Is there an institutional theory of distribution?

Author:Brown, Christopher

Income distribution is a primordial question. "Who gets what" is a universal, unremitting source of resentment and social discord. Economic science is nominally concerned with the "positive" aspects of the problem. That is, what forces regulate the apportionment of the social dividend? Or, what assumptions must be made about the nature of reality to logically demonstrate that a given distribution of income is Pareto optimal?

Does institutionalism offer a coherent and surpassing alternative to the standard model of distribution? The issue is clouded by several factors. For one thing, there is no single piece of scholarship that can be pointed to as the authoritative or definitive institutional treatment of the subject. The problem of relative rewards does figure materially in the works of Thorstein Veblen, John R. Commons, and Clarence Ayres. However, with the exception of Veblen's critique of John Bates Clark's marginal productivity theory (Veblen 1908), the views of these economists with regard to distribution are nested within their respective analyses of related phenomena such as the nature of technology, the evolving substance of property, or the meaning of capital. An extensive literature has accumulated in the past three decades wherein specific institutional sources of rising income inequality have been identified and explicated. (1) Though this scholarship is not lacking for "models of inequality," it is frequently difficult to determine if a particular inquiry is linked to, or constitutes an extension of, an overarching theory grounded in institutional principles. Other authors have performed an exegesis of seminal institutional works and in the process contributed valuable insights about the social and/or technological factors that shape distribution. (2) Yet none of these presents a comprehensive view of the subject. In summary, if there is an institutional theory of distribution, it presently exists as a hard-to-descry constellation of mutually consistent ideas distributed through a broad space of literature.

This article endeavors to make the institutional view of distribution more coalescent and intelligible. It aims first to put the essential points of divergence between institutional and standard economics concerning relative rewards in sharper relief. The argument is made that the fundamental source of disagreement concerns a critical premise of the standard theory of distribution--that is, the supposition that resources have "intrinsic worth." The view of distribution that emerges from the institutional literature goes well beyond critique, however. The objective here is to identify and explain the salient aspects of this collective opinion. Achieving this goal will require a defragmentation of the scholarship as well as an examination of how several of the core theorems of institutional thought intersect with, or impinge on, the problem of distribution. Among these core ideas are (1) production is a social activity; (2) folk views or belief systems assist in the maintenance of power relationships; (3) market outcomes are often predetermined by the rules governing transacting parties; (4) the institution of property is not static; and (5) the pursuit of pecuniary interest can upset the delicate balance among vertically arranged activities vital to modern production and distribution methods.

The following section contains a critique of the standard (marginal productivity) theory of distribution. Next an institutional interpretation of the factors which regulate income distribution is discussed. Concluding remarks follow.

Do Resources Have Intrinsic Worth?

The concept of intrinsic worth is fundamental to the standard theory of distribution. The term "intrinsic worth" is used here to convey the idea that resources are like vessels that contain so many units of productive energy or potential exchange value. These vessels are emptied into semifinished or finished goods and services, the market value of which must be equal to the sum of values transferred by the land, labor, capital, and entrepreneurship necessary to produce them. It is not the incorporation of privately owned resources within a social process which endows them with usefulness. Rather, the productive energy or potentiality of an electrician, a tool, or an acre of land is thought to reside in, or belong to, the thing itself. Hence it is possible to determine (if not directly, then at least indirectly through factor prices) the contribution of a specific factor to exchange value.

The standard, or "marginal productivity," model of distribution has been alternatively classified as an application of partial equilibrium analysis to the problem of "factor" prices or as a generalization of David Ricardo's theory of rent to other inputs--that is, labor and capital. The theory is concerned with two principal problems: (1) the factors that determine the intrinsic worth or the true value of a productive resource and (2) the conditions under which incomes or distributive shares are forced into (or deviate from) parity with intrinsic worth) Clark, the founder of the modern theory, had this to say about the second issue:

[W]e may now advance the more general thesis ... that, where natural laws have their way, the share of income that attests to any productive function is gauged by the actual product of it. In other words, free competition tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates. (1908, 13) Clark's thesis has a clear normative dimension--specifically, the distributive share that ought to accrue to any resource owner is given by the exchange value that would be lost if, ceteris paribus, that resource were withheld from production. In other words, the question of who gets what can be, in theory at least, resolved by appeal to objective or technical factors. The standard model makes the just price of resources equivalent to their inherent value. Defenders of the marginal productivity theory concede that, in any collaborative economic activity, direct measurement of the proportion of exchange value attributable to the miscellany of factors employed is not feasible. (4) It is left to the invisible hand to put remunerative shares in proximity to intrinsic values. Setting aside the problem of "imperfections" (monopsony or oligopsony, wage legislation, legal restrictions on entry to occupations, and so forth), the market mechanism guarantees that income received by resource owners via factor market transactions accurately measures the value contributed by resources at the margin of production.

The attack launched against marginal productivity by Pierra Sraffa (1951, 1960) and Joan Robinson (1953-1954) initially focused on the problem of measuring capital. Sraffa's 1951 preface to Ricardo's work was aimed at the marginal productivity theory of distribution, whereas Robinson's 1953 article concerned the measurement of capital in the aggregate production function. Sraffa and Robinson showed that it was impossible to find an index number measuring capital that could be determined independent of distribution of income between wages and profits. G. C. Harcourt noted that

such independence is necessary if we are to constrtict an iso-product curve showing the different quantities of labor and capital which produce a given level of national output.... The slope' of this curve plays a key part in the determination of relative prices of capital and labor and therefore of factor rewards. However, the curve cannot be constructed and the slope measured unless the prices it is intended to determine are known beforehand. (Harcourt 1969, 371) Robinson commented in a retrospective on the Cambridge capital debates that "nearly the whole argument ... has circled around this question of measurement. But it is a superficial problem. The real issue is not about the measurement of capital but about the meaning of capital" (1980, 114-115). Ayres asserted that the percept of capital which forms the basis on modern economic theory in fact has a dual meaning. Capital is commonly apprehended to designate tangible instruments of production (machinery, buildings) as well as intangible or institutional phenomena (money or "finance"). Ayres' genealogy of the modern idea of capital laid bare the importance of this dual concept in dissolving social resistance to the transfer of economic and political power to the money-controlling, interest-receiving classes (1944). The efficacy of the standard notion of capital in serving this specific ideological purpose is explained by two factors: (1) it establishes a causal link between the "critical activity" of the interest-earning classes (that is, waiting or sacrifice) and the accumulation of those things upon which the welfare of the community ultimately depends-"the physical materials and instruments of trade and manufacture" (42) and (2) it attributes magical productive potency to "capital equipment."

That the source of productive power is the piling up of liquid claims to goods is a myth that goes far in explaining social acquiescence to gross disparities of income and wealth. As Ayres made plain:

That growth was a function of the industrial equipment of the community, as anybody could see even in earlier times. To identify that function with the accumulation of money was to attribute the whole thing to the men who made money. This is what we accomplish by calling both things "capital." (1946, 10) The idea summarized under point (1) above is formally expressed by the "loanable funds" or, what is the same thing, "time preference" theory. (5) This theory is based on the supposition that credit or finance materializes only when intermediaries make unexercised claims to goods (saving) available to borrowing agents. John Maynard Keynes pointed out that, ceteris paribus, decisions by agents to spend or not to spend have no effect on...

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