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Neoclassical distribution theory

from Lars Syll

negotiation1Walked-out Harvard economist Greg Mankiw has more than once tried to defend the 1 % by invoking Adam Smith’s invisible hand:

[B]y delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us …

[T]he richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.

When reading Mankiw’s articles on the “just desert” of the 1 % one gets a strong feeling that Mankiw is really trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they “deserve.” Where does this view come from? Most neoclassical economists actually have a more or less Panglossian view on unfettered markets, but maybe Mankiw has also read neoliberal philosophers like Robert Nozick or David Gauthier. The latter writes in his Morals by Agreement:

The rich man may feast on caviar and champagne, while the poor woman starves at his gate. And she may not even take the crumbs from his table, if that would deprive him of his pleasure in feeding them to his birds.

Now, compare that unashamed neoliberal apologetics with what three truly great economists and liberals — John Maynard Keynes, Amartya Sen and Robert Solow — have to say on the issue:

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes … I believe that there is social and psychological justification for significant inequalities of income and wealth, but not for such large disparities as exist to-day.

John Maynard Keynes General Theory (1936)


FOTOGRAFATRIBUNAAMARTYASENThe personal production view is difficult to sustain in cases of interdependent production … i.e., in almost all the usual cases … A common method of attribution is according to “marginal product” … This method of accounting is internally consistent only under some special assumptions, and the actual earning rates of resource owners will equal the corresponding marginal products”only under some further special assumptions. But even when all these assumptions have been made … marginal product accounting, when consistent, is useful for deciding how to use additional resources … but it does not “show” which resource has “produced” how much … The alleged fact is, thus, a fiction, and while it might appear to be a convenient fiction, it is more convenient for some than for others….

The personal production view … confounds the marginal impact with total contribution, glosses over the issues of relative prices, and equates “being more productive” with “owning more productive resources” … An Indian barber or circus performer may not be producing any less than a British barber or circus performer — just the opposite if I am any judge — but will certainly earn a great deal less …

Amartya Sen Just Deserts (1982)

4703325Who could be against allowing people their ‘just deserts?’ But there is that matter of what is ‘just.’ Most serious ethical thinkers distinguish between deservingness and happenstance. Deservingness has to be rigorously earned. You do not ‘deserve’ that part of your income that comes from your parents’ wealth or connections or, for that matter, their DNA. You may be born just plain gorgeous or smart or tall, and those characteristics add to the market value of your marginal product, but not to your deserts. It may be impractical to separate effort from happenstance numerically, but that is no reason to confound them, especially when you are thinking about taxation and redistribution. That is why we want to temper the wind to the shorn lamb, and let it blow on the sable coat.

Robert Solow Journal of Economic Perspectives (2014)

A society where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implodes. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed.

  1. November 10, 2015 at 7:01 pm

    If one accepts that humans have no inherent character or “identity,” which I do, how do we explain the great and continuing to grow inequality of wealth and earnings we see today. Arthur Conan Doyle’s famous detective once explained simply and in a matter-of-fact fashion how a Duke became so. “He was the best horse thief in the county.” A useful skill for a King to have available? Yes. I explain most of the wealth/earning inequality today in the same fashion. Those who have learned, through accident or necessity how to take things (money, property, etc.) from others without being caught or called to account make themselves and their peers richer and richer. A useful set of skills for capitalism? Yes. A useful set of skills to foster social solidarity? No.

  2. November 10, 2015 at 8:55 pm

    Profit and the poverty of economics
    Comment on ‘Neoclassical distribution theory’

    All heterodox economists agree that neoclassical distribution theory is a failure and has to be replaced. The all-important question is wherewith?

    Distribution theory suffers from the known fact that, after more than 200 years, economists cannot tell the difference between income, profit, distributed profit and retained profit. As the Palgrave summarizes: “A satisfactory theory of profits is still elusive.” (Dessai, 2008)

    Therefore both, the defenders and attackers of the market economy, have one property in common: they have no idea of what they are talking about. As a consequence, distribution theory has come down to psychologism and sociologism. There is nothing wrong with psychology and sociology per se, except that is not economics. Economics has to explain how the actual economy works and how the system produces the distributions we observe.

    The economist, who in his manifest professional incompetence has not yet managed to exactly determine the difference between the pivotal concepts of his trade — income and profit — regularly takes refuge to moral outrage ‘The rich man may feast on caviar and champagne, while the poor woman starves at his gate.’

    Is there a relationship between profit and poverty? For a crash course in elementary economics take this formula

    This is the fundamental economic law that contains the interrelation between the consolidated business sector’s cost/profit situation rhoF, the real rhoX and the nominal rhoE side of the product market, and the income distribution rhoD. It’s all in this formal nutshell. And this is how the economy evolves over time as an open system

    This formula explains how the income distribution develops. For details see

    ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’

    ‘Profit for Marxists’

    ‘Essentials of Constructive Heterodoxy: Profit’

    ‘The Synthesis of Economic Law, Evolution, and History’

    Economists do not help anybody by pointing out that poverty has a moral dimension. This has already been found out by non-economists long ago. It will be a first step in the right direction to stop the senseless filibuster of political economics and to start with scientifically sound theoretical economics. With neoclassical distribution theory economists have done a poor job so far. Heterodoxy is supposed to perform much better. More than 200 years of economists’s scientific failure did not help much to end poverty.

    Egmont Kakarot-Handtke

  3. BC
    November 10, 2015 at 10:45 pm

    Ken, well said, and not to forget the superior skill of a growing majority share of the top 0.001-1% to 5-10% who chose well their parents.

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