Marginal productivity theory of distribution
Marginal productivity theory of distribution is an microeconomic concept, which explains how work and capital are rewarded for their productivity. This theory is based on the existence of a perfectly competitive economy in which wages and interest rates are at a constant, uniform level[1]. It assumes the use of production factors (labor, land, capital) in unitary terms until the costs of these factors equal to the unit value of the marginal product. In other words, it sets the limit of profitability of production, in which the value of the marginal product is equal to the cost of production of this product[2].
The marginal productivity theory of distribution is directly related to Clark's law of final productivity[3].
Criticism of the marginal productivity theory of distribution
The marginal productivity theory of distribution currently faces criticism from authors who pay attention to the following issues[4]:
- This theory does not explain in what part a given factor is assigned to a marginal product. For example "even if the marginal product that occurs after the employment of the last unit of labour is equal to almost nothing, that 'almost nothing' is not produced by the last unit of labour alone. If the last unit of labour receives a wage equal to the marginal product that occurs after the employment of the last unit of labour, the last unit of labour is receiving a reward for something it has not produced".
- This theory indicates the need to divide capital between different production factors. However, there is no rule in the economic and accounting theory to divide this capital, which would be reasonable enough.
- This theory assumes that changes within the production factors occur singly. This means that it considers cases where only one factor of production changes at the same time (ceteris paribus clause).
- The theory of marginal productivity is now considered by many critics as devoid of normative grounds. Is called "ethical theory of distribution" because it bears traces of ideological and ethical assertions.
Footnotes
| Marginal productivity theory of distribution — recommended articles |
| David Ricardo — Marginal revenue productivity theory of wages — Marginal private benefit — Point elasticity — Baumol model — Rybczynski theorem — Economic income — Permanent employment — Austrian theory of money |
References
- Asimakopulos A., (2012), Theories of Income Distribution, Kluwer Academic Publishers, Boston & Dordecht & Lancaster,
- Felipe J. & McCombie J. S. L., (2015), Can the Marginal Productivity Theory of Distribution be Tested?, "Review of Radical Political Economics", vol. 47, p. 274-291,
- Krugman P. & Wells R., (2017), Economics (International Edition), Palgrave Macmillan, New York,
- Pullen J., (2010), The Marginal Productivity Theory of Distribution: A Critical History, Routledge, London & New York,
- Rima I. H., (2012), Development of Economic Analysis, Routledge, London & New York,
Author: Wojciech Musiał
