In economics, theories of distribution explain how an economy’s total wealth or national income is divided among individuals (personal distribution) and among the factors of production (functional distribution). Functional distribution focuses on the rewards paid for productive services: rent for land, wages for labour, interest for capital, and profit for entrepreneurship.
Core Classifications of Distribution
- Functional Distribution: Measures income share based on the function performed by resource types.
- Personal Distribution: Measures income distribution among individual households, tracking economic inequality.
Major Theories of Distribution
Economic thought offers several frameworks to explain how these factor prices are determined.
1. The Marginal Productivity Theory (Neoclassical Approach)
Developed by late-19th-century economists such as J.B. Clark and Alfred Marshall, this is the traditional foundation of microeconomic factor pricing.
- Core Principle: In a perfectly competitive market, every factor of production is rewarded according to its marginal productivity (its specific contribution to total output).
- Mechanism: A firm will continue hiring units of a factor (e.g., labour) up to the point where the cost of the last unit matches its Marginal Revenue Product.
- Assumptions: Relies on perfect competition, homogeneous factor units, and perfect mobility of resources.
2. The Modern Theory of Distribution (Demand & Supply Framework)
Modern economists view factor pricing simply as a special extension of the general theory of value.
- Core Principle: Factor prices are determined by the interaction of market demand and supply forces.
- Demand Side: The demand for any factor of production is derived, meaning it depends directly on consumer demand for the final goods that the factor helps produce.
- Supply Side: The supply curve represents the availability of the factor at varying reward rates. Equilibrium occurs where the demand and supply curves intersect.
3. Classical Theories of Distribution
- Ricardian Theory: David Ricardo argued that national output is split into rent, wages, and profits based on social classes (landlords, workers, and capitalists). He believed rent is a “differential surplus” earned by superior land over less fertile land, while wages gravitate toward a physical subsistence level.
- Marxian Theory: Karl Marx built upon classical ideas to argue that the value of commodities is driven entirely by labour. Under capitalism, workers are paid baseline subsistence wages, while the remaining “surplus value” is entirely extracted by capitalists as profit.
4. Macroeconomic and Alternative Theories
- Kaldor’s Keynesian Theory: Nicholas Kaldor proposed that the distribution of income between wages and profits is determined by macroeconomic factors, specifically the rate of investment and the differing savings propensities of workers and capitalists.
- Kalecki’s Monopoly Theory: Michał Kalecki argued that functional distribution does not depend on perfect competition but rather on the degree of monopoly and mark-up pricing power held by large firms in an industry.
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