Henry George, John Rae, and the theory of capital in a rapidly transforming economy

Purpose - The purpose of this paper is to establish a historical context for the often maligned capital theory of Henry George within a North American frontier tradition that includes John Rae. Design/methodology/approach - Modern discussions of rapid technological and institutional change provide a framework for detailed re‐examination of the capital theories of Rae and George, whose critics were largely constrained by a rigid neoclassical perspective. Findings - Both Rae and George presented capital theories, defined as explanations of the supply of and demand for capital resulting in a determinate capital stock. Both writers stress elements that were not emphasized in neoclassical capital theory, most notably that the capital stock can increase rapidly under certain conditions; increases in knowledge, inventions, technical and technological changes, and scale are more important than mere accumulation of capital; high rates of return combined with rapid technical obsolescence and physical deterioration provide the opportunity for rapid changes in the form of the capital stock, and; the ephemeral nature, and hence potential mobility, of capital implies that security of property is essential for economic growth. Research limitations/implications - The focus on two writers leads to the question of how widespread their ideas were in nineteenth century North America. Practical implications - The rapidly changing technology and institutions that Rae and George observed place their theories closer to some modern trends in the study of economic development than to the literature of neoclassical capital theory. Originality/value - George's grasp of economic theory deserves greater respect than it has often received in the economics literature when his work is considered in its historical context.