The distribution of the national income

Book 6, Chapter 1

§1. Marshall’s thoughts on national income are too good to summarise (p 418):

The keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc… But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions: What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and “wait,” as contrasted with those who work and consume at once the fruits of their endeavours?

Recall that Marshall is writing in 1920, whereas GDP was “invented” in 1934. His points above were (and are) often forgotten by people focussing on the size, rather than the distribution, of GDP.

§2. Marshall delves into historic thinking about labor and capital. He summarises the views of France’s 17th century physiocrats and Malthus as variations on “iron laws” in which capital comes and goes as taxes fall and rise, and labor supply rises and falls as food is plentiful or scarce, respectively. From these views came the idea of “laisser faire, laisser passer“, which advises the King to raise revenues by taxing landowners’ surplus rents (capital and labor having no surplus in equilibrium) while leaving everyone else to do what they like (laissez faire is the expression we’re more familiar with). Adam Smith, David Ricardo, et al. did not agree with these “laws;” instead, they focussed on incentives, e.g., higher wages lead to greater effort, not more children. These thoughts had evolved by Marshall’s time into an empirical investigation of how higher productivity could cause (permanently) higher wages, thereby introducing questions of distribution among “rich” and “poor” labor.

§3. To explain distribution, Marshall begins with an imaginary world in which capital and resources are “free,” and everyone can do any job. In this world, wages and prices are directly proportional to effort (labor theory of value), and increases in labor productivity make everyone better off, i.e., consuming more goods for the same labor input.

§4. Specialisation does not change these relations, since anyone can change trades (with some time), but it does increase the diversity of goods/services on offer.

§5. Population growth brings an increase in demand and diminishing returns on land-based food production. With higher prices for food, land “rents” will grow faster than returns to labor or capital.

§6. By adding back obvious factors affecting labor (mobility, tradition, law and morality), Marshall approaches realism, and unequal returns to labor emerge.

§7. Marshall adds realistic assumptions on capital, i.e., that capital is limited and “lumpy” (not matching each unit of labor). Now managers must match labor and capital “on the margin,” in two ways. First, each labourer’s additional production must exceed their wages. Second, management should decide based on marginal rather than average values. Although economists had been advocating “marginal thinking” for several decades before Marshall’s Principles, he still played an important role in explaining how such thinking was useful for making business decisions.

§8. Interest rates push capital from wasteful to useful investments, since (in)efficient investments (lose) make money.

§9. In sum, “every agent of production, land, machinery, skilled labour, unskilled labour, etc., tends to be applied in production as far as it profitably can be. If employers, and other business men, think that they can get a better result by using a little more of any one agent they will do so” p 432.

§10. The “net” in national income reflects replacement of worn machines plus a fraction of the enduring contribution of new machines, but excludes “income’ (benefits) derived from common practices of individuals, i.e.,

Thus, unless anything is said to the contrary, the services which a person renders to himself, and those which he renders gratuitously to members of his family or friends; the benefits which he derives from using his own personal goods, or public property such as toll-free bridges, are not reckoned as parts of the national dividend, but are left to be accounted for separately (p 434).

This last statement will be familiar to anyone critical of the exclusion of “self-production” or “a mother’s work” from GDP statistics. It’s also unusual (relative to GDP discussions) in calling for those factors to be accounted for separately.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

Leave a Reply

Your email address will not be published. Required fields are marked *