry George.

Our new adult course is based on the improved secondary course, but contains further revisions and changes. Some of them are presented in this paper. As we developed our thinking, we did not try to confine ourselves to a particular book. All of George's books became the raw material from which we built the successful adult courses we present under the name of 'The Classical Analysis'.

PART II: THE SCIENCE OF POLITICAL ECONOMY

The Study

Political economy is a behavioral study of social Man. It is both an art and a science. Art is synonymous with 'skill'; science is another name for 'knowledge'. The term political refers to 'social' and the term economy means 'organization', which makes Political Economy 'the science of social organization'. It has been called the 'science of the natural social order' and has been described very specifically as the 'art and science which deals with the production and distribution of wealth'.

It should be noted that this is a science of production, not of consumption. This science stops when production reaches the consumer - when, in fact, production is over. Also, not part of the study are those who service the consumer, or his products. Such people may satisfy desires and maintain existing production, but they don't produce wealth.

This removal of the service economy from examination is not a cavalier or lightly taken act. It is made necessary by the natural boundaries of the science.


Basic Assumptions

This study of Man begins with two assumptions of human behavior. The first assumption points to Man's direction; the second describes how he gets there. The two assumptions say that:

"Man's desires are unlimited."

"Man seeks to satisfy his desires with the least exertion."

Thus antipathy to exertion confirms the conclusion that the consumer is not important to our study. A producer will not exert if his production is not desired. Thus, the fact of production indicates desire for it.

The desires of Mankind take a multitude of forms. We may easily pick 'survival' as the most reasonable primary desire. This thought can be extended to suggest that Man has a general desire for personal advantage --along with an equivalent aversion to disadvantage.

We should also note the effectiveness of Man's reasoning ability. Man may choose, something denied other animals. This ability to deny his instinctual conditioning leads to the conclusion that his choices must have been pretty good - or he would not have survived.

The Path of Inquiry

The objective of scientific inquiry is the confirmation of consequences and particularly to discover oinvariable consequences' (consequences that repeat). 'Consequences' is one of a connected set of concepts which make analysis more simple. Henry George discussed the first three. We can add to them:

• a sequence is the name given to two happenings that occur one after the other.
• a consequence is the second of two happenings when it is the result of the first;
• a Natural Law is the name given to the consequence that is seen always to repeat - the 'invariable consequence';
• a rule is a homely guide to sensible action based on Natural Law. 'Slow down when driving around a corner1 is a useful rule - even if the Natural Law on which it is based isn't known.
• a law is a formal statement of a rule, with a penalty added for non-compliance. Individuals within a community accept laws -- and their penalties -- because they make sense. Laws help to reduce the impact of poor choice and temporary irrationality.
• a privilege is a private law (privi-lege). Its purpose is to benefit one at the expense of another. When privilege is recognised, it is resented (except by the recipient). Unfortunately, people see little distinction between 'law' and 'privilege' and a proper resentment of privilege develops into opposition to all legislation. Then laws -- useful lubricants to smooth the advance of civilization -- become suspect, unwelcome and ineffective.

This set of related concepts deserves comment Societal "rules' may be called 'implicit contracts', or 'understandings'. You do not expect a person walking toward you on the sidewalk to beat you up. Implicit contract is the real social contract. Its enforcement exists only in the minds of those who practise it.

'Law' is an explicit contract. One hopes that its formality might reduce the ambiguity that may attend social understandings. The intent of law should be to provide the stability that helps a civilization to endure.

Both 'rules' and 'laws' are contractual -- or the result of voluntary agreement. Not so 'privilege' which implies a coercive obligation.

PART III: REFINING BASIC TERMINOLOGY

Defined Concepts

To accomplish his desires Man does things. To aid the analysis of his behavior it is necessary to establish a precise and common language. So, we divide the world into four classifications. They are:

LABOR	which is the complete 'package' called a human being
LAND	all natural resources outside of Man and his products;
CAPITAL	any material product of Labor and Land (not in the hands of the consumer).
WEALTH	any material product of Labor and Land (in the hands of the consumer).

These four broad classifications cover everything in the universe -- even to including God. Further, the classes are mutually exclusive. Something that is in one class cannot be in another - a vital requirement if our language is to be precise.


Simplifying the Study

Most of us know how to use a television set. How to turn it on, to search for programs, to adjust for color and irregularities of the picture. This is enough to know until something goes wrong. At this point, a more complete knowledge may be required. When the trouble is fixed, we can go back to the simple procedures that will handle 99% of the needs of watching television.

