Don’t you find words interesting sometimes? I occasionally talk popular economics to random people online and I’m always amused at the funny way they think about certain words related to economic theory, one of my favorites being “distribution,” as in distributional indifference or neutrality, ethical issues relating to distributions, mechanisms for distributing economic power, and so on. One fellow told me my fundamental problem was that I started out from an incorrect premise. In his opinion, no one should be distributing anything, we just need to let markets do their thing and leave well enough alone. When I explained labor and capital markets are distributive mechanisms and just the sort of thing I was talking about, he apparently concluded I was mentally deranged and left the building. But seriously, we all know what we’re talking about, right? An economic system inevitably distributes economic power in some way, and when people express that economic power in markets goods and services end up being distributed in some way. If you don’t have that, you don’t really have an economic system. Even anarchy ends up being a distributive system of sorts, with the final distribution of goods and services depending on the prior distribution of economic power in the form of rocks, swords, axes, guns, or whatever the weapon of choice happens to be at the moment.
Another amusing aspect of the use of the word “distribution” in economic contexts is the relationship to another word one commonly hears in economic contexts, “allocation.” Linguistically the terms seem quite similar, don’t they? They’re listed as synonyms on some word sites. But in economics my experience is they’re used slightly differently. One of the words, “distribution,” is usually used in reference to economic power or the goods and services one can command using that economic power. “Allocation,” on the other hand, is usually used in reference to productive resources or inputs such as labor and capital. Market incentives, in the form of wages and returns to capital, function to allocate productive resources, and the results of that allocation of productive resources, in the form of goods and services, are then distributed via the market to those with previously distributed economic power. So, in addition to the actual productive resources involved, does the market “allocate” economic power in the form of wages and returns to capital? Or does it “distribute” economic power in the form of wages and returns to capital? When economists claim to be indifferent to distributional issues are they talking about wages and returns to capital? They’re indifferent to changing the wages and returns to capital that allocate those productive resources on the market? They’re indifferent to the redistribution of economic power?
That was what they call a rhetorical question. The answer is yes, of course. That’s what distributional indifference means. It doesn’t matter if you call wages and returns to capital part of a system of distribution or allocation. The mechanism for assigning economic power to different people is what we’re talking about. There are ethical issues involved in doing that. Should it be based on hard work, innate talent, rights, contribution to the economy, what mommy and daddy did, needs, etc.? I don’t know the answer. The issues can be controversial. I have opinions, but other people probably have different opinions about how that ought to work. That’s why neoclassical economic theory is officially neutral or indifferent about such matters. It’s meant to avoid the controversial ethical issues associated with distributional issues. It doesn’t matter if you also call wages and returns to capital incentives governing the allocation of productive resources. There’s nothing ethically special about wages or returns to capital in neoclassical economic theory. An optimal allocation can only be defined with respect to a particular distribution of economic power and a given pattern of demand flowing from that distribution of economic power.
However, when people aren’t paying attention they can easily get confused on that point. They can come to believe economic theory says one cannot or should not change the distribution of economic power generated by wages and returns to capital because it leads to a non-optimal allocation of productive resources or equivalently that it renders the economic system less “efficient.” One ends up with the curious spectacle of the market itself, the economy, appearing to tell us what is ethical, rather than us discussing among ourselves what we think is ethical. This is the sort of thing that leads many confused popular economists to believe they’re not doing ethics at all when they try to establish that certain economic results are socially optimal and so on. They’re just passing on what the market or the economy says.
Are academic economists trying to clear up this sort of confusion? Or are they actively trying to generate it? Is there some reason they use the words “distribute” and “allocate” in different contexts? Why are so many people so confused about what seems a rather simple issue to set straight? Why, after the decades of time neoclassical welfare economics has been around, is this still an issue? Well, I don’t know. But this is the sort of thing that makes me wonder sometimes about the intellectual integrity and seriousness of academic economists. Nothing anyone can do anything about right now, apparently. But let’s all at least just do what we can to explain it to one another, shall we?
