The Principal Problem in Political Economy: Income Distribution in the History of Economic Thought

Abstract

The paper considers the history of theories of income distribution, from the time of Adam Smith until the 1970s. It is divided into two main parts. Part I considers the positive theory of income distribution, beginning with the classical economists’ analysis of the functional distribution of income between wages, profits and rent. It goes on to present the new theories that emerged with the marginalist revolution and which were based on maximizing behaviour and market equilibrium. The main focus during the early stages of the new developments was on the markets for consumer goods and the role of marginal utility in price determination. The later neoclassical economists, including Alfred Marshall and Knut Wicksell, paid more attention to the special features that characterized the labour market and the role of marginal productivity in wage formation. In the 20th century the neoclassical theory was extended to include analysis of the role of imperfect competition, human capital and risk-taking. Also included in this part of the paper is a discussion of statistical and institutional approaches. Part II covers normative theories of income distribution and their implications for redistributive policy. It begins with a consideration of the value judgements implicit in the policy recommendations of the classical economists and continues with the attempts to establish an analytical foundation for welfare economics. The rise of Paretian welfare theory with its emphasis on the impossibility of interpersonal comparisons of utility made it difficult to draw conclusions regarding income redistribution, but the older utilitarian approach, including equal sacrifice theories, continued to live on in the modern analysis of optimal redistribution. A short Part III contains some concluding reflections on the position of income distribution theory within economics as a whole.

Keywords: functional and personal income distribution, distributive justice

JEL Classification: B10, B20, D30, D63