Marshall’s Economic Ideas on Theory of Distribution
To Marshall, the theory of distribution is essentially a theory of factor pricing like all other commodities, the pricing of productive services has two aspects: demand and supply. ‘The normal value of everything, be a particular kind of labour or capital or anything else, rests, like the keys to of an arch, balanced in equilibrium between the contending pressures of its two opposing sides; the forces of demand press on the one side, and those of supply on the other. The demand for a factor of production is a derived demand and depends upon its marginal productivity. It is regulated by two forces: the demand for the product it produces, and the means at the command of the producer who employs it. A producer, who aims at the most profitable application of his resources, will go on making marginal shifts in the employment of factum of production in accordance with the principle of substitution and will employ each factor up to that margin or limit at which ‘its cost is proportionate to the additional net product resulting from its use.
Marshall’s theory of distribution was marginal productivity theory of distribution. This is clear from the following statement: In each case tin- income lends to equal the value of the marginal net product. Marshall also accepted Wicksteed’s argument about the exhaustion of product. But Marshall’s acceptance of the marginal productivity was not unconditional. To overcome Hobson’s objection that a single factor cannot be varied without affecting the amounts employed of other factors, Marshall used the term marginal net product He was also aware of the difficulty of measuring marginal productivity arising out of the failure of the law of substitution.
Marshall also admits that the marginal productivity theory is not a complete theory of factor pricing; it throws light on the one aspect of the problem. The other side that requires investigation is the supply side. The effective supply of a factor of production at any time, according to Marshall, depend – firstly on the stock of it in existence, and secondly on the willingness of those, in whose charge it is, to apply it in production. The equilibrium price of a factor of production is determined by the interaction of demand and supply forces.
Views on Rent:
Marshall’s theory of distribution provides a good example of his law of continuity. Continuity is an essential feature of economic life. No doubt, the difference between wages, interest, profit and rent is fundamental, but it is not absolute. First of all, ‘wages and other earnings of effort have much in common with interest on capital’. The causes that determine the supply price of material and personal capital are generally the same. For example, the motives which induce a man to accumulate personal capital for his son’s education and training arc identical to those which determine his accumulation of material capital for his son. Similarly, rent of land is ‘not a thing by itself, but the leading species of a larger genus’. The income from land which is generally called rent is not true rent but contains elements of interest and wages. Almost all lands require initial efforts and improvements before it is ready for cultivation. Again, true rent does not arise on land alone; returns of other factors too contain an element of rent. Like land, durable capital goods are also fixed in supply which is the cause of rent. The rent which durable capital goods earn is termed by Marshall as quasi-rent; it will vanish in the long- run when no investment remains fixed.
The Concept of Quasi-Rent:
The concept of quasi-rent explains the return from fixed investment on durable capital goods. Marshall defined quasi rent as ‘the Income derived from machines and other appliances for production made by man. Land and other free gifts of nature are permanently fixed in supply. Therefore, their earnings are called rent. But there are manmade appliances whose supply is fixed only temporarily. The income derived from such appliances is also of the nature of rent. But because such earning will not remain forever and will disappear when in the long-run the supply of these appliances is fully adjusted by its demand. Marshall called it quasi-rent. Thus, through quasi-rent, Marshall was able to extend the classical theory of rent to the incomes of fixed investments.
Like rent, quasi-rent is price determined and not price determining. In the short-run, price is determined by the variable costs and the income of the fixed factors is a surplus over and above the necessary cost of production. On the contrary, it is the price of the product as influenced by the market demand that determines income of the fixed factors. But, there is a difference between the rent of land and quasi-rent of fixed investment. Quasi-rents are price determined for both the entrepreneur and society, while the rent on land is price determined only for the economy as a whole.
Views on of Wages:
Wages are the reward for labour. Labour is defined ‘as any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work. The determination of wages has been explained by the law of demand and supply. ‘Wages tend to equal the net product of labour; its marginal productivity rules the demand-price for it; and, on the other side, wages tend to retain a close though indirect and intricate relation with the cost of rearing, training and sustaining the energy of efficient labor. Marshall here attempted to combine the marginal productivity theory of relative wages with the Malthusian subsistence theory of the level of average aggregate wages.
The demand for labour arises because labour is productive and all labour is productive that produces utilities. The forces governing the supply of labour vary in different market periods. The short-run theory of labour supply has been developed on the lines of Jevons’s analysis. That is, the supply of labour is determined at the level where the marginal disutility of labour equals the marginal utility of labour. The chief force governing the long-run supply of labour is the cost of producing labour. Wages must be high enough to maintain the physical and mental powers of the laborer, or, in other words, they must cover the worker’s expenditures for bare necessaries, for conventional necessaries and for habitual comfort. Both the short-run and long-run supply curves are, in general, positively sloped. Marshall also mentioned various peculiarities of labour as a factor of production. The worker sells his work, but he himself remains his own property. When a person sells his services, he has to present himself where they are delivered, Labor is perishable. The sellers of labour are often at a disadvantage in bargaining. Great length of time is required for providing additional supplies «>1 skilled labour.
Views on Interest:
Marshall defined capital as anything other than land that yields income through time and interest, the return on capital, as the reward for waiting. The rate of interest is determined, on the supply side, by prospective or time preference and, on the demand side, on the productiveness. The demand lot capital arises generally from its productiveness, from the services it renders it is subject to diminishing returns. The supply of capital, on the other hand, depends upon the fact that in order to accumulate capital, we must save, wall and sacrifice the present to the future. In the short-run, given the stock of capital, the rate of interest is mainly governed by the marginal productivity theory, but in the long-run, the cost of producing capital determines its return. Marshall, however, ignored some other problems closely related to the theory of interest, such as, the cumulative nature of interest and the effects of saving on invention.
Views on Profits:
Marshall gave to organization the status of fourth factor of production and made profits the reward for organization or the earnings of management Organization involves risk-bearing, business connection, and exceptional abilities of the entrepreneurs. In the long-run, the profits are determined by the cost of production of the entrepreneurial ability.