Distribution, theory of

Updated: Aug 20, 2021

The branch of economics concerned with explaining how the prices of factors of production (land, labour and capital), and hence the incomes they receive, are determined. It attempts to explain the way in which the total flow of goods and services available for consumption is distributed among people in the economy. The traditional approach is to analyse the question of distribution in terms of market analysis: each factor of production is bought and sold in a market. The conditions of the supply of and demand for each factor will determine its equilibrium price (rent, wages, interest) and the equilibrium quantity utilized, and the product of these gives the total flow of income to that factor of production. The reasons why a dentist earns more than a dustman would be given in terms of the supply and demand conditions for each of these types of labour, and so factors such as the period of training, restrictions on entry, etc., would be taken as determin­ing the conditions of supply and demand. Since, in the traditional theory, the demand curve for a factor of production is determined by its marginal productivity, the theory is sometimes referred to as the marginal productivity theory of distribution.

There have, of course, been suggested alternatives to this theory. The existence of monopoly and monopsony in particular types of factor market has lent emphasis to the development of barganing theories of factor prices (in fact, such theories have been generally directed at the determination of wages). Furthermore in contrast to the microeconomic approach of the traditional theory of distribution, N. Kaldor has put forward a macroeconomic theory of distribution which, though it does not explain the determination of the prices of factors of production, attempts to explain the relative shares of factors of production in national income using an extension of the Keynesian mode! of the economy. A major aim of this theory was to explain the observed constancy of the relative shares of wages and profits in national income over the past fifty years or so; although the traditional theory is not incompatible with such constancy, the theory requires some rather special assumptions to give this result.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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