Henry George and Austrian Economics. (History of Thought)

Beginning of article

LELAND B. YEAGER (*)

HENRY GEORGE HAS been widely pigeonholed and dismissed as a single-taxer. Actually, he was a profound and original economist. He independently arrived at several of the most characteristic insights of the "Austrian" School, which is enjoying a revival nowadays. Yet George scorned the Austrians of his time, and their present-day successors show scant appreciation of his work. An apparent lapse in intellectual communication calls for repair.

Austrian Economics

THE AUSTRIAN SCHOOL traces to the work of Carl Menger, one of the leaders of the marginal-utility revolution of the 1870s, and his fellow-countrymen, Eugen von Bohm-Bawerk and Friedrich von Wieser. Notable contributors of a later generation include Ludwig von Mises, F. A. Hayek, and Ludwig Lachmann, each of whom worked first in Austria or Germany and later in the United States, and also the American Frank A. Fetter. In a still later generation, eminent Austrians--the word no longer carries any implications about nationality or mother tongue--include Murray Rothbard and Israel Kirzner. Some eminent young members of the school are Dominick Armentano, Gerald O'Driscoll, Mario Rizzo, Steven Littlechild, and Karen Vaughn; and apologies are in order for not extending the list further. (1)

What follows is an impression of the leading characteristics of Austrian economics.

(i) Austrians are concerned with the big picture--with how a whole economic system functions. They avoid tunnel vision; they do not focus too narrowly on the administration of the individual business firm and the individual household. They investigate how the specialized activities of millions of persons, who are making their decisions in a decentralized manner, can be coordinated. These diverse activities are interdependent; yet no particular agency takes charge of coordinating them, and none would be competent to do so. The relevant knowledge--about resources, technology, human wants, and market conditions--is inevitably fragmented among millions, even billions, of separate human minds.

(ii) Austrians take interest in how alternative sets of institutions can function. Von Mises in particular, and later Hayek, demonstrated the impossibility of economic calculation--scheduling of economic activities in accordance with accurate assessment of values and costs-under socialism. Centralized mobilization of knowledge and planning of activities is admittedly conceivable. In a Swiss Family Robinson setting, the head of the family could survey the available resources and technology and the capabilities and needs and wants of family members and could sensibly decide on and monitor production and consumption in some detail. In a large, modern economy, however, sensible central direction is not possible. Austrians are alert to possibilities of unplanned order and to what Hayek (1967) has called "the results of human action but not of human design." They investigate how the market and prices function as a vast communications system and computer, transmitting information and incentives and so putting to use scattered knowledge that would otherwise necessarily go to waste.

(iii) Not only do Austrians appreciate the implications of incomplete, imperfect, and scattered knowledge; they also appreciate the implications of change, uncertainty, and unpredictability in human affairs. They take these facts of reality seriously not only in confronting supposed theoretical and econometric models of the economy but also in assessing alternative sets of institutions and lines of policy.

(iv) In connection with the implications of fragmented knowledge, change, and unpredictability, Austrians pay attention to disequilibrium, process, and entrepreneurship. While not totally scornful of elaborate analysis of the properties of imaginary equilibrium states and of comparative-static analysis, they recognize how incomplete a contribution such analyses can make to the understanding of how economic systems function. They do not suppose, for example, that cost curves and demand curves are somehow "given" to business decisionmakers. On the contrary, one of the services of the competitive process is to press for discovery of ways to get the cost curves down-if one adopts such terminology at all. Austrians tend to accept the concept of Xefficiency (2) and to appreciate the role of competition in promoting it. Far from being an ideal state of affairs with which the real world is to be compared-unfavorably-competition is seen as a process. Entrepreneurs play key roles in that process; they are men and women alert to opportunities of advantageously undertaking new activities or adopting new methods.

