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Monday, September 17, 2012

Changing the Distribution of Income

After a considerable detour we have finally arrived at that decisive stage in our investigations where we may take a position on the burning question of a just distribution of income, without being sucked into a torrent of blind passions. Several times in the course of this book we have been at pains to explain the purpose and the character of our economic system. On each such occasion we saw ourselves obliged to admit that the equilibrium mechanism we had described functioned only under a certain condition—and one which can be criticized from many angles—viz., the existing and unequal distribution of income. While the “capitalistic” economic process can be compared to a continuing plebiscite in which each piece of currency represents a ballot and in which the consumers, via their demands, are constantly voting to decide what types and amounts of goods shall be produced, this right of the consumers to vote par-takes of that “majestic equality” to which Anatole France alludes so ironically in the motto to this chapter. The ballots are in truth very unequally distributed. It is right that the mechanism of our economic system should be so constructed that it synchronizes production with the wants of the consumers, and it is an objection which holds no water to say that producers seek to influence these wants by advertising their goods in the same way that political parties make propaganda for their programs and their candidates.10 But since what counts are only those wants which are backed up by money, we have not the right to regard the outcome of the consumers’ plebiscite as a complete and satisfying one. While our voting mechanism ensures, in the long run, that the production of houses will correspond to that demand for houses which arises from the existing distribution of income, it does not of itself prevent the production of houses from lagging behind the need for decent and healthful living accommodations. Outright condemnation of our economic system would seem to be the next logical step, and there are many who take it. The considerations upon which we have dwelt throughout this book make it possible for us to recognize the confusion which lies at the bottom of this popular condemnation, and to find a way to avoid the ruinous consequences of unreasoning anger.
Even the adversaries of our economic system do not, as a rule, deny that the services which it renders in the sphere of production are deserving of considerable respect. A number of them were not even dissuaded by the economic crisis of the thirties from holding that in this regard our economic system is very much superior to a communist one. Only because it is so unjust, they say, should it be done away with. To criticisms of this sort one must resolutely affirm that it is thoroughly possible, and even necessary, to bring about changes in distribution so long as such action does not result in the destruction of the high achievements of our economic system in the realm of production. To accomplish this purpose, three courses of action are available: 1) an “organic” change in the functional distribution of income; 2) a change in the personal distribution of income; 3) the use of extra-economic means to offset a change in the distribution of income.
We have already established that for a change in the functional distribution of income, it is not required to employ force, but rather to effect an “organic” change by acting on the original factors. To describe these factors in detail would require a whole book, the reading of which would not be easy since it would be necessary to treat of the very thorny questions connected with the theories of wages, interest, and rent. What must here be stressed is only the most essential consideration, viz., that both theory and experience point to productivity as being the final determining cause of the average level of wages in a country. All the differences in national living standards—between the United States and Europe, between Sweden and the countries in the Danube basin—can be traced back to this single factor. Everything which increases the productivity of labor, increases wages. Of decisive importance is the fact that the productivity of labor is greater, the larger are the quantities of capital and of land with which the labor factor of production can be combined. This depends, in turn, on the quantitative ratios of the three factors of production to one another, a circumstance whose importance has already been made clear to us (pp. 133 ff.). We can doubly understand now why the level of wages is high in a country where the labor factor of production is scarce in relation to capital and land. Because labor is scarce, a higher price must be paid for it, and because it is combined with a greater quantity of capital and land, its productivity is increased. This much established, it can be easily demonstrated that both points are reducible to the same common denominator. Of especial importance in this connection is the quantitative relationship between the productive factors of labor and capital, a fact corroborated by the classical theory of wages (wages fund theory), if not in its premises, nevertheless in its conclusions. At the same time, the truth is once again borne in upon us that an unrestricted increase of population will almost certainly cause a change in the distribution of income to the detriment of the wage income of the masses. A waste of capital caused by unproductive government expenditures has, in the long run, an identical effect.
Last but not least, we must make mention of the role played by foreign trade. The more completely a country participates in the international division of labor, thereby making the most rational use of its factors of production, the more favorable are the terms of trade which it can obtain on international markets. The less restricted a country is in buying foreign goods where they are cheapest and in selling its own where they are dearest, the higher will be the wage level of that country. This is a factor which plays an especially big role today in the surprising prosperity of certain small countries such as Switzerland and the Scandinavian countries.
We have thus arrived at a strange but suggestive result. It turns out that the functional distribution of income is the more prejudicial to wage income the poorer—i.e., the more unproductive, the more “proletarian,” and capital-poor—a country is. On the other hand, the greater a country’s average wealth, the more equitable will be its distribution of wage and property incomes. There is some truth to Uncle Bräsig’s famous thesis in Fritz Reuters Ut mine Stromtid “that poverty comes from being poor.”* We can see from the foregoing that it is possible to formulate a policy of raising the national level of wages which will have a real chance of success. Such a policy will consist of the following: increasing capital wealth (by means, if need be, of capital imports and a rational organization of credit), allocation of the factors of production to their most productive uses, intelligent participation in the international division of labor, exploitation of technological and organizational progress, restrained increases in population, a reasonable economic policy in all fields, peace, security, confidence and order—such are the bases of national prosperity.
A change in the functional distribution of income in favor of wages will result at the same time in a more equal distribution of personal income since it will give to the masses of wage receivers the increasing possibility of obtaining—via wealth formation—income from the ownership of property of all kinds. The consequence will be a “de-proletarianization” which ought to be close to the hearts of those who need no propertyless masses for the fulfillment of their political ambitions. This process can be assisted by a number of direct measures, above all by an economic policy which sees to it that the equalizing effects of the competitive principle are not frustrated by manipulations which lead to an undeserved enrichment of the few at the expense of the many. An antimonopoly policy is thus always a good income policy, as is also the suppression of abuses born of the competitive struggle. Other measures that would help to reduce excessive concentration of wealth are housing programs, encouragement of independent farming, easing the difficulties encountered in progressing from one social class to another, attention to the credit needs of small industries, and numerous other measures.
As a last resort, there is available the extra-economic correction of the distribution of income. This consists in the state awaiting the results of the economic distribution of income as they are crystallized in the market processes, and then correcting these results by taxing the rich and spending for the poor. As a matter of fact, a considerable portion of the public finances is devoted to such rectification, supplemented by the efforts of private welfare groups. Obviously, there are certain limits here which may not be overstepped if paralyzing effects on the process of production are to be avoided. It is, of course, clear that the state can go much further in employing such corrective measures the smaller are its expenditures for other purposes.

Economics of the Free Society

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