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The principal problem in political economy: income distribution in the history of economic thought

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  • Sandmo, Agnar

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    (Dept. of Economics, Norwegian School of Economics and Business Administration)

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    Abstract

    The paper considers the history of theories of income distribution, from the time of Adam Smith until the 1970s. It is divided into two main parts. Part I considers the positive theory of income distribution, beginning with the classical economists’ analysis of the functional distribution of income between wages, profits and rent. It goes on to present the new theories that emerged with the marginalist revolution and which were based on maximizing behaviour and market equilibrium. The main focus during the early stages of the new developments was on the markets for consumer goods and the role of marginal utility in price determination. The later neoclassical economists, including Alfred Marshall and Knut Wicksell, paid more attention to the special features that characterized the labour market and the role of marginal productivity in wage formation. In the 20th century the neoclassical theory was extended to include analysis of the role of imperfect competition, human capital and risk-taking. Also included in this part of the paper is a discussion of statistical and institutional approaches. Part II covers normative theories of income distribution and their implications for redistributive policy. It begins with a consideration of the value judgements implicit in the policy recommendations of the classical economists and continues with the attempts to establish an analytical foundation for welfare economics. The rise of Paretian welfare theory with its emphasis on the impossibility of interpersonal comparisons of utility made it difficult to draw conclusions regarding income redistribution, but the older utilitarian approach, including equal sacrifice theories, continued to live on in the modern analysis of optimal redistribution. A short Part III contains some concluding reflections on the position of income distribution theory within economics as a whole.

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    Bibliographic Info

    Paper provided by Department of Economics, Norwegian School of Economics in its series Discussion Paper Series in Economics with number 15/2013.

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    Length: 98 pages
    Date of creation: 27 Sep 2013
    Date of revision:
    Handle: RePEc:hhs:nhheco:2013_015

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    Web page: http://www.nhh.no/sam/
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    Keywords: Functional and personal income distribution; distributive justice; redistribution policy.;

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    1. Kanbur, S.M, 1978. "Risk Taking and Taxation : An Alternative Perspective," The Warwick Economics Research Paper Series (TWERPS) 136, University of Warwick, Department of Economics.
    2. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
    3. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
    4. Sahota, Gian Singh, 1978. "Theories of Personal Income Distribution: A Survey," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 1-55, March.
    5. Chipman, John S., 1974. "The welfare ranking of Pareto distributions," Journal of Economic Theory, Elsevier, vol. 9(3), pages 275-282, November.
    6. Joseph E. Stiglitz, 1967. "Distribution of Income and Wealth Among Individuals," Cowles Foundation Discussion Papers 238, Cowles Foundation for Research in Economics, Yale University.
    7. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277.
    8. Atkinson, Anthony B, 2001. "The Strange Disappearance of Welfare Economics," Kyklos, Wiley Blackwell, vol. 54(2-3), pages 193-206.
    9. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
    10. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    11. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
    12. Cooter, Robert & Rappoport, Peter, 1984. "Were the Ordinalists Wrong about Welfare Economics?," Journal of Economic Literature, American Economic Association, vol. 22(2), pages 507-30, June.
    13. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
    14. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
    15. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    16. Agnar Sandmo, 1999. "Asymmetric Information and Public Economics: The Mirrlees-Vickrey Nobel Prize," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 165-180, Winter.
    17. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
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