Table Of ContentREADINGS IN THE THEORY
OF
INCOME DISTRIBUTION
Selected by a Committee of
THE AMERICAN ECONOMIC ASSOCIATION
Ptiladelphia Toronto
THE BLAKIST C^^ COxMPANY
1949
C.'PVRiGHi, 1946. UY THE BL,\KISTON COMPANV
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E\ .rlE MAPLE PRESS YvlRK, PA,
PREFACE
The Blakiston Series of Republished Articles on Economics
designed to make accessible in its successive volumes the most us^
ful articles and essays in the various fields of economic analysis an.
policy. By an agreement between The Blakiston Company s.
the American Economic Association, the Company, during o
initial experimental term, will undertake the publication of \
annual volume devoted to a subject chosen Ijy a standing committCi
of the Association and edited by a special committee of experts oi
that subject. The fav'orable reception of the first two volumes ii
the series has encouraged the publishers to continue the ventun
despite technical and editorial dil^culties entailed by the war an
reconversion periods.
Primarily, the Series is oriented toward the tuition of senior an
graduate university students; but there is also the hope that pro''°
sional economists will find it a useful means of keeping abreai
developments in fields other than their own. Thus the Series m:
help to lessen the intellectual provincialism of specialists, whic
is said, threatens them with having nothing in common— not ev
an education. Furthermore, despite the aridity which economi;
seem to cherish, and despite their affection of technical jargon ar
even of terminological monsters called up for the occasion,
intelligent layman will in general be' able to find his way success,
fully tlirough these collections, to his lasting benefit if not dclig'
It should go without saying that the editorial committees de.u
not only to acquaint the reader with doctrines common to ma
or all of the scholars in the field, with the contentious issues, a
with the m.ore interesting idiosyncrasies of certain writers, but .
to do all this without bias in the selection of content.
Editorial responsibility for the present volume was borr
Professor Bernard Haley until the pressure of duties in the D<
PREFACE
lent of State interfered. Thereupon Professor William Fellner
took over the undertaking and carried it through to actual publica-
t'on. Readers of the volume will find it profitable to begin with
he explanatory introduction written by these editors. As with
l-i earJicr volumes in this Series, a helpful role was played by
^ofessor Fritz Machlup, adviser on economic publications to The
lakiston Company.
It is contemplated that the fourth volume reproduce articles in
.".e field of international economic theory and policy. Suggestions
lative to that volume, or regarding the character of future vol-
mes, are welcome; they may be addressed to Professor James
Washington Bell, American Economic Association, Evanston,
Uinois.
HOWARD S. ELLIS.
Chairman, General Committee on
Republications.
BEIUMLEY, CALIFORNIA
March, 1946.
INTRODUCTION
The present state of the theory of income distribution is gen
erally considered unsatisfactory, and it is rightly so considered.
However, important elements of a theory are recognizable. Some
of these elements, such as the marginal productivity theory, are
comparatively well developed, while others are in their initial
stages or are as yet no more than tentative suggestions.
There exists a reasonable degree of consensus concerning the
validity of the proposition that, on the assumptions underlying
the profit-maximization axiom, the demand functions for factors
of production are marginal value product (or marginal revenue
product) functions. The qualifications to which this proposition
is subject relate to cases in which it is impossible to speak of a
demand function for factors (as under monopsony) or in which the
demand function is discontinuous and therefore nonexistent for
certain ranges. The relationship between marginal productivity
and the demand for factors constitutes the main link between the
theory of production and that of distribution. It seemed appro
priate, therefore, to include in this volume a general section con
cerned with those areas of the theory of production from which the
various concepts of marginal productivity have been developed.
The incompleteness of the marginal productivity theory as a
theory of distribution manifests itself somewhat diflcrently with
respect to the various distributive shares. Consequently the
volume contains no general section on these limitations and on the
further analytical elements required for a satisfactory theory of
distribution. Some discussion of these matters, however, is
included under the separate headings corresponding to the "four
distributive shares."
It was comparatively easy to select essays discussing those
qualifications to the marginal productivity theory of wages which
Vill INTRODUCTION
Stem from discontinuities in the functions on the one hand, and
from monopsony on the other. As far as a consistent general
theory of wages is concerned, however, this leaves at least two
further difficulties unresolved. In the first place, the marginal
productivity theory is a theory of factor demand. A complete
theory of factor prices (that is, of "distribution") must contain a
theory of supply as well as of demand. Yet at present there exists
no satisfactory theory of labor supply for the kind of economy in
which we are living. If such a theory emerges, it will have to take
into account the "institutional" circumstances determining the
policies of labor unions. An article dealing with some of these
circumstances was included in the volume, but it cannot of course
be claimed that anything approaching a complete theory of labor
supply is presented.
Aside from this deficiency in the available literature, it has
become increasingly clear to economists that the demand for labor
is interrelated with supply conditions and that no satisfactory
analysis of this problem has so far been incorporated into the theory
of wages. Even if we assume the wage claims of labor as given,
instead of attempting to explain them by a theory of supply, we
still should take account of the fact that the position of the marginal
productivity functions depends on what the "given" level of the
supply functions is for the economy as a whole and that the rela-
tionslup between the demand side and the supply side of the labor
market presumably is quite complex. The Keynesian assumption
(in its extreme version) could be interpreted to maintain that shifts
on the supply side typically produce shifts on the demand side of
the size required to neutralize the original change (in all respects
except those pertaining to the price level) and that therefoi^e change
in the general level of money wage rates produce no changes in
real wage rates and in employment. Such an assumption proba
bly is no more warranted than was the "orthodox" implicadon by
which the interrelation between the supply side and the demand
side, and with it the problem of effective demand, was disregarded
(or at best was relegated to "business cycle theory," which was
expected to live a more or less independent life). The sad fact is
INTRODUCTION IX
that the problem under consideration has not yet received an
adequate treatment and that the theory of distribution will remain
incomplete as long as it does not include an adequate treatment of
this problem. The selection of readings here presented contains
one of the well-known contributions to the problem of the relation
ship between changes in money wage rates and changes in real
wage rates. This may start the reader along lines of thought
pertaining to the problem just considered, but it obviously cannot
be said to solve this problem. The problem remains unresolved—
in this volume as in the available literature.
