Of all the panaceas advanced during the Great Depression of the early 1880s, the American journalist Henry George’s land tax attracted by far the most popular attention and support. George’s best seller, Progress & Poverty, had made him an instant celebrity, and his lectures drew huge crowds. George’s premise was that poverty was growing faster than wealth and that landlords were to blame. He claimed that landlords were collecting fabulous incomes not for rendering a service to the community but merely because they were lucky enough to own real estate. What was more, rising rents were depressing profits and real wages by depriving businessmen of needed investment funds. Having identified rental income as the cause of poverty, he proposed a massive tax on land as a cure. The land tax would not only eliminate the need for all other taxes, he claimed. It would also “raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals and taste and intelligence, purify government, and carry civilization to yet nobler heights.”119
Marshall was still working on Principles when he was drawn once again into the long-simmering standard-of-living controversy. The early 1880s, a period of financial and economic crisis, witnessed a resurgence of radicalism and demands for social reform, as well as growing skepticism about the extent to which economic growth was benefiting the majority of citizens. The term unemployment was coined during the recession that followed the Panic of 1893 during a heated debate over whether real wages were rising or falling in the long run.
At issue in the debate was the dominant effect of competition. Did competition result in a race to the bottom in which employers matched one another’s wage cuts? Or was it the case, as optimists insisted, that competition put pressure on companies to make constant efforts to increase efficiency and push up the average level of productivity and wages while reducing the number of poor?
The first formal confrontation between Marshall and Henry George took place at the Clarendon Hotel in Oxford in 1884.120 Catcalls, clapping, and hissing repeatedly drowned out the debaters. At one point, an undergraduate felt it necessary to primly remind the chairman that “ladies were present.” By eleven o’clock, the uproar was so deafening that George declared the meeting to be “the most disorderly he had ever addressed” and refused to answer any more questions. Amid “great noise” and groans of “Land Nationalization” and “Land Robbery,” the meeting “was brought to a rather abrupt conclusion.”
If Marshall’s support for the agricultural lockout in 1874 signaled his rejection of the “dogmas” of classical economy, his confrontation with George a decade later showed that he also objected to trendy new dogmas.
On other occasions when he had criticized George’s proposal to cure poverty with a tax on land, Marshall had called George a “poet” and praised “the freshness and earnestness of his view of life.” But at the Clarendon, Marshall was decidedly less polite, accusing George of using his “singular and almost unexampled power of catching the ear of the people” to “instill poison into their minds.” By “poison,” he meant George’s cure-all for poverty.
In his Bristol lectures, Marshall stuck to his stated intention to “avoid talking very much about George: but to discuss his subject,” “George’s subtitle includes an inquiry into” the increase of want with the increase of wealth,” Marshall said. “But are we sure that with the increase of wealth want has actually increased? . . . Let us then enquire what the facts are of the case.”121
Citing statistical evidence—much of it collected in the Red Book that he and Mary had compiled—Marshall argued that only the “lowest stratum” of the working classes were being pushed downward and that that stratum was far smaller—less than half the size, in proportion to the population—than it had been earlier in the century. As for the working classes as a whole, their purchasing power had tripled. “Nearly one half of the whole income of England goes to the working classes . . . [So] a very large part of all the benefit that comes from the progress of invention must fall to their share.”122
Marshall drew on his growing command of economic history. He was confident that, whatever the vices of the current age, they paled in comparison to the past. “The working classes are in no part of the world, except new countries, nearly as well off as they are in England.” What makes Marshall’s optimism all the more noteworthy is that he was speaking during what historians would later call the Great Depression.
In his second lecture, Marshall challenged George’s contention that employers who paid low wages were to blame for poverty. For one thing, employers could not set the price of labor any more than they could dictate the price of cotton or machinery. They paid the market rate, which could be high if a worker was very productive and low if he was not. “Many of the English working classes have not been properly fed, and scarcely any of them have been properly educated.” Low productivity was the cause of “low wages of a large part of the English people and of the actual pauperism of no inconsiderable number.” And although Marshall did not deny that “there is any form of land nationalization which, on the whole, would benefit,” he argued that “there is none that contains a magic and sudden remedy for poverty. We must be content to look for a less sensational cure.”123
That cure, Marshall said, was to raise productivity. One way was to:
educate (in the broadest sense) the unskilled and inefficient workers out of existence. On the other hand—and this sentence is the kernel of all I have to say about poverty—if the numbers of unskilled laborers were to diminish sufficiently, then those who did unskilled work would have to be paid good wages. If total production has not increased, these extra wages would have to be paid out of the shares of capital and of higher kinds of labor . . . But if the diminution of unskilled labor is brought about by the increasing efficiency of labor, it will increase production, and there will be a larger fund to be divided up.
He did not object to unions or even to some fairly radical proposals for land reform or progressive taxation. He merely noted that none of these could produce “more bread and butter.” This required “competition,” time, and the cooperation of all parts of society, government, and the poor themselves.124
He accused George of promoting a quack cure. The problem wasn’t just that “Mr. George said, ‘If you want to get rich, take land,’” but that it would divert from education and training, hard work, and thrift. George’s scheme would yield “less than a penny in the shilling on their income . . . For the sake of this, Mr. George is willing to pour contempt on all the plans by which workingmen have striven to benefit themselves.”125
When Marshall’s Principles of Economics finally appeared in 1890, it breathed new life into a faltering discipline. It established him as its intellectual leader and the authority to whom governments turned for advice.
Principles embodied Marshall’s rejection of Socialism, embrace of the system of private property and competition, and optimism about the improvability of man and his circumstances. The book portrayed economics not as a dogma but as “an apparatus of the mind.” As Dickens hoped, Marshall had managed, while placing the discipline on a more sound scientific footing, to humanize economics by injecting “a little human bloom . . . and a little human warmth.”
But the chief insight reflected the lesson he learned in America. Under a system of private property and competition, business firms are under constant pressure to achieve more with the same or fewer resources. From society’s standpoint, the corporation’s function is to raise productivity and, hence, living standards.
Of all social institutions, the business firm was more central, enjoyed a higher status, and did more to shape the American mind and civilization than elsewhere. The company was not only the principal creator of wealth in America