Teaching Henry George's Theory of Interest

Harry Pollard

[Reprinted from a Faculty Lounge discussion, 4 December, 2008]

Precise definition is at the heart of scientific George.

If there is anything we must make clear in teaching George it is that Interest is the label for a particular defined concept. People may use the term in any way they like -- but in a Georgist course the use of Interest is precise.

Where errors have cropped up in the past is the belief that the extra amount provided labor by the use of capital is somehow interest. Of course it isn't, but may somehow have been implied by the use of "Interest is the return to Capital."

George's economics are people economics. The production of Wealth can only be carried out by people -- the people we call Labor.

Except in the beginning, when producer and consumer are essentially the same, we teach how labor produces valuable things that have exchange value - because they are valuable.

We will make a large assumption. We will assume that Labor is free and not in any way enslaved.

Cutting to the quick, Labor (about whom the whole thing is about) has two costs to his production. He has to pay Interest and Rent in the course of production.

Why does he pay Interest? For the same reason he does all things. It is to his advantage to pay it because the use of the Capital increases his wages. The Interest rate has hovered around 3% for centuries changed by special circumstances such as war, but always controlled by the price mechanism (as far as it can be).

Using Capital is a good deal for Labor. If it weren't, he wouldn't use it and he wouldn't pay Interest.

The other cost to labor is Rent. I'll stay with urban location Rents as they illustrate the point well and is of primary importance to our study. Ricardo's 'Rents of fertility' are another matter, though oil, gold, and other mineral 'Rents' are not to be forgotten.

From my first class with the HGS (My Gawd! Sixty years ago!) I learned that urban location Rents were produced by the surrounding community. (I would now say "are a consequence of the surrounding community".)

Collecting that Rent for the benefit of the community would seem therefore to be just. But, what does it matter if they are left in private hands?

Let's look at Rent. With the same exertion and Capital, if I can sell 100 pairs of shoes at the no-Rent margin, but 200 pairs on a better location, the Rent of the better location will be 100 pairs of shoes.

So, I pay this cost -- these 100 pairs of shoes to the Duke of Westminster.

While we would argue that it would be better if this 100 pairs of shoes were collected by the community and used in place of taxes, the fact is that my Wages are unaffected by payment of Rent to the Duke. I get 100 pairs, I pay 100 pairs.

It is true that I must pay taxes, but I am only buying what I want (clean streets, sewage removal, etc).

In any event, as the Duke is rich, we will tax him heavily and take some of his Rent collection back for the benefit of the people. That's easier than valuing all land.

Actually, I've heard Georgists argue for taxing privilege (of which the private collection of Rent is most important). Maybe we have lost our radical roots and adopted Keynesianism.

The only thing to do with privilege is to end it, get rid of it, throw it out -- never accept it.

But, back to our Laborer. He produces his Wages after paying Interest (which is a bargain) and Rent which he gets back anyway from increased production on this better location.

So, all the terms have been used as perhaps George would have used them. Except that Labor gets his full Wages and is free to expand his well-being in an advancing economy.

What is wrong with this picture?