In similar fashion, we can extract from our broad classifications the simple specifics needed for 99% of subsequent analysis.

The objective of production is Wealth. But, we are not interested in all production. Mud pies and sand castles may be 'material products' of Labor and Land, but they are hardly significant. To avoid the less essential we dismiss all products without market exchange-value. As a corollary, Labor that doesn't produce Wealth (with exchange value) is also removed.

This is a social science, so anything not reaching the market is omitted. (For example, the apple that is individually picked and eaten.) Also, production and distribution of Wealth does not include consumption. With the consumer removed from our study, all services to him and to his Wealth may also be discarded.


Returns or Rewards

The market decides the value of production. This value returns to the 'Factors or Production1 as reward for their participation. The part of production that returns to Labor is called WAGES; the part that returns to Capital is called INTEREST; the part that returns to Land is called RENT. We can use these returns to sharpen still further our definitions.


Operating Definitions

The total human package, which we call 'Labor', may usefully be evaluated by his exertion -- the external manifestation of all his hidden desires, skills, qualities and abilities. How he exerts and to what end, is a reflection of his mental and physical make-up. Rather than undertake a complex examination of his psychological condition, or his mental and physical abilities, we can form conclusions by observing what he does and why he is rewarded. And we see that his Wages are a reward for exertion in the production of Wealth.

'Capital' is the name for a group of products and products are created only to satisfy desires. The characteristic of Capital is that it is kept from the direct satisfaction of desires in order further to increase production. Interest is paid for the time the product is kept from satisfying consumer desires.

'Land' is not used in general, but in particular. We want to produce on a particular site, or in a particular area. Rent, which is the return for the part that Land plays in production, is always paid for use of a specific and definite location.

So, our operating definitions for the Factors of Production become:

LABOR	human exertion engaged in the production of Wealth
LAND	the location of production
CAPITAL	material products during the time they are kept from the consumer
WEALTH	material products possessing exchange value which have reached the consumer.

In practice, all Wealth is the sum of three values, Wages, Interest and Rent - all measured at the market. 'Wages' is a value derived from exertion; 'Interest' is a value derived from time; 'Rent' is a value derived from location. E.G. Harwood described these three returns as 'form-value', 'time-value', and 'space-value'. In any event, when these values are returned to their Factors, there is nothing more to distribute, for between them they make the whole product.

At this point an important addendum. Wages and Interest and Rent are market determined returns. Yet, the present land market does not parallel those of Labor an Capital. The process of the market, the price-mechanism is not effective with Land* Necessary to the price mechanism's proper action is unrestricted production and unrestricted mobility. Response to a price rise is a rush of new goods, or people, to market. Land cannot rush to market. The market for a location is at the location and there it is unique. Thus, the value of land is not the result of price-mechanism pressure.

Arranging for Land to obey the pressure of the price-mechanism pressure is a simple matter. But, in present markets, land is divorced from market pressure. This requires its value to be separately named. So, for the contemporary economy, the return to Land will be called 'land-value' which capitalizes into 'sale-price'.

We devote much effort to describing this basic language, because it is the most important part of the study. Once these defined concepts are named, understood and used, many problems of modern society fall comfortably into focus and may be addressed.

PART IV: VALUE

Two Kinds of Value

Value is the same as worth. Something that is worth more to you is more valuable to you. As you wish to increase your desire satisfactions, anything which allows you to do this are 'valuable'. You prefer to have something of higher, rather than lower value. A preference indicates you value one thing more than another.

However, getting values costs you exertion and time and you seek always "to avoid costs -- which is another Way to state the 'least exertion' principle.

We can view the world only subjectively. So any emphasis of the subjective aspect of value is unnecessary. However, when several of us see the same value, we may regard this as an 'objective' value.

Values in the market are objective. Values in our minds are not, and we will call such subjective values 'personal'. Personal values are difficult (impossible) to ascertain. We can be unreliably told a personal value, or we can more reliably find a clue to personal value through action in the market. When an exchange takes place, we have evidence that each trader preferred (valued) the thing he got more than the thing he gave. But, we know no more than that.

One of the more famous and continuing debates in political economy concerned 'use value' and 'market value'. Use value is simply usefulness to you, or 'personal value'.


Market Value

Market value and exertion are related. But, exertion is the consequence of market value, rather than the reverse. If one can get a worthwhile market value for a product, exertion will be invested in its manufacture.

Things that take much skill and ability to produce will not be manufactured unless their market value is (or is likely to be) high. Products in the market take station, with their positions in the hierarchy directly related to their difficulty of production.

