Henry George and Classical Growth Theory: A Significant Contribution to Modeling Scale Economies

JOHN K. WHITAKER [*] ABSTRACT. It is widely recognized that the analysis of economic growth in Henry George's Progress and Poverty was considerably influenced by the British classical tradition, especially the writings of Adam Smith, David Ricardo, and John Stuart Mill. What has been less clearly perceived is that George made significant extensions to the classical theory. This paper's aim is to provide an interpretation, and to some extent a "rational reconstruction," of George's positive analysis, largely leaving aside the striking normative lessons he drew from it. George's unsatisfactory treatment of capital is disposed of in Section I, while Section II--the core of the paper--follows George's lead in aggregating capital and labor into a single productive factor which is employed in a given natural environment. Section III adds the complication of improvement in the arts of production, and Section IV deals briefly with George's views on land speculation. Section V assesses, comparing George with his contemporary Alfred Marsha ll. HENRY GEORGE (1839--1897) is widely regarded as a mediocre amateur economist who absorbed--perhaps too well--the general ideas of the British classical school as to the effects of growth on factoral income distribution, and built thereon a social reform movement reflecting a largely outmoded view of the world. There can be little doubt that in writing Progress and Poverty, first published in 1879, [1] George was strongly influenced by the classical economists, especially Adam Smith, David Ricardo, and John Stuart Mill, as well as by the views of Thomas Robert Malthus on population. (Subsequently he was to claim affinity with the Physiocrats, but that was more retrospective affiliation than formative influence.) George's claims that land was rightly the property of all and pure rent an unearned and undeserved individual income echoed a long tradition, also associated with the classical school, especially James Mill and his son John Stuart, and rather naturally incited by classical rent theory. What distinguish ed George's proposals and helps account for the worldwide furor they raised was his call for "expropriation now" by the immediate punitive taxation of pure Ricardian rent without compensation to landowners. However, my concern here is not with George the social reformer, propagandist, and political activist, but with George the economic theorist: that is, not with the normative aspects of his thought but with the positive ones. I hope to show that his modeling of the economic growth process in Progress and Poverty went well beyond the classical paradigm and displayed considerable ingenuity, innovativeness, and analytical skill. In particular, he took spatial aspects into account, in a way giving him some claim to be regarded as a significant contributor to spatial economics. His analytical performance was, of course, not without flaws. In particular, his treatment of capital remains problematic and I propose to dispose briefly of that facet of his thought before expounding his analysis in the context of a two-factor setting involving only land and labor. This, as will be seen, follows a line of simplification suggested by George himself. It allows the exposition to be sharpened and focused on essentials. I The Problem of Capital ON THE PLUS SIDE, George deserves considerable credit for breaking away from the unsatisfactory wage-fund idea that all wages have to be advanced during the gestation period of any production process from a previously accumulated store of finished workers' consumption goods--perhaps a relic of a propensity of earlier writers to treat all production as synchronously yielded by an annual harvest cycle and all wages as immediately consumed. George recognized clearly the possibility of a balanced-flow situation in which production starts for any good are undertaken at a steady rate in time and current consumption requirements are met by the output emerging from a just-maturing previous start. …