The Views Of Alfred Marshall

The Views of Alfred Marshall

The idea of marginal production as applied to distribution was worked out more intelligently and more concretely by Alfred Marshall. In the final section of his Principles of Economics, which is entitled "The Distribution of the National Income," Marshall devotes a great deal of time and attention to clarifying the baffling problem of how income is distributed. One is forced to note at the outset Marshall's warning that the explanation of economic processes is by no means simple. First of all there appears an annual dividend which consists of the material and immaterial goods produced in a given year. This "National Divi dend" is divided up into wages, the interest on capital, the rent of land, and profits on organizing ability. The problem of dis­tribution is essentially one of describing the forces which determine the relative quantity of income received by each of the factors responsible for producing it. In such fashion does Marshall state the problem. His answers are not so easy to grasp. In simplest language Marshall's explanation is this: The price of any commodity is determined by the operation of supply and demand. In the case of the factors in production, the demand is determined by the entrepreneurs.' estimate of the value of the land, labor, and capital, in production. The supply is determined by the costs (sometimes discussed as subjective costs, sometimes as real costs) of producing land, labor, capital. Land, of course being irreplaceable, has only a money cost figured in much the same fashion as Ricardo's differential payment for more produc­tive land; labor's cost is essentially the cost of maintaining a family at a customary standard of living; capital's cost is the cost of abstaining from consumption, or the estimate of the superiority of present value over future value.

In determining the actual return which each factor is to receive, marshall makes use of the concept of marginal productivity. Land, labor, and capital receive a return equivalent to the productivity of the last unit of the factor used, as judged in relation to its supply. Marshall then analyzes the way returns on land, labor, and capital are determined under defferent economic conditions. In each case the analysis rests upon the general idea that the return of each of the factors of production depends upon the price it can command. This price in turn is fixed by all the factors affecting demand on one side, that is, the marginal value to the entrepreneur; and all the factors affecting supply on the other. If a homely illustration may be permitted, the price paid for any of the factors in production is like a large rubber ball held in the air by an indefinite number of streams of water playing upon it from every angle. Roughly speaking these streams appear to line themselves off into two groups, each group exerting a counteracting pressure to the other in order to hold the ball in suspended equillibrium. Marshall’s explanation of distribution is stil generally accepted among economists primarily for its realistic and penetrating examination of all the separate factors representing distribution rather than for the clarity of the theory itself.

Ideas similar to those of Marshall were being expressed in America at about the same time by John Bates Clark. He is the chief exponet of neo-classical economics in America, and according to eminent authorities ranks among the best five or six Anglo-Saxon economists of all times. A professor of economics at Columbia University, his reputation rests principally on his Distribution Of Wealth, published in 1899. briefly stated, he believed that functional distribution that is, distribution of shares of income to the factors of production was in proportion to the marginal productivity of each of the shares. Thus labor would receive what labor had created, capital would receive what capital had created, and so on. To demonstrate his idea Clark assumed the existence of a static society in which the amounts of capital and labor were fixed and considered as a fund, that is, a fund of social capital and social labor. To the entrepreneur who organized production by assembling land, labor, and capital the value of each of these factors would be equivalent to the value of the last unit of each of these he engaged to produce. In order to make this situation clear Clark assumed that the entrepreneur would hire units of land, labor, and capital until it was a matter of complete indifference in production whether additional units were hired or not. Clark engaged in a bit of circular reasoning here when he said the entrepreneur would continue to engage additional units of production until the value contributed by the last unit hired equalled the expense in­curred for that unit. Such a statement apparently means that the return for each of the factors of production is already determined by forces other than the productivity of the factor. This confus­ing thought is overcome by the Ricardian explanation that the "long-run" and not the short-run process must be considered. In the light of Clark's direct statement on the subject, marginal productivity is the key factor. The idea is better stated by saying that the wages of labor or the interest on capital is equivalent to the loss in production when the last man hired is again withdrawn from service.

By the law of diminishing returns this unit does not and can­not produce as much as the next above it. Whether it is profitable to keep the marginal unit working or not is determined by the price at which the final product is sold in relation to the value of the marginal unit in production. There are innumerable assump­tions made by Clark in order to set forth the above explanation. He assumes, for example, that all units of labor are completely interchangeable, that capital is entirely fluid and can be adjusted to any number of workmen, that no distinction exists between the rent on land and the interest on capital. In addition to criti­cism leveled at the abstract nature of Clark's explanation of distribution, Clark himself has been criticised for seeking two mutually exclusive things: the unchanging natural laws which govern distribution, and a method of eliminating the injustice existing in present distribution. It has been asked why, if natural laws govern distribution, should one seek a more ethical plan of distribution? Like all classical economists Clark believed in the existence of the natural laws and in the essential justice of their control; the injustice arises not from the laws but from the ob­structions which stand in the way of their full operation.