Once products have taken station in the market, the price mechanism acts normally to maintain their position relative to other products in their stations.

The combination of high prices and production difficulty means such goods are not plentiful. Thus, a third condition, rarity, becomes the natural companion of production difficulty and high prices.


Price Mechanism

This is the active market process. Essential to its effectiveness is an available supply of goods which, in response to rising prices, can quickly get to market.

Should production be restricted, or goods kept from market, the price mechanism cannot work. When goods fail to respond to the urgencies of the price rise, the market tries harder by raising the price still further. This phenomenon of rising market price for difficult to produce goods has led to a sub-market for collectibles.


Collectibles

When a production run is finished, no more can easily be made. This is true of a properly unique production, such as the 'Mona Lisa'; or a contrived uniqueness, such as a limited edition, or first cover; or even a product that has little value other than uniqueness, such as an American 'Rosalie Beer' can ($10,000).

Such things are not merely difficult to produce, they are impossible. (To make one Rosalie Beer can would be tremendously expensive, to produce 10,000 would make production pointless.)

When market demand for one of these items is felt, the price mechanism increases its price. But, no more are forthcoming, so the price rises further. These items have become 'collectibles' -- things which are coveted because one may become wealthy merely by holding them.


Anticipated Future Value

When you possess a collectible, you think not of its present market value, but of its future value, which you anticipate will be higher. This 'anticipated future value' is a personal value. When the market value of your product is higher than personal value, exchange takes place. In the case of a collectible, your personal value is the anticipated higher value of a future market. You will not exchange.

Collectibles need not be unique. I may possess a rare coin which is one of several hundred in existence. The relationship of 'present market' to 'future anticipated' will still hold, even though other collectors may trade their coins.

If present market price is $100, but my personal value is $120,1 will not sell. If someone sells at $120, a new market price will be established. It is likely that instead of selling at $120 my personal, or anticipated, value will rise to $140.1 still will not sell.


Last To Sell

One thing becomes clearly evident to a collector. The one who is last to sell gets the highest price.

The normal market doesn't act this way. When the widget maker sees a price rise he rushes to market. The race is to the swift. If he is second to market, he will get a lower price than he who got there first. When people praise the free market, they are applauding this quick reaction to price change.

Collectibles reverse the process. Collectors gain most by acting least, and their continuing reluctance to trade still further tightens the market.


Land Value

Collectibles don't get in anyone's way, to paraphrase Churchill. However, the most important collectible is Land. It is not subject to price mechanism discipline. More Land cannot be produced, nor can it be transported to market.

Land-value rises with the normal growth of activity among an increasing population. A site next year is likely to be worth more than it is this year. Thus, your personal value of Land you hold will always be 'anticipated future value'. But, Land is vital to all production. Unlike the contrived desirability of the beer can, Land is essential to life. Demand, fed by the reluctance of collectors to sell, will continue even to desperation. And the consequential price increases further strengthen each landholder's decision to stay away from the market. So, personal anticipated values increase, the land market noose tightens, and prices soar.

The value that attaches to a site in this situation can hardly be called Rent. It is Rent plus a premium. It deserves a name of its own. As has been noted, the name is 'land-value' and this, not Rent, is the value that will be capitalized into a sale-price.

So Rent, like Wages and Interest, is a return determined by the price mechanism operating in a free market. Land-value is the value we must deal with, the one that attaches to a site in our non-free land market.

Needless to say, land-values are turned quickly into Rents by use of community rent charges, the effect of which is to make the collecting of land unprofitable. Where 100% of the Rent is collected, the market value of land (zero) becomes greater than the negative personal value and the site changes hands. If the holder can profitably use the site, its personal value (use-value) then becomes greater than market and it is developed.

PART IV : MONEY AND PURCHASING MEDIA

Chalk and Cheese

Nowhere is precise concept definition more needed than in the discussion of 'Money'. The monkey that rides the back of anyone wishing to discuss 'Money1 is the treatment of two disparate entities as one. One entity acts as a 'measure of value'. The other serves as a 'medium of exchange'. They are not the same.

That one commodity may, at times, act in both capacities tends to confound any attempt to analyze. One struggles to find things that may be used for both functions. This inevitably 1eads to definition by accounting category, a course that simplifies the work of the statistician, even as it makes all but impossible the task of the political economist.

Properly to tackle the subject of 'Money' demands separation by function of the two entities that are so easily and confusingly combined. Any standard entity that measures value we shall call Money. Anything that serves as a trading convenience we shall call PM, the short form for Purchasing Medium.


