Distribution (economics)

• 1. Introduction

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  Distribution in economics is the study of who ends up with the output, income, and wealth that an economy produces. Economists can split that question two ways. One approach follows individuals. The other follows the factors of production, such as labour, land, and capital. In the accounting framework behind the U.S. National Income and Product Accounts, the books are built on a simple rule: each unit of output corresponds to a unit of income. So every dollar of production lands somewhere as someone's earnings. That raises sharper questions. How do the earnings divide between workers, landowners, and the owners of capital? How do they divide among households, from the top slice to the bottom? And which thinkers have fought over the answer, and what forces do they say settle it?

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• 2. Shares and Slices

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  The national accounts can sort income by factor of production and measure how large each factor's share is, as in national income. That view treats labour, land, and capital as the players.

  Households are a different matter. When attention shifts to the income of persons or households, economists frequently adjust the national accounts or turn to other data sources. The interest then falls on the fraction of income going to the top or bottom x percent of households, then the next x percent, and so on. Those groups are defined by equally spaced cut points, and quintiles are the usual example. Researchers then ask what moves those fractions, and the source names globalization, tax policy, and technology. The simplest yardstick in this picture is median household income. The U.S. Census Bureau's series on income inequality runs from 1947 to 1998, which shows how long such slices have been tracked.

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• 3. Classical Roots

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  Adam Smith, David Ricardo, and John Stuart Mill all studied distribution, and their work shows it has been central to political economy since the 19th century. Later writers group them under classical economics, where distribution connects to a theory of value.

  Classical thinking was not the only school to claim the subject. Reference works on the topic give separate treatments to classical, Marxian, Keynesian, and neoclassical distribution theories. The Marxian line draws on Marx's economic theories and on the idea of value product. Each school offers its own account of why income splits the way it does. The 1987 edition of The New Palgrave dictionary gave the neoclassical entry to Christopher Bliss.

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• 4. Neoclassical Machinery

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  In neoclassical economics, each factor of production has its own market. The supply and demand for a factor meet in factor markets, and their interaction fixes equilibrium output, income, and the distribution of income. Demand for a factor reflects its marginal productivity, meaning what it adds in the output market. The same reasoning covers capital and land, and it also covers wages in labor markets.

  The neoclassical growth model stretches the logic across time. It describes how income divides between capital and labor in competitive markets at the macroeconomic level. Technological change, a growing capital stock, and a changing labour force all feed into the result.

  Recent work has drawn finer lines. It separates human capital from physical capital, and social capital from personal capital, and those distinctions have deepened the analysis. The New Palgrave gave its 1987 entry on marginal productivity theory to Robert F. Dorfman.

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• 5. Testing and Judging

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  Gary Becker's work, cited in the source with dates of 1971 and 1993, shows how income distribution can serve as evidence. Because the distribution of income in an economy can be observed, economists use it as an input for testing theories that try to explain it. The source gives two examples: human capital theory and the theory of economic discrimination.

  Welfare economics asks a different question. It separates the level of output an economy could feasibly reach from how the income from that output is shared out. In the formal theory of social welfare, rules for picking among feasible distributions of income and output represent normative economics at a high level of generality. That is the territory of distributive justice, which the 1987 New Palgrave handed to Edmund S. Phelps.

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• 6. Pareto's Power Law

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  Vilfredo Pareto proposed that the distribution of income can be described by a power law. That proposal is now called the Pareto distribution, and it remains the statistical idea most closely tied to the subject. Related reading points to measures such as the Gini coefficient and the Lorenz curve.

  The questions Pareto's formula raised are still live. A 2006 paper by Xavier Sala-Martin in the Quarterly Journal of Economics, on the world distribution of income, carries a title that promises falling poverty and convergence.

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