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9. Production: Particular Factor Prices and Productive Incomes

5. A Note on the Fallcy of "Distribution"

Ever since the days of early classical economics, many writers have discussed “distribution theory” as if it were completely separate and isolated from production theory.69 Yet we have seen that “distribution” theory is simply production theory. The receivers of income earn wages, rent, interest, and increases in capital values; and these earnings are the prices of productive factors. The theory of the market determines the prices and incomes accruing to productive factors, thereby also determining the “functional distribution” of the factors. “Personal distribution”—how much money each person receives from the productive system—is determined, in turn, by the functions that he or his property performs in that system. There is no separation between production and distribution, and it is completely erroneous for writers to treat the productive system as if producers dump their product onto some stockpile, to be later “distributed” in some way to the people in the society. “Distribution” is only the other side of the coin of production on the market.

Many people criticize the free market as follows: Yes, we agree that production and prices will be allocated on the free market in a way best fitted to serve the needs of the consumers. But this law is necessarily based on a given initial distribution of income among the consumers; some consumers begin with only a little money, others with a great deal. The market system of production can be commended only if the original distribution of income meets with our approval.

This initial distribution of income (or rather of money assets) did not originate in thin air, however. It, too, was the necessary consequence of a market allocation of prices and production. It was the consequence of serving the needs of previous consumers. It was not an arbitrarily given distribution, but one that itself emerged from satisfying consumer needs. It too was inextricably bound up with production.

As we saw in chapter 2, a person's presently owned property could have been ultimately obtained in only one of the following ways: through personal production, voluntary exchange for a personal product, the finding and first using of unappropriated land, or theft from a producer. On a free market, only the first three can obtain, so that any “distribution” served by producers was in itself the result of free production and exchange.

Suppose, however, that at some preceding time the bulk of the wealthy consumers had acquired their property through theft and not through serving other consumers on the free market. Does this not instill a “built-in bias” into the market economy, since future producers must satisfy demands ensuing from unjust incomes?

The answer is that after the initial period, the effect of unjust incomes becomes less and less important. For in order to keep and increase their ill-gotten gains, the former robbers, now that a free economy is established, have to invest and recoup their funds so as to serve consumers correctly. If they are not fit for this task, and their exploits in predation have certainly not trained them for it, then entrepreneurial losses will diminish their assets and shift them to more able producers.

  • 69. For a critique of some aspects of this separation in the “new welfare economics,” see B.R. Rairikar, “Welfare Economics and Welfare Criteria,” Indian Journal of Economics, July, 1953, pp. 1–15.