Henry George and Austrian economics - History of Thought

American Journal of Economics and Sociology, The, Dec, 2001 by Leland B. Yeager

The valid subjective element in George's doctrine also appears in his recognition that wealth can be produced not only (1) by physically shaping things and (2) by growing things but also (3) by exchanging things:

[T]his third mode of production consists in the utilization of a power or principle or tendency manifested only in man, and belonging to him by virtue of his peculiar gift of reason....

[I]t is by and through his disposition and power to exchange, in which man essentially differs from all other animals, that human advance goes on....[I]n itself exchange brings about a perceptible increase in the sum of wealth.... Each of the two parties to an exchange aims to get, and as a rule does get, something that is more valuable to him than what he gives--that is to say, that represents to him a greater power of labor to satisfy desire. Thus there is in the transaction an actual increase in the sum of wealth, an actual production of wealth.... Each party to the exchange gets in return for what costs it comparatively little labor what would cost it a great deal of labor to get by either of the other modes of production. Each gains by the act....[T]he joint wealth of both parties, the sum of the wealth of the world, is by the exchange itself increased. [SPE:331-32]

George had some glimmerings of the marginalist and Austrian idea of imputation: the values and remunerations of the factors of production are imputed to them according to what they contribute to producing outputs valued by consumers. Labor, George explained, does not transmit value to whatever it is applied to. Instead, labor derives its wages from its productive contribution and from the value that consumers attribute to the output produced. This insight refuted the wages-fund doctrine (P&P, pp. 23, 50-70). Even labor employed on a project of long duration is effectively deriving its wages from the project's growth in value as it comes gradually closer to completion.

Some authorities credit George with contributing to the development of the marginal-productivity theory of functional income distribution. (7) Even John Bates Clark recognized his contribution:

It was the claim advanced by Mr. Henry George, that wages are fixed by the product which a man can create by tilling rentless land, that first led me to seek a method by which the product of labor everywhere may be disentangled from the product of cooperating agents and separately identified; and it was this

quest which led to the attainment of the law that is here presented, according to which the wages of all labor tend, under perfectly free competition, to equal the product that is separately attributable to the labor. The product of the "final unit" of labor is the same as that of every unit, separately considered; and if normal tendencies could work in perfection, it would be true not only of each unit, but of the working force as a whole, that its product and its pay are identical. (1899:viii)

George did not see how his marginal-productivity theory of the wages of labor applied in a similar way to all factor remunerations (Collier in Andelson 1979:228). Neither did the early Austrians; it was left to Wicksteed to make that contribution in 1894.