The more important contemporary interest theories are also
not free from the weaknesses just considered in connection with
wage theory but perhaps they may be said to suffer less from them.
Most interest theories do include theories of supply, on the "real"
level as well as on the "monetary" level. In other words, they
include certain hypotheses concerning the main determinants of
voluntary savings and—insofar as they go into the monetary aspects
of the interest-rate mechanism—also concerning such further
sources of capital supply as the creation of new money and dis-
hoarding. The interrelation between capital supply (or the supply
of funds for new investment) and the demand functions (marginal
efficiency functions) in this case again is not particularly well inte
grated with the main body of the theories in question. However,
in interest theory this problem has received some attention from
the outset, and simplifying assumptions of an extreme character
are less en vogue than in wage theory'.
Diflcrcnces of opinion exist on the nonmonetary level between
the adherents of the time-period theories of capital (implying
periodic disinvestment of capital) and those who favor deriving
capital values from the net marginal productivity of capital (thereby
implying perpetual maintenance when defining the quantity of
capital). Both types of theory ai-e "real" in the sen.se of being
concerned mainly with the nature of the process of production and
with the reladonship between interest-rates and the capital stock.
The "monetary" theories—such as the loanable funds theory, on
the one hand, and the liquidity preference theory, on the other—
X INTRODUCTION
could be compatible with eiti.er type of "real" theory, and they
usually focus attention on further determinants of "the" interest-
rate. Readings expressing these different theories and analyzing
the relationship between them are included in the volume and so
is a well-known article discussing the problems of the interest-rate
structure which lie behind the all too simple concept of "the"
interest-rate.
The theory of profit and that of rent contain many controversial
issues. So far as the concept of profit is concerned, difficulties arise
from the lack of clarity of what constitutes the entrepreneurial
function in the present institutional setting. One of the authors,
whose views find expression in this volume, has shown on what
assumptions these difficulties could be overcome, and he undertakes
to develop a conceptually consistent theory of profit applicable to
the mixed forms of enterprise in our present society. In another
essay more skepticism is expressed concerning the possibility of over
coming the difficulties on assumptions that could be regarded as
sufficiently realistic. The reader of this volume may get acquainted
with both arguments and also with some of the older profit theories.
The selections on rent—which, like profit, overlaps the other
distributive shares—are less suitable for giving even a sketchy
picture of the present state of theory. The reason for this is that
recent developments in rent theory have been integrated more
closely with value theory than with distribution theory. Conse
quently, if a somewhat arbitrary line must be drawn between
value theory and distribution theory, as must be the case for the
present purpose, much of the literature incorporating newer
developments in rent theory falls in the area beyond the line of
demarcation. It is believed, however, that the two essays included
here contribute to overcoming some of the difficulties inherent in
the rent concept.
From the titles of the essays in the introductory section of this
volume it will be obvious that an attempt has been made to include
readings on the concept of national income and on some other con
cepts of the family to which the national income concept belongs.
Before studying distribution, the student should of course ask the
INTRODUCTION
question: the distribution of what^ The introductory section
intended to be helpful in answering this question. It also conta
a general essay on the problem of distribution and an article cc
cerned with the problem of personal income distribution. D
tribution theory in the usual sense relates mostly to function
income distribution, that is, to distribution as between diflfere*
groups of the population performing different economic function
Yet the nature of the personal income distribution pattc'n—t
pattern of the distribution of aggregate income as between grn
earning incomes of different sizes—also gives rise to probl
great significance. The article which deals with this pr
discusses also the merits and limitations of alternative measi-.
inequality.
In the selection of articles for inclusion in the volume, an at«^
has been made to give a tolerably rounded "presentation" c
field with which the volume is concerned. Much of what sk
go into an intermediate course on distribution theory car be
by using these readings, provided they are supplemer
care by observations of the instructor. It is fully n
editors, however, that the book will not by itself pro\
reading material for such a cuuisc. An adequate
selected readings for this purpose would have to include r f
from books as well as of articles and essays, and it probably
have to contain an elaborate commentary by the editors,
have confined themselves to selecting for republication article
essays which otherwise might not be easily accessible tD s^^i
and to instructors of large classes and which, it is hop< '
be able to use with profit.
The method of selection differed somewhat from thac follow
the publication of the "Readings in Business Cycle Theory."
editors consulted approximately 30 professional economist
were known to have an interest in the theory of distril
These economists were then requested to offer suggestions as
articles and essays that should be considered for inclusion ;
proposed volume. To the suggestions thus obtained th^ •
added their own, and then submitted the complete list to tht
INTRODUCTION
-nomists—who were regarded as the Selection Committee—for
ir comments and criticisms. Taking into account these comments
1 criticisms, the editors, or Co-Chairmen of the Selection
mmutee, then prepared the final list.
A substantial amount of clerical work involved in this procedure
as performed by the Bureau of Business and Economic Research
' the University of California. For this generous assistance we
nress our gratitude. We have received considerable help and
lable advice from Mr. Frank E. Norton, Jr. He is also the
^ the bibliography at the close of the volume.
WILLIAM FELLNER,
BERNARD F. HALEY,
Co-Chairmen, Selection Com.mittee
