How the Distribution of Production Explains the Distribution of Income

The word "distribution" means two things to economists, one active, the other passive.

The active use describes human action: how people are using plans, processes, methods, strategies, and organizations to better their living conditions. Goods and services follow channels of distribution. All along inumerable production networks, rights, materials and ideas are distributed (i.e. both traded and stolen) from person to person, organization to organization, following a path not of least resistance, but of greatest profit. People are distributed among and within organizations, held there by interest and ownership, voluntary consent and weaker alternatives.

The passive use is as a tool of description: a method of counting and grouping people based on some trait, for instance, income. This type of distribution is summarized by a small set of statistics, describing either the exact shape of the distribution, or its important characteristics.

Perhaps surprisingly, the passive definition is considered more sexy and exciting than the active one; newspapers are always writing about it, and debates over it are furious and heated.

But it is the active definition that is the core of an economic system. The active use is what Adam Smith analyzed at work in the pin factory, even if he didn't use the words. And the passive use is what he analyzed to see if economic outcomes fit his moral system.

And as far as the "distribution of income" goes, I think that is an entirely misleading collection of statistics.

The truth is that production is distributed over vast networks -- not income.

Income is usually contracted for between two parties: an agreement to pay for a specific set of services. The transfer of income is one step in the distribution of cash flows -- but it is not the end product of all cash flows. Income is just one node in the cash flow network; it is the mirror image of a retail store receiving goods for sale.

The study of the active distribution of income is fine in itself, but not terribly interesting. And the study of the distribution of income in the aggregate is generally a passive affair. Take a snapshot of incomes and one time, and then another, and compare and contrast. Histograms do not show the flow or pattern of incomes, do not show the causes of variance, and must be taken with great care before being entwined in discussions of morality.

But it is the study of the distribution of production that is really exciting. Production is dynamic; even a snapshot of production reveals its underlying activity, complexity, and most of all, dynamism.

The snapshot of a passive distribution of income tells you no such story by itself. In other words, you must impose the story on the data -- personal, subjective stories related only anecdotally to the data presented.

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This page contains a single entry by Kevin published on June 2, 2005 11:20 AM.

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