THE THEORY OF DISTRIBUTION

For Marshall and his neo-classical contemporaries the analysis of distribution was essentially a problem in the pricing of productive services. Its solution was sought along lines analogous to those followed in explaining the pricing of products.

This approach was built around a three-fold classification of the basic productive factors - land, labour and capital - to each of which was assigned a unique distributive share. (Some writers added a fourth productive factor; Marshall suggested that organizational skill might be so regarded). In this scheme of things wages were defined as the reward for human effort. This definition, unlike the classical one, did not restrict wage payments to a working class. Salary incomes and an imputed 'wage to management' in owner-operated establishments also fell within the neo-classicist's wage classification. Interest accrued to the owners of capital as a reward for 'waiting' - i.e. for the sacrifice involved in foregoing present consumption in favour of prospective future gains. While rents were associated with the productive services supplied by land, the classical pre-occupation with agricultural land was

shaded towards the background. In the neoclassical era the site values of urban land came into prominence.

In this re-definition of distributive shares the concept of profits with which the classical and Marxian traditions had worked largely disappeared. Much of the income earlier traditions assigned to profits was now absorbed as a wage to management and as interest. Though neoclassical economists did not share a common concept of profits, most (including Marshall) held that pure profits (i.e. rewards to business in excess of the normal wage of management, interest on invested capital, etc.) should be regarded as symptomatic of a temporary disequilibrium or of the existence of monopoly.

This approach to distribution represented a clear rejection of the class-oriented scheme around which classical and Marxian models had been organized. Neoclassical theory rested on a functional interpretation of distributive shares which linked income payments to the productive contribution of the various factors. These definitions provided ammunition for a further attack on Marxian analysis. Marshall drove the point home forcefully:

It is not true that the spinning of yarn in a factory, after allowance has been made for the wear-and-tear of the machinery, is the product of the labour of the operatives. It is the product of their labour, together with that of the employer and subordinate managers, and of the capital employed; and that capital itself is the product of labour and waiting; and therefore the spinning is the product of labour of many kinds, and of waiting. If we admit that it is the product of labour alone, and not of labour and waiting, we can no doubt be compelled by inexorable logic to admit that there is no justification of interest, the reward of waiting; for the conclusion is implied in the premiss.10

Marshall might, of course, have added that his own conclusions followed from the premisses he had chosen - premisses that imparted to property shares of income a legitimacy that Marx had not been prepared to allow.

Once these distributional categories had been defined, supply and demand forces in the market could be appealed to as the basis on which rewards to the suppliers of productive services were established. It was, of course, recognized that each of the markets in which productive factors were priced had special properties. The labour force, for example, was highly differentiated by varying skills and abilities; the market, however, could usually be relied upon to recognize differences in the productive contribution of various types of labour and to establish appropriate wage differentials. In any event, classical exercises in reducing labour to a standard unit were superfluous. The treatment of capital presented a complication of another sort. As Marshall recognized, a distinction between the accumulated stock of capital and the flow of new investments was required because the economic implications of payments to the owners of old and newly-created capital were quite different. As he saw the matter:

That which is rightly regarded as interest on ‘free' or 'floating' capital, or on new investments of capital, is more properly treated as a sort of rent - a quasi-rent - on old

investments of capital.... And thus even the rent of land is seen, not as a thing by itself, but as the leading species of a large genus....11

All this was a far cry from the classical concern over the long-period behaviour of distributive shares. In Marshall's hands, distribution theory was primarily a special case of the pricing of productive inputs in the marketplace.

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