Origin of the Idea

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12.1 Elasticity of Resource Demand

Although not in their modern form, Alfred Marshall articulated the determinants of the elasticity of resource demand found in the text. Marshall's explanation survived and flourished in part because of the work of Arthur C. Pigou (1877-1959) and Sir John R. Hicks (1904-1989), who helped to summarize and clarify the determinants.

Alfred Marshall (1842-1924) was born in Clapham, England, the son of a cashier of the Bank of England. Despite his father's wishes that he study for the ministry at Oxford, Marshall attended Cambridge University, where he studied mathematics, physics and economics. In 1877 he married one of his students, Mary Paley. They collaborated on his first book, The Economics of Industry, published in 1879.⁽¹⁾

The leading economist of his time, Marshall belonged to what economists refer to as the Neoclassical school of economic thought. Much of what appears in your textbook comes from Neoclassical economics, and Marshall's contributions have stood the test of time. Although Marshall used mathematics extensively in his economic models, he emphasized that the math was merely a shorthand language, and not the foundation for economic inquiry and analysis. Marshall established his own set of rules for the use of mathematics in economic theorizing:

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"(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in (4), burn (3). This last I [Marshall] did often."⁽²⁾

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12.2 Marginal Productivity Theory of Distribution

There are numerous theories attempting to explain how income is distributed. The most widely known and accepted of these is marginal productivity theory. The distribution theory and the term marginal productivity itself originated with John Bates Clark (1847-1938). One of the first prominent American economists, Clark was born in Rhode Island, studied at Amherst and in Germany, and taught at Carleton, Smith, Amherst, Johns Hopkins, and Columbia. He was a pioneer in the area of marginal analysis, working at roughly the same time (though independently) as the marginalists of Europe.

In his most important work, The Distribution of Wealth, Clark summarized his analysis and conclusions:

It is the purpose of this work to show that the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates. However wages may be adjusted by bargains freely made between individual men, the rates of pay that result from such transactions tend, it is here claimed, to equal that part of the product of industry which is traceable to the labor itself; and however interest may be adjusted by similarly free bargaining, it naturally tends to equal the fractional product that is separately traceable to capital. At the point in the economic system where titles to property originate,---where labor and capital come into possession of the amounts that the state afterwards treats as their own,---the social procedure is true to the principle on which the right of property rests. So far as it is not obstructed, it assigns to every one what he has specifically produced.(1) Clark based his distribution theory on the Law of Diminishing Returns. He was one of the first to apply the concept of diminishing returns beyond agricultural production, and in fact applied it to all forms of production. Clark stated the law as follows: The last tool adds less to man's efficiency that do earlier tools. If capital be used in increasing quantity by a fixed working force, it is subject to a law of diminishing productivity ... The diminishing productivity of labor, when it is used in connection with a fixed amount of capital, is a universal phenomenon ... The action of the general law … becomes the basis of a theory of distribution.(2)

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Among the general population of the United States, one can often hear the argument that if income is to be distributed fairly, people should be paid based on what they produce or contribute. If we use that standard, and if John Bates Clark's theory is correct, then the distribution of income in the United States is equitable.

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