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Friday, September 14, 2012

RICH AND POOR - The Distribution of Income

As he analyzes the mechanism of our economic system, the economist finds himself lapsing easily into the language of GHQ communiqués—those cold, impersonal descriptions of military operations which leave it to the reader to picture the sum of human resolves, deeds, and sufferings that lie behind the bare words. We speak facilely, for example, of the purchasing power of money, although we know quite well that money does not enter the market by itself but that it gets there because individual human beings, at once deliberate, weak, and passionate, have spent it. Similarly, we have spoken of the demand for a good almost as if it were a physical quantum, in the certain expectation that the reader would remain at every instance aware of the abbreviated form of expression which we here employed. As a matter of fact, the demand for a good is made up of the demands of all individuals who, with reference to a specific price, decide to employ a specific part of their income for the said good. These individual portions of demand, moreover, vary greatly in amount, not only because of differences in taste but also because of the inequality of incomes.
Herewith our discussion turns upon that phase of economic inquiry which, in every age, has most deeply interested the majority of mankind. The contrast between rich and poor, between the hovel and the palace, between the haves and the have-nots—this is the great question which for thousands of years has agitated the minds and hearts of men. And, inevitably, the ages in which the contrast was most acute brought forth the champions of justice and equality: the prophets of the Old Testament, the Gracchi of Rome, the founders of the great religions, the peasant leaders and the religious dissenters of the Middle Ages and of the Reformation, the socialists, Communists, and anarchists, the agrarian and social reformers from Solon to the present. In the civilized countries of our own day this problem has lost nothing of its actuality, although it is precisely in the most advanced countries that we find a tendency for it to become less rather than more acute. The distribution of income is everywhere unequal in the sense that as contrasted with the large number of small incomes, we find only a small number of large incomes. While to this law there appears to have been never and nowhere an exception—least of all in Soviet Russia—inequality in some countries has lessened due to the existence of an extensive middle class. Contrariwise, in other countries—and those certainly not the highly developed “capitalistic” countries—we find the bitterest poverty standing directly alongside the most ostentatious wealth. But what arouses doubt about the justice of the existing social order are not only the differences in the size of incomes, but also the differences in the origin and nature of these incomes. While one income accrues from the visible application of effort and hence is intimately connected with the health and well-being of the income receiver, another is made up of interest, dividends, rents, profits and indemnities which reflect no visible work (and frequently no invisible work either) and are independent of the health of the receiver. And lastly, the larger income confers not only a greater power over the use of things but also a greater power over men; it confers on its recipients prestige, influence, and both educational and cultural advantages.
Before entering upon a scientific study of the distribution of income, it remains for us to note the following possible types of income formation: 1. The extra-economic formation of income, so designated because income accrues to the recipient irrespective of whether he performs a corresponding service in exchange, i.e., it has no connection with the process of production, be it obtained through violence or fraud, or through governmental charities (welfare and relief payments, gifts, and that “distribution according to need” which doctrinaire Communists would establish for the whole of society). 2. The economic distribution of income, which arises from the participation of each individual in the economic process, i.e., from the sale of goods and services of all kinds. In this fashion is formed that type of income referred to previously (p. 120) as original income. Although the extra-economic formation of income is frequently encountered in our economic system, it is the economic formation of income which predominates and upon which the attention of economists is concentrated.

Economics of the Free Society

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