Marginal productivity theory — a dangerous thought virus

19 Aug, 2019 at 16:33 | Posted in Economics | 6 Comments

The marginal productivity theory of income distribution was born a little over a century ago. Its principle creator, John Bates Clark, was explicit that his theory was about ideology and not science. Clark wanted show that in capitalist societies, everyone got what they produced, and hence all was fair:

“It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates. (John Bates Clark in The Distribution of Wealth)”

Clark was also explicit about why his theory was needed. The stability of the capitalist order was at stake! Here’s Clark again:

“The welfare of the laboring classes depends on whether they get much or little; but their attitude toward other classes—and, therefore, the stability of the social state—depends chiefly on the question, whether the amount that they get, be it large or small, is what they produce. If they create a small amount of wealth and get the whole of it, they may not seek to revolutionize society; but if it were to appear that they produce an ample amount and get only a part of it, many of them would become revolutionists, and all would have the right to do so. (John Bates Clark in The Distribution of Wealth)”

So the neoclassical theory of income distribution was born as an ideological response to Marxism. According to Marx, capitalists extract a surplus from workers, and so workers get less than what they deserve. Clark’s marginal productivity theory aimed to show that this was not true. Both capitalists and workers, Clark claimed, got what they deserved.

The message of Clark’s theory is simple: workers need to stay in their place. They already earn what they produce, so they have no right to demand more.

Blair Fix

Although card-carrying neoclassical apologetics like Greg Mankiw wants to recall John Bates Clark’s (1899) argument that marginal productivity results in an ethically just distribution, that is not something – even if it was true – we could confirm empirically, since it is impossible to separate out what is the marginal contribution of any factor of production. The hypothetical ceteris paribus addition of only one factor in a production process is often heard of in textbooks, but never seen in reality.

Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models – not to mention how extremely difficult, if not outright impossible it is to empirically disentangle and measure different individuals’ contributions in the typical teamwork production that characterize modern societies.

History has over and over again disconfirmed the close connection between productivity and remuneration postulated in mainstream income distribution theory. The theory is obviously a collapsed theory — and when a theory is impossible to reconcile with facts there is only one thing to do — scrap it!