Saturday, February 13, 2010

Why the Marginal Productivity Theory of Distribution is False

First of all, what is the "Marginal Productivity Theory of Distribution"? Before explaining what it says, I should mention briefly who it is that puts it forward and what they take it to justify.

Those on the Right (e.g. neoclassical types as well as the deceptively self-anointed folks that call themselves "libertarians") often claim that if we have markets that are "free" and competitive enough, then the distribution of wealth and income they generate will be just. The marginal productivity theory was developed by neoclassical economists who had this view, and most thought that the theory was a good reason to think that "laissez-faire" capitalism is the most just social formation.

Now here's what the theory says (the account that follows tracks the summary given by John Rawls in his lectures on the history of political philosophy). Very roughly speaking, the theory claims that the main factors of production (land, labor and capital) contribute a share in producing the total social output. And given that this is the case, the theory is then taken to imply that "it is just that those who contribute their land and capital should share in the output along with labor". In other words, capitalists, landlords and laborers should all get to share in the social output according to their contribution.

There are many problems with this picture. The first is that the three members (capitalists, landlords and laborers) in this "economic trinity" (as Marx put it) appear in the above as "three co-equal partners in the process of production... as co-equal partners each of whom receive their share of the out according to their contribution". In other words, this formula pretends that each of the three factors of production are "on a par", i.e. that they are "uniform and symmetrical".

But Marx's claim here is that if we understand exactly how a capitalist economy actually works, then we'll notice that landowners, capitalists and wage-laborers are clearly not on a par. What does this mean?

Capitalism is a society in which the ownership of the means of production is concentrated in a small fraction of the population's hands. The majority of people in capitalism do not have large amounts of capital or land that they could invest for a profit; the only important productive asset most people have is their ability to labor. Now this means that those who own the means of production are in a strategic position vis-a-vis others in that society, and thus they are in a position "to demand returns in the form of profit, interest, and rent". Since most people aren't strategically placed in this way, they are not in a position of economic power such that they may extract profit, interest and rent from others.

Let me say a bit more about this to drive the point home. Marx is not claiming that capitalists and landowners never derive any income from, say, improvements to their land or labor they expend managing their firms. What fraction of income landlords and capitalist receive as a result of their labor is not, strictly speaking, what angers Marxists. What Marxists see as problematic is that fraction of income that capitalists and landlords receive, just because they are owners of capital or land. Their complaint is about "money making more money" in a society in which most don't have such a luxury and must work for every dollar they earn.

In Capitalism, land (resources) and capital are scarce factors of production (relative to labor, which is more abundant), and this is why those who happen to own land or capital are in a strategic position of power in a competitive market such that they may command an income just for being in their position. As Rawls describes it, since Mother Nature is not around to collect her share of the productive contributions of natural resources... the landlord comes to claim it in her stead.

Notice that the above is not true of people who earn their income from working a job: all of working peoples' wages owe, in the last instance, to work they do. Since they do not have the same economic bargaining power as capitalists or landlords in a market economy, they are not able to draw an income just for being laborers. But notice here that it is just for being the owner of something that capitalists are able to draw the lion's share of their incomes. Thus it is hardly the case that those who own major productive assets are on equal footing, even in an ideally "free" and competitive market, with those who do not.

Another problem with the marginal productivity picture is that it implicitly suggests that the economic structure of capitalism is somehow natural, having "existed since time immemorial". Marx's project was in part to show why this illusion is perpetuated by the methodology of neoclassical economics. That is, by means of an accurate analysis of the way capitalism actually works, Marx wanted to show that what traditional economists take for granted as "natural" is in fact a contingent arrangement that owes to the actions of certain concrete economic agents. This means that we could arrange economic institutions differently, such that it would not be the case that some were strategically placed with respect to the means of production while other were not.

For Marxists, "all members of society have an equal claim to full access to and the use of society's means of production and natural resources." The reason why is that, even in capitalism, all wealth is socially produced by means of a complicated network of social coordination and cooperation. Nothing in contemporary societies is produced by one individual alone. Now, if we didn't live in societies built around social cooperation, then perhaps the issues of justice raised by Marxism wouldn't be relevant. If someone really were to produce something entirely in abstraction and isolation from all social labor, perhaps there would be no just re-distributive claim on that product. But as long as we participate in a massive system of cooperation and coordination to socially produce wealth, we should accord to everyone that is part of that system of cooperation an equal right of access to ownership of the means of production.

We already think this has got to be true of certain public institutions. We don't think, for example, that something like roads or sidewalks (given that everyone has to use them no matter what they do) should be the sorts of things that one person could purchase and own as private property. Why? Because that person would be in a position to exploit their strategic placement by demanding that everyone pay them tribute for something that everyone needs to use.

Now, those on the Right will sometimes respond here that the sidewalk case above is a special case, since it describes a monopoly. If there were more competition, they'll point out, perhaps the prices on sidewalk use might fall and the situation might be optimal.

This reply misses the point. First of all, certain kinds of infrastructure like roads and railroads, are not the sorts of things that competition can reasonably be expected to make more efficient. Railroads are a natural monopoly, given the sort of technological, physical thing that they are.

But the bigger picture here, is that even if there were several capitalists, rather than just one, owning the sidewalks and roads, this wouldn't change the fact that every non-sidewalk owner would still be forced to purchase their sidewalk use from a capitalist. They may be able to choose between two or three different capitalists, true, but they are still forced to transact with a capitalist. (Think here of recent healthcare debates: does it much matter that Aetna and Cigna compete with one another if, at the end of the day, I'm forced to choose between capitalist A and capitalist B? As Adorno put it, "freedom wouldn't be to choose between black and white, but to abjure such prescribed choices".)

Moreover, it will still be the case that some groups, because of their strategic position as owners of means of production, are in a position of power vis-a-vis everyone else such that they can exploit and draw income from the fact that they occupy this position. Thus it remains to be seen why this asymmetrical relation of power, generated by unequal ownership of the means of production, is justified. And it is worth point out that most "libertarians" or neoclassical-types don't have an answer here, because this isn't a question they think critically about. Far more often, they merely assume that the institutional "rules of the game" in capitalism are quasi-natural laws, and for good reason. Because if most ordinary people (who work for a living) were asked if they thought it was just that some people are able to get paid just for, as it were, already being rich... it's hard to imagine them unequivocally saying "yes".

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