This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
The Meaning of the Word " Distribution."Having studied under the head of consumption the human wants that lead to economic activity, and the satisfactions that result from consumption ; having studied in the second place the production of goods and services for the satisfaction of human wants ; and having in the third place studied the subject of transfers of goods and services, and especially of their exchange among producers or between producers and consumers, we come now to a study of the distribution of the income of society, especially among the factors that have united in its production. Under the heading Distribution we might, and to some slight extent shall, consider the division of the social income among individuals ; but this part of the entire subject of distribution is so vast and so complex that we cannot in such a book as this attempt a complete treatment of it.
There is one sense in which the word " distribution" is not used here. We shall not use the word in the sense of moving goods from the place where they are produced to the place where they are consumed. When we speak of railways or retail stores as "distributive agencies," we are using the word in a sense wholly different from that of the technical term which describes one of the four main divisions of economic analysis.
Before passing on to study the determination of the great shares of the annual product of industry, it will be well for us to pause for a moment to consider certain general ideas that underlie all the special topics which are to follow.
Social Wealth and Social Income. All the economic goods that society has for use at any time constitute the social wealth. The satisfactions that flow from the social wealth and services during any period of time constitute the social income for that period. Social wealth is, therefore, a fund or reservoir from which issues one of the great streams of social income, the other proceeding from services. The body of social wealth in any two nations may be of the same volume, while the stream of social satisfactions may be of very different volume in the two cases ; for the size of the social income depends not alone upon the size of the social wealth, but also upon the completeness with which that social wealth is utilized and upon the services rendered. Well-being, moreover, is increased by the satisfactions flowing from the use of free goods, and is not dependent merely on income.
Private Income. The social income is of course shared among the members of society. That part of the social income which the individual enjoys is his real private income. The money which an individual receives during any period of time constitutes his money or nominal income. It is important to keep this distinction in mind, since equality of money incomes may coexist with great inequality of real incomes, and vice versa. Thus it is a commonplace to-day that city laborers regularly receive higher money wages than the same classes of laborers in the country. But the differences in cost of living would go far to make the real incomes of the two classes equal. Again, a house occupied by its owner yields a real income to him, though this does not enter into his money income at all.
Private Property. Private incomes depend upon the institution of private property. Every change in the laws of property is bound to change to some extent the production and exchange of goods, and hence the social income, but to a still greater extent and more immediately every such change reacts upon the distribution of the social income among those who share it. The importance of our property laws is therefore evident. These laws have sometimes been so fixed and unchanging that they have wrought injustice to great classes of people ; e.g., the laws making human beings private property.
Primary and Secondary Processes of Distribution.Under modern industrial conditions there are two regular ways in which individuals secure their share of the social income. In the first place, (1) there is a class of men who receive their incomes directly from the use or sale of the product which they make or the making of which they direct. Thus the independent farmer secures his income from the produce of his farm, either by consuming it directly or by exchanging all or part of it for money or other commodities. So, too, the professional man regularly receives his income directly from the sale of his services. The same is true of the independent entrepreneur. His net income is that part of the goods produced which remains after he has paid the necessary expenses of the business. TJiis process of distribution, by which the incomes are derived directly from the use or sale of the goods or services, is called primary distribution; the resulting incomes are called primary incomes.
But the greater number of those who receive regular incomes in advanced industrial nations secure them in a different way. Hired laborers, capitalists who lend their capital to others, and landlords who rent their farms all these classes get their incomes not directly from the consumption or sale of the product of industry, but (2) through contractual relations with receivers of primary incomes. This process is called secondary distribution, and the resulting incomes are secondary incomes.
A Third Process of Distribution.Analysis of distribution might be carried still further to show the presence of a third, or (3) tertiary, form of distribution and incomes. Minors, who constitute about one-half the total population of every country, and whom the parents are legally bound to maintain, and the large classes of delinquent and defective persons in the community, receive their incomes not through the use or sale of goods or services produced by them, nor through contractual relations with receivers of primary incomes, but from those who do receive primary or secondary incomes. If it were not for this distribution, often caritative, as it rests on love and benevolence, the competitive system, which in the main dominates our industrial life, would be unendurable.
The Shares and Share Receivers. As we have said, the distribution on which attention will be centred in the following pages is the distribution of the product of industry among the great factors that have united to create it. The factors considered in the study of production were land, labor, and capital; and in that order we shall consider the distribution of the product among them. The shares of these three factors are known as rent, wages, and interest. But the entrepreneur he who secures and directs the organization of the factors is also an important share receiver in modern industry, and hence we shall study the principles governing his share of the product, called profits. Some writers, in view of the great part played in all production by the State, treat separately the share received by the State. All that for our purposes needs to be said regarding the State's share in the product of industry will be presented in the final chapters of the book, under the head of Public Finance.
Relation of Individuals to the Four Shares. And now just a word as to the relation which share distribution bears to distribution among individuals. Individuals regularly receive their incomes by virtue of their proprietary relation to one or more of the factors of production. Thus, when we are discussing the share of the annual produce that goes to land, we are at the same time explaining the principles which determine the size of the rent income of the farmer himself. Similarly, an inquiry into the shares received by capital, labor, and entrepre-neurship brings us more or less closely to the question of the income of the individual capitalist, laborer, or entrepreneur. But it is the share of the factor as a factor that we shall study primarily, noting only incidentally the results of the distribution upon the income of individuals. The importance of this distinction appears when we reflect that a justification of the share of industry that goes to land or capital is not a justification of the landlord's or the capitalist's income, unless the possession of the land or capital is also justified.
1.Distribution is that part of economics which deals with the division of the social income among individuals and classes, and among the different factors of production.
2.Our modern system of distribution depends directly upon our institution of private property. It is therefore along the lines of changes in private property that improvement of distribution is, in part, likely to come.
3.Primary incomes are derived directly from the product; secondary
incomes are the result of contract relations with those who control the product; tertiary incomes are incomes derived from receivers of primary and secondary incomes.
4.Private income is the individual's share of the social income. Real
income consists of commodities and services which the individual has for his consumption. Money income is the money received by an individual during any period of time.
1.What is distribution? What problems does it seek to solve?
2.What is the relation of private property to distribution ? How is this illustrated in the case of land ? In the case of capital ?
3.If a physician's practice is worth $10,000 a year, what is his money income? Mention some of the things that probably go to make up his real income.
4.What other persons are likely to enjoy a part of this income?
What sort of an income is that which falls to his children ? Is the physician's income primary or secondary ? Mention different classes of incomes that you are familiar with, and show whether they are primary, secondary, or tertiary.
5.What is the primary process of distribution? The secondary? The tertiary? Mention examples of the last. What is private income ? How does it differ from social income?
Mill, J. S.: Political Economy, Bk. II, Ch. II, §§ 1, 2, and 3.