Gold As Money

The history of Money is fascinating in its exposure of man's inventiveness. Most of man's products have been used as the measure of value. For one reason or another they have all failed to survive the test of the market place - except one. From time to time, other products have acted as a 'measure of value - notably silver -- but always the market has returned to its long-time favorite, gold.

The choice of gold was not born in the wild ideas of monetary theorists, nor derived from the superstitions of ignorant peasants. It was a market decision proven over thousands of years of experience.

The metal was easily recognized. Its value would remain constant, and its uniformity and portability made buying convenient. Gold was a good measure of value and not a bad medium for purchasing goods.

Gold earned its position not just as good Money, but as best Money. Therefore! we shall use 'Money' and 'gold' as synonymous terms. Yet, as the metal is soft and wears with handling, its virtue as a purchasing medium is more questionable. This other function we shall now examine.


Purchasing Media or PM

Adam Smith described the butcher with an excess of meat who could not sell it to the brewer or baker for they had nothing he wanted at the moment. Smith underestimated people. The butcher would not let the meat rot. Rather would he give the meat to his customers in return for a promise to pay at a future date.

This promise to pay would certainly be transferable. If the butcher required some work from the blacksmith, he might use the baker's 'promise to pay' to purchase the work.

In their modern dress of paper, plastic, or metal, these 'promises' have become an integral part of commerce. The most obvious characteristic of PM is that its value is extrinsic. It indicates that a promise has been made by someone. Any value it possesses rests on the integrity of he who made the promise. Any contract that may be written or stamped on the 'Medium', will be no better than the word of the issuer.


Advanced Purchasing Media

One would expect that as civilization progresses, means of purchase would simplify, become more effective and cost less. We can assume that the simplest Purchasing Medium would be:

(a) a printed contract form -- 'I promise to pay ...';

(b) written in terms of a standard payment unit, so that calculation of a transaction would be easy;

(c) in such a form that quick and easy recognition and certification of authenticity is possible.

Its effectiveness would include these and add to them the advantages of portability, value stability during the period it was held, general acceptance by traders, and protection against loss.

Its cost would be no more than the expense of manufacture plus any compensation required by the issuer. Such compensation would depend on the conditions of issuance -- and might even be negative.

The implication of all the above is that a Purchasing Medium is a material thing that passes from hand to hand in exchange for other material things. A piece of paper in more or less standard form, duly authenticated, would appear to be best Purchasing Medium. This kind of PM is so easy to issue, it is likely that its life will tend to be short.

The issuer of a generally acceptable "promise to pay" would probably like to keep track of them. Counterfeit "promises" might be a problem. To keep insurance premiums low, loss protection ought to be as effective as possible.

These conditions have mostly been realized by travellers' checks. These provide an insured medium at very low cost. (In fact, many U.S. banks offer them to their customers as a free service.)


Inflation

Inflation is a physical term meaning expansion of volume. The volume of purchasing media (PM) may change in response to the amount of trade with no effect on the economy except to improve it. Banks increase PM as the market needs it. This is how they 'create money', which is highly desirable for it facilitates exchange.

The methods of providing the PM (cash, certified check, money order, charge card slip, or deposit into an account book) do not matter at all -- although these are matters pawed endlessly by monetary theorists. All that's important is that traders have been provided with pledges, which convenient and useful media are accepted in the market (because the integrity of the issuer is credible).

Inflation of PM merely shows that trade is brisk. In advanced societies, where PM accounts for virtually all transactions, total PM would change daily.


PM As a Measure of Value

Governments issue PM as a convenience to their peoples. Usually, they are rather ornately printed standard documents. Familiarity and apparent authority leads to their acceptance as Wealth. Thus, normal desire for Wealth is transferred to the common representations of Wealth. In the words of the semanticists, 'the map has become the territory'.

PM made of printed paper is easy to produce and quantity is limited only by the integrity of the issuing government, not an historically sound basis for honorable action. Governments find irresistible the pressure to produce 'Wealth1 at little cost and the presses roll.

The stability of a 'measure of value1 depends on its quantity relationship with other goods. This is why gold is such an attractive measure. Considerable exertion and time must enter into every ounce that reaches the market. Its quantity suffers natural restriction.

Little physical restraint limits the production of official PM. Its volume is likely to increase considerably in relation to other goods. Plentiful official PM drops its market value and more is required to buy the same Wealth. This general price increase receives a popular name - 'inflation'. Thus, the term which describes an increase in volume of the 'measure of value (money) is transferred to an effect of the increase.