(v) As already implied, Austrians have certain methodological predilections. They are unhappy with the tacit view of economic activity as the resultant of interplay among objective conditions and impersonal forces. They are unhappy with theorizing in terms of aggregates and averages (real GNP, the price level, and the like). They take pains to trace their analyses back to the perceptions, decisions, and actions of individual persons: methodological individualism is a key aspect of their approach. Austrians recognize introspection as one legitimate source of the facts underpinning economic theory. They emphasize subjectivism: not only do personal tastes help determine the course of economic activity, but even the objective facts of resources and technology operate only as they are filtered through the perceptions and evaluations of individuals. Insofar as Austrians recognize macroeconomics as a legitimate topic at all, they are concerned to provide it with microeconomic underpinnings.

(vi) Although Austrians like to think of their economics as valuefree and although some of them, at least, emphasize that it is not logically linked with any particular policy position, Austrian insights into positive economics, coupled with plausible value judgments of a humanitarian and individualistic nature, undeniably do tend toward a particular policy postion--noninterventionistic, laissez-faire, libertarian. More about this later.

George's Independence

I SHALL TRY to show Henry George's affinities with the Austrians by citing passages from his writings. The demonstration proceeds from partial agreement on theoretical points to agreement on major questions. First, however, we should note George's misunderstanding of and even scorn for the Austrians of his time, suggesting that his Austrian-like insights were original with him. (3) George did not understand the marginal revolution in value theory that was getting under way in the last decades of his life. He regretted that "'the classical school' of political economy" seemed to have been abandoned:

What has succeeded is usually denominated the Austrian school, for no other reason that I can discover than that "far kine have long horns." If it has any principles, I have been utterly unable to find them. The inquirer is usually referred to the incomprehensible works of Professor Alfred Marshall of Cambridge, England...; to the ponderous works of Eugen V. Bohm-Bawerk, Professor of Political Economy, first in Innsbruck and then at Vienna ... or to a lot of German works written by men he never heard of and whose names he cannot even pronounce.

This pseudo-science gets its name from a foreign language, and uses for its terms words adapted from the German--words that have no place and no meaning in an English work. It is, indeed, admirably calculated to serve the purpose of those powerful interests dominant in the colleges ... that must fear a simple and understandable political economy, and who vaguely wish to have the poor boys who are subjected to it by their professors rendered incapable of thought on economic subjects. (4)

Later, as quoted below, George complains about the "grotesque confusions" of the Austrian School.

The Austrians, for their part, have not adequately appreciated George. Bohm-Bawerk criticized the natural-fructification theory of interest presented in Progress and Poverty, apparently unaware of the advance (discussed below) that George achieved in The Science of Political Economy. (5) Among present-day Austrians, Murray Rothbard shows the greatest acquaintance with George's writings, or some of them. (For example, he recognizes George as a free-trader and applauds his "excellent discussion" of the distinction between patents and copyrights.) Yet Rothbard is mostly concerned with what he considers the unsatisfactory moral and economic arguments used in favor of the single tax. (6) With the Austrians as with other present-day economists, George's reputation does seem to suffer from his being pigeonholed as a propagandist for dubious reforms.

Value Theory: Subjectivism, Productivity, and Time

GEORGE HELD A kind of labor-in-exchange or exertion-saved theory of value, following Adam Smith, but not a Marxian labor-cost theory (SPE:212-56, 503). Still, he had some Austrian-like subjectivist insights:

... the value of a thing in any time and place is the largest amount of exertion that any one will render in exchange for it; or to make the estimate from the other side, ... it is the smallest amount of exertion for which any one will part with it in exchange.

Value is thus an expression which, when used in its proper economic sense of value in exchange, has no direct relation to any intrinsic quality of external things, but only to man's desires. Its essential element is subjective, not objective; that is to say, lying in the mind or will of man, and not lying in the nature of things external to the human will or mind. There is no material test for value. Whether a thing is valuable or not valuable, or what may be the degree of its value, we cannot really tell by its size or shape or color or smell, or any other material quality, except so far as such investigations may enable us to infer how other men may regard them....

Now this fact that the perception of value springs from a feeling of man, and has not at bottom any relation to the external world--a fact that has been much ignored in the teachings and expositions of accepted economists--is what lies at the bottom of the grotesque …