DISTRIBUTION THEORY

in economics, the systematic attempt to account for the sharing of the national income among the owners of the factors of productionland, labour, and capital. Traditionally, economists have studied how the costs of these factors and the size of their returnrent, wages, and profitsare fixed. The theory of distribution involves three distinguishable sets of questions. First, how is the national income distributed among persons? How many persons earn less than $10,000, how many between $10,000 and $20,000, how many between $20,000 and $30,000, and so on? Are there regularities in these statistics? Is it possible to generalize about them? This is the problem of personal distribution. Second, what determines the prices of the factors of production? What are the influences governing the wage rate for a specific kind of labour? Why is the general wage level of a country not lower or higher than it is? What determines the rate of interest? What determines profits and rents? These questions have to do with functional distribution. Third, how is the national income distributed proportionally among the factors of production? What determines the share of labour in the national income, the share of capital, the share of land? This is the problem of distributive shares. Although the three sets of problems are obviously interrelated, they should not be confused with one another. The theoretical approaches to each of them involve quite different considerations. in economics, the systematic attempt to account for the sharing of the national income among the owners of the factors of productionland, labour, and capital. Traditionally, economists have studied how the costs of these factors and the size of their returnsrent, wages, and profitare fixed. Distribution theory may be applied to the question of whether national income is distributed among persons or among the factors of production (the problems of personal distribution and distributive shares), but it has proved most fruitful on the question of how the prices of the factors are determined (the problem of functional distribution). The classical economists of the 18th and 19th centuries applied the principles of the market to the determination of the rewards of the factors. Supply was thought to be the most important element, and the influence of demand was rated as fairly insignificant. The subsistence theory of wages, derived in large part from the teachings of Thomas Malthus, held that wages would not diverge significantly from a natural level that was just enough to enable the wage earner to live at a subsistence level. Higher levels of earnings would increase the supply of labour through larger families and depress the wages back to subsistence level. Conversely, if the wage rate fell below the subsistence level, the number of workers would decrease and the ensuing shortage would push wages back up. The classical theory of rent (from David Ricardo) held that rentthe return to landownerswas determined by the cost of production of the least favourable land worthwhile to cultivate. Thus, land of better quality had a surplus rent over and above the cost of production. For the economy as a whole the total amount of the rent surplus received from land represented the landowner's share of national income. The remainder of the income produced in the economy was available for distribution among the other two economic groups, labourers and capitalists. It was the view of a number of classical economists that in the long run these two groups would not reap the benefits of economic growth, while the position of the landlord class would be substantially improved. As the rapid economic development of the 19th century produced conditions quite different from those predicted by the classical economists, new approaches were required to account for the prices of factors of production. Marginal-productivity theories were developed independently by a number of economists. According to the marginal-productivity theory, the price of a factor is not governed by simply its productivity but its productivity at the margin, that is, the value of the extra output made possible by the addition of a unit of the factor. The earnings rate of any factor of production tends to equal the value of the marginal product of the factor. The theory assumes that the law of diminishing returns applies to marginal productivity of a factor and that substitution of one factor for another at the margin is similarly affected by diminishing returns. The effect of the diminishing return is to reduce the price as the marginal productivity declines. Other key assumptions of the theory are that to a large degree the economy is static, that it is possible to measure the productivity of each factor of production, and that nearly perfect competition prevails in the marketplace. The ratio in which the factors are combined is determined by employers, guided by the principles of substitution and diminishing marginal productivity and varying their demand for any one factor until its marginal productivity is equal to its price or earnings. This neoclassical theory is particularly successful in explaining the phenomenon, observed in industrializing nations, that labour commands an increasing share of national income and capital a decreasing one. The removal of the assumptions of stasis and perfect competition introduces an element of indeterminacy, because, in practice, wage rates are influenced by collective bargaining between trade unions and employers, by various forms of arbitration, or by minimum-wage levels set by government. Similarly, under imperfect and dynamic competition the earnings of capital are determined by a host of other factors, such as technological change, monopolistic trends, and government influence over the economy. Additional reading Analyses of economic distribution appear in David Ricardo, Principles of Political Economy and Taxation (1817, reissued 1981), the classical subsistence theory of wages; Karl Marx, Capital, vol. 1 (1886; originally published in German, 1867), also available in many later editions, treating the process of distribution as pure conflict; John Bates Clark, Distribution of Wealth (1899, reissued 1965), the classic work on marginal productivity theory whereby distribution is viewed as a harmonious process in which the factors of production receive as income what they contribute to the product; Frank H. Knight, Risk, Uncertainty, and Profit (1921, reprinted 1985), an analysis of profits viewed as a result of imperfect foresight and as a remuneration for risk-bearing; Joseph Schumpeter, The Theory of Economic Development (1934, reprinted 1987; originally published in German, 1912), an analysis of economic development as a result of the innovations of entrepreneurs motivated by profit; Paul H. Douglas, The Theory of Wages (1934, reissued 1964), marginalist theory based on statistical research which sets forth the famous CobbDouglas function; K.J. Arrow et al., CapitalLabor Substitution and Economic Efficiency, The Review of Economics and Statistics, 43:225250 (1961), an econometric study explaining the falling share of capital in the national income by the elasticity of substitution; J.R. Hicks, The Theory of Wages, 2nd ed. (1963, reissued 1973), a sophisticated treatment of marginal productivity theory; and Nicholas Kaldor, Alternative Theories of Distribution, in his Essays on Value and Distribution, 2nd ed. (1980), a discussion of various theories from Ricardo to Keynes. Dan Usher, The Economic Prerequisite to Democracy (1981), suggests that democracy requires broad agreement on how an economic system will distribute wealth. Other works in this area are Alan S. Blinder, Toward an Economic Theory of Income Distribution (1974); and Ronald G. Ehrenberg and Robert S. Smith, Modern Labor Economics: Theory and Public Policy, 5th ed. (1994). Kenneth E. Boulding Paul Lincoln Kleinsorge Hans Otto Schmitt Jan Pen The Editors of the Encyclopdia Britannica