Income Distribution : Definition and Basis of Theories
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Income Distribution : Definition and Basis of Theories

Income distribution is the allocation of income among the owners of the factors of production. Theories of income distribution are based on 4 elements : Marginal productivity, Needs, Social Usefulness, Equality.

Income distribution is the allocation of income among the owners of the factors of production. There are various ideas or theories of income distribution. The early social philosophers crusaded not only for economic equality but also for social and political equality.

For instance, the French philosopher Rousseau contended that private property was robbery and it did not exist in the state of nature. Another social performer, Babeuf stated that nature has given to every man an equal right in the enjoyment of all goods. Likewise, Proudhon, a believer in equality and bitter enemy of private property, claimed that employers robbed laborers by not rendering to them the full value of their labor. In the case of Karl Marx, he said that the capitalist is a recipient, of surplus value or profit. He claimed further that the capitalist, in the process of accumulating wealth for himself, therefore robs and exploits the worker.

The maldistribution of income and wealth among the less-developed countries has been more widespread. The gap between the rich and the poor is getting wider and wider. Only very few are rich while most of the people exist under the poverty line.

Basis of the Theories of Income Distribution

In view of the extreme poverty in the less developed regions of the world which has emanated from unjust distribution of wealth and income not a few countries have charged or changed or modified their economic systems in the hope of improving the social and economic conditions of their peoples. They have introduced radical economic, social and political reforms to uplift the masses from their miserable conditions. This means there is a redistribution of wealth and income based on social and economic justice.

Several theories of income distribution are based on the following:

1. Marginal productivity – holds that the income of the factor of production is equal to the value of its marginal product. This is simply means that the owners of the factors of production are paid based on their contribution to production under a competitive market condition. However, there are government laws to comply with, and that the market is not perfectly competitive. Another, capitalists have another idea of income distribution.

2. Needs – determine the amount of income of families or individuals. Those who have more needs receive more incomes in proportion to their needs. Some countries, especially the highly developed ones, have been using this theory of income distribution. They provide allowances to the children of their employees.

3. Social Usefulness – is the basis of income distribution. Jobs which are more useful to society are paid higher. Jobs under this category are teachers, farmers, fishermen, doctors, and nurses. Such theory encounters difficulties in implementation. Singers, actors, comedians, athletes and other groups are most likely to oppose such social usefulness theory of income distribution.

4. Equality – refers to an income distribution in which all members of society receive an equal amount of income. This is the idea of communism in an attempt to erase the gap between the rich and the poor. Such theory is good to other but not to all. Those who are lazy and those who have little qualifications are happy under this arrangement. However, those who are highly qualified and ambitious are discouraged or demoralized. Consequently, both economy and society will not progress for lack of economic incentives to deserving individuals.

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The Income Gap Widens

In the United States the income gap is widening to the worst ever in history. While in developing countries, the income gaps have lessened to some degree. In the developing countries, this is due to globalization and the fact so many manufacturing and even service type jobs have moved from the United States to countries that have far cheaper labor costs.

The social usefulness at one time might have been valid in the United States, but today in 2018 as I write this update, teachers all across the United States are protesting low pay and the worry that their pension plans will not even be there when they retire.

The monetary needs of individuals and families have increased dramatically as wages have not kept up, not even close to it. For Americans, the cost of housing, health insurance, medical costs, car insurances and other necessities have increased as much as 50% to 100% in many areas, while wages have been stagnant for years and only recently started to inch upwards again. According to Bloomberg.com, median real wages only went up 0.2% in 2017.

Even with full or near full employment, wages are still not going up as one would expect in a tight labor market. A double edge sword is the fact that for most good paying jobs, a college degree is needed. But with a college degree, comes a large student loan hanging over most college graduates.

There was a time in the United States that one working parent could easily buy a home, a car or two and pay all of the bills. Today, both parents usually have to work to make ends meet.

In many parts of the country, it is getting harder to buy a home, since home prices have increased so fast. And with a student loan, recent graduates are barely able to move out of their parent’s home, let alone buy a house of their own.

Owning a home used to be the American dream with 90% of Americans expecting to own their own home some day. Today that expectation has dropped of making more money than their parents did has fallen to 50%.

In 2018, the so-called top 1%, the wealthy, are earning on average $1.3 million per year, while in the 1980s, the rich were making an average of $428,000 per year, a 300% increase.

In the 1980s, the bottom 50% of the wage earners were making an average of $16,000 per year in pre-tax income, today that figure has not changed.

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Comments (1)

Very well-explained!

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