The distribution of income was a big topic in the economics literature of the 1970s. The most-used theoretical basis of welfare economics is ASWF, the “additive social welfare function”based on knowing the utility of each person (how much well-being one has) and adding up all the utilities to obtain the total social utility. Most of the distribution models assume, as condition for the conclusions, that utility is obtained from goods and also from the satisfaction from knowing that there is a more equal distribution of income after redistribution.
These theorems also recognize PACL: the positive association between consumption and labor. Redistribution shifts some hours from labor to leisure, when the person would have preferred more goods to more leisure. Therefore, a completely equal distribution of income cannot be optimal, since it reduces labor. However, by these models, some redistribution is optimal up to the amount for which the gain in utility from there being greater equality offsets the loss of utility from a tax taking away some wage income. But none of these journal articles with all their mathematical lemmas and corollaries even considered income from land rent.
In contrast, the “difference principle” proposed by John Rawls in A Theory of Justice (1971, p. 3) rejected the ASWF concept of social welfare based merely on adding up individual utilities. He wrote, “each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override. For this reason justice denies that the loss of freedom for some is made right by a greater good shared by others. It does not allow that the sacrifices imposed on a few are outweighed by the larger sum of advantages enjoyed by many.”
Rawls proposed a redistribution based on increasing the utility of the persons who suffer the lowest utility. Feed the person who is desperately hungry, rather than give money to someone just because his income is lower than average. This is called the “min-max” or the “minimax” or “max-min” criterion. We minimize the maximum loss.
There are also articles on the growth-maximizing distribution of income, such as by Robson and Wooders in the August 1997 issue of the “International Economic Review.” The basic premise of neoclassical income economics is marginal productivity, where the contribution to total output from one more unit of input (such as an hour of labor) equals the income of that input. Robson and Wooders add that it is optimal to maximize economic growth, because otherwise a society will be overtaken by societies which have had greater growth, just as the faster-growing Europe of the 1800s conquered places in which there was less growth, as the strong conquer the weak.
Based purely on labor effort, a growth path that does not distribute income in accordance with marginal productivity is non-optimal. However, if one takes into account that greater education induces greater upwards mobility and greater output and growth, the models say that some redistribution is justified in order to promote optimal education. The problem with such models is that, once again, they ignore the existence of land and its income, rent, which could pay for education.
Some of these models include the production of capital goods, so that labor can either produce consumer goods or else the capital goods that generate greater growth. A redistribution of capital yields reduces investment in capital goods and reduces growth. But some redistribution can pay for productive capital goods provided by government, the infrastructure of highways and security, which, up to some level, can be more productive than private investment such as for buildings and machines.
When land is included in economic theory, the fancy models that just apply labor and capital goods become irrelevant for optimal policy. Minimax can be satisfied by distributing enough rent to the poor so that their total income from wages and rent are above subsistence. Given that the amount of land rent is substantial, about a third of national income (according to Australian studies), the efficient initial distribution of income is zero taxes on labor and capital, and the complete community collection of economic land rent, the surplus beyond the financial rental needed to provide a positive land value and to compensate the real estate managers and entrepreneurs for their labor.
Given the moral premise of human moral equality, and its application as an equal share of the surplus from nature, community, and civic goods, then the equalization of income from land is a proper initial distribution, as is the full keeping of wages and capital yields. Redistribution is then suboptimal.
Economists today ignore land because it is excluded from most textbooks and economics classes, and when it is taken into account, it is usually wrongly analyzed.
Economists today ignore land because it is excluded from most textbooks and economics classes, and when it is taken into account, it is usually wrongly analyzed, such as mixing in returns to capital goods and entrepreneurship into land rent with a physical rather than an economic definition of land. Economists, even when they acknowledge the efficiency of land value taxes, believe that land rent is but a tiny portion of national income, because it says so in the national income statistics, even though this data excludes land held by corporations and excludes rent that is masked by taxes, the excessive depreciation of buildings, profits, and capital gains.
Also, perhaps most importantly, including land would add a third variable to mathematical functions that use just labor and land, hence Q = f(K,L). The mathematics of models are already complex with only one or two variables; adding a third would make the models’ lemmas and corollaries that much more difficult. That can be solved with a classical two-factor model that uses land and labor, but Karl Marx told everybody that Das Kapital is the key to economics, and almost all economists since then, even the free-marketeers, have been, in that sense, Marxist.
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FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.
Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.
Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.