Marginalism and the Distribution of Income

John Bates Clark

(1847-1938)

 

 

 

 

John Bates Clark was the leading American economic theorist at the beginning of the twentieth century. His position in American economics was similar to that of Alfred Marshall in British economics. In some ways, Clark’s achievements are even more remarkable because he was an important innovator in economic theory even though he lacked the vigorous intellectual stimulation Marshall received at Cambridge.

Clark's complete writings were intended to restructure classical theories of value and distribution, but his most enduring contribution is found in the marginal productivity theory of income distribution set forth in The Distribution of Wealth (1899). Clark sought to prove that every unit of labor and capital is paid precisely the value it adds to total product – its marginal productivity. His model hinges on resource mobility, competition, and the law of diminishing returns.

Labor and capital are each interchangeable, according to Clark, so each worker or piece of capital is, in a sense, the last one. Clark reasoned that, although tasks within a firm differ in importance, if a worker engaged in an important task were removed, the remaining work would be reassigned so that all essential tasks would be done, leaving the least important tasks undone. This means that no single unit of labor is more important than any other.

Firms operate in a region of their production functions where diminishing marginal returns cause each worker added to a work force to raise total output by a smaller amount than did the previous worker. The employer will hire more workers as long as the last one hired contributes at least as much to total revenue as the cost of employing that worker. Because every worker is the marginal worker, and because the last worker hired adds to the employer's gross income an amount equaling the wage rate in a competitive labor market, all workers are paid the values of their marginal products.

Properly understood, Clark's marginal productivity theory is a rebuttal to Marx's charge that competitive capitalism systematically robs labor because workers contribute more to total product than the wages they receive. Clark maintained, on the contrary, that the payment to capital is also determined by its marginal productivity and that there is no “surplus value” expropriated from labor as alleged by Marx. Whatever amount of labor is employed, capital so shapes itself that each unit of equivalent labor is working with the same amount of capital. Thus, the product of every unit of capital is also equivalent to every other; when every unit is paid the value of its contribution to total product, there is no surplus to be expropriated. In short, each factor receives a payment determined by the product of its own final increment, and the reward to capital, no less than the reward to labor, is a necessary payment for its productivity.

Early economists were even more prone to take positions on normative issues than are economists today, many of whom pride themselves on their scientific objectivity (if such a thing is possible). Clark tried to use his positive findings to “prove” that payments of income according to contribution (marginal productivity) are inherently equitable. The fact that this idea is as controversial today as it was when Clark first pronounced and published his “proof” is testimony that normative issues cannot be resolved scientifically.

Author: Ralph Byrns

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