Marginal productivity theory of income distribution and how it works

We claim now three things: We have in mind definitions of labor and capital, and the usual distinction between fixed capital and that of the circulating kind. The embodiment of economic activity in the physical world disappeared.

We are familiar with the so-called law of diminishing returns, by which land under tillage rewards labor and capital less and less bountifully, as more and more labor and capital are used on a given area.

Marginal productivity theory

Note that this is not self-evident: Ultimately, any lathe, loom or lorry is made with labour and with other inputs. Many interpretations of the current crisis have indeed emphasised the importance of distributional concerns.

This is also a part of the all-embracing process of social production. Incidental to the making of them are the trading and sharing processes that are termed exchange and distribution; but production and consumption still exhaust the whole economy: Hobson The Industrial System.

If the producer employs less units of factors the productivity will be more and the cost will be less. If the theory were true it would be demonstrated by rising costs as companies try to expand, but these are not the findings.

The marginal productivity theory of Distribution explained

Thus, with a given fixed supply of labour in the market the wage rate will be determined by the marginal product of labour. What he docs is to push the use of each of the factors tu such a point as to make its marginal productivity equal to its price as already determined by the market forces.

What if, as a result of employing a unit of labor, he decides to let go or add on an extra unit of capital as well? Equal products everywhere per unit of labor and equal products per unit of capital—this is the condition that affords natural prices of goods.

The first natural division of economic science should, therefore, present the universal laws of wealth: Thus, the present price of wheat is such as to afford a larger product per unit of capital than is afforded in some other industries; it is above the natural standard, and would be so even if wages and interest were locally so high that entrepreneurs got nothing above cost of production.

In short, the distinctively social relations that are created when society as a whole becomes the producer, may be treated under the title, distribution.

First it is not a perfect description of how factor incomes are determined but that it works pretty well.• The main conclusion you should draw from this discussion is that the marginal productivity theory of income distribution is not a perfect description of how factor incomes are determined, but that it works.

The fact that the theory does not match reality does not stop marginal productivity theory and diminishing returns being reproduced in the textbooks because it is useful ideologically as an “explanation” of. Capital in neoclassical theory.

The fact that the theory does not match reality does not stop marginal productivity theory and diminishing returns being reproduced in the textbooks because it is useful ideologically as an “explanation” of income distribution.

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Marginal productivity theory

The oldest and most significant theory of factor pricing is the marginal productivity theory. It is also known as Micro Theory of Factor Pricing.

Marginal Productivity Theory: (Clark’s and Marshall-Hicks’ Versions)

It was propounded by the German economist T.H. Von Thunen. Distribution theory, in economics, the systematic attempt to account for the sharing of the national income among the owners of the factors of production—land, labour, and bistroriviere.comionally, economists have studied how the costs of these factors and the size of their return—rent, wages, and profits—are fixed.

This edition is the third reprinting of Clark's path-breaking, yet widely under-read, textbook, in which he developed marginal productivity theory and used it to explore the way income is distributed between wages, interest, and rents in a market economy.

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Marginal productivity theory of income distribution and how it works
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