In recent years there has been in evidence a growing tendency to scrap the marginal productivity concept of distribution in favor of a more realistic and simpler bargaining theory. Maxi­mum returns in this explanation would be determined by the profitability of any factor of production to a business enterprise; the minimum would be set by the peculiar circumstances under­lying the supply of land, labor, and capital, and the alternative uses or opportunities in which these factors might engage. The work of Alfred Marshall is not discredited. His analysis of the factors affecting the supply and the demand of the various fac­tors in production is extremely pertinent, as the work of John A. Hobson (1858-1940) very well illustrates. Hobson, writing a few years later than Marshall, built upon Marshall's work. He was essentially a social reformer, but he realized the necessity of bringing economic theory more into harmony with the economic development of the times. Hobson conceived of distribution in the classical sense, as a payment to the factors in production. Over and above the money payments necessary to bring these factors into production there were surpluses. Some surpluses were productive, that is, needed for growth; some were wholly unpro­ductive and came about as a result of scarcity, as for example rent on land beyond the sum necessary to improve it, or interest beyond the rate necessary to increase the supply of capital for natural growth. These unproductive surpluses, Hobson believed, should be used as the most available source of state revenue. Two additional ideas on distribution constitute Hobson's special con­tribution to this subject. In the first place, instead of just a general return paid to each of the factors in production, Hobson introduces three levels of return. These are: returns necessary to maintenance, necessary to growth, and surplus unnecessary to social production. These levels apply to rent (return on land), wages (return on labor), interest (return on capital), and profit (return on enterprise and organization). In the second place, it is the surpluses which cause so much dissatisfaction in society. If there were just sufficient to provide each factor of production with a return necessary for natural growth, no injustice would result, but in an expanding industrial economy surpluses are pro­duced, and they are grasped by the elements in the strongest bargaining position.

Hobson's ideas have been stimulating to progressive economists but few of them have been persuaded to accept his explanation because of his interest in social reform, and because of his tend­ency to be careless of factual details.

The average citizen finds little satisfaction in the economics of distribution, for even the best of the ideas are weighed down by as­sumptions and abstract reasoning which eliminate all sense of reality. In conclusion, therefore, it might not be amiss to present additional information on the actual wealth and income distribu­tion as it applies to the United States today. A study of the func­tional division of national income made recently by reliable authorities indicated that the proportion of the income which is received by labor (wages and salaries) has been increasing while the proportion received by property (profit, interest, and rent) has been decreasing. In 1900 labor received 53% of the national income, while property received 47%. In 1939, labor received 68% and property only 32%. The trends have been constant, each year noting an increase for labor and a decrease for prop­erty. However, by dividing the total income of labor into its com­ponent parts of wages and salaries, one notes that wages have accounted for about 40% of the total income, while more than 20% has been devoted to salaries. One further fact is worth noting. During the last 40 years the number of wage-earners and salaried workers has been growing steadily, while the number of those deriving their income from the earnings of property has steadily decreased proportionately. For example, according to Professor W. I. King the number of wage-earners and salaried workers increased from 24,410,000 in 1909, to 35,572,000 in 1927. In the same period, however, the number of independent business men declined from 9,845,000 to 9,801,000. Income from independent business enterprises has declined sharply while in­terest and dividend payments of corporations has been increasing. The continued existence of rich and poor even in a nation as economically favored as the United States is clear evidence of the persistence of the problem of personal distribution. Indeed, some writers contend that the extreme inequality of wealth and income which marks American society is its most significant characteris­tic. A number of recent studies of personal income distribution in the United States all testify to the tremendous differences sepa­rating poverty and wealth. The richest 2% of the American population owns 40% of the total national wealth, while the poorest 65% owns but 16% of the wealth. A study made by the Brookings Institution in 1929 showed that over eleven million families, accounting for more than 40% of the population, re­ceived annual incomes of less than $1500 a year, a sum which at best would provide bare subsistence; while 160,000 families, composing 0.6% of the population, had incomes of over $25,000 per year. A more recent study made of consumer incomes throughout the United States in 1935-36 by the National Re­sources Committee, revealed more striking inequalities in dis­tribution of income. Families and individuals with incomes of less than $1000 represented about 47% of the population, yet they received only 18% of the total national income. Put in a different way the 1% of the families and individuals with the highest incomes received almost as large a share of the national income (14% of the income) as the 40% of families and indi­viduals at the lower end of the scale. About half of the families in the United States received less than $1160 a year.

A great deal of the disparity in income distribution can be attributed to the disproportion in the ownership of wealth. Fed­eral income tax figures indicate that those with incomes of from $1000 to $2000 received approximately 82% of their income from labor and 18% from property. Those with incomes of over $500,000 obtained more than 95% of their income from prop­erty. By means of inheritance these extremes of wealth and pov­erty are perpetuated.