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• Literature of Liberty a Review of Contemporary Liberal Thought
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• Bibliographical Essay: William Marina, Revolution and Social Change: the American Revolution As a People's War
• I: Autonomy
• Paternalism
• Autonomy Vs. Cooperation
• Selfish Benevolence
• Self-esteem and Helpfulness
• Self-responsibility
• Democracy and Self-esteem
• Obedience Vs. Self-ownership
• Self-determination
• Freedom and Learning
• Intolerance Vs. Self-actualization
• II: Civil Liberties
• Liberty In America
• State Schooling and Freedom
• The Right to Bear Arms
• An Armed Militia
• The Right to Die
• Pornography
• Ideology and Justice
• III: Political Economy
• Adam Smith's Achievements
• Smithian Scholarship
• Smith As Political Economist
• Protectionism Vs. Free Trade
• Protectionism and Politics
• Say's Law of Markets
• Political Decentralization
• Information Costs
• Free Market Banking
• Income and Motivations
• IV: Values
• Social Determinism and Objective Values
• Relativism
• Health and Objective Values
• Ought Vs. Is
• Values In Research
• Rights Vs. Right Judgment
• Prima Facie Values
• Fetal Rights
• The Greatest Good Or Number?
• Politics and Objective Values
• Ontological Values
• V: Justice
• Justice, Lockean Rights, and Liberty
• Justice and Adam Smith
• Rawls's Social Contract
• Rawls's Methodology
• Justice and Social Welfare
• Compensatory Justice
• Nozick's Legal Code
• Legal Justice and Coercion
• Justice, Punishment, and Deterrence
• Justice and Self-actualization
• VI: Property
• Liberty, Property, and Social Welfare
• Prima Facie Rights
• Lockean Property and Social Welfare
• Nozick, Taxes, and Property
• Locke Vs. Women's Property
• Indian Property Rights
• Kant On Property
• Just Price and Balancing Rights

Income and Motivations

Gian Singh Sahota

• Vanderbilt University

“Theories of Personal Income Distribution: A Survey.” Journal of Economic Literature 16 (1978): 1–55.

Why does one individual earn a larger income than another? More sophisticated versions of this question raise moral issues of fairness and distributive justice as well as economic problems.

Economists, through empirical and theoretical studies, are waging a “great debate” to explain general inequalities and equalities of income earned by various income classes or individuals. They advance many separate reasons for such income differences: inherited abilities (I.Q.), opportunity, family environment, educational training, voluntary individual choices and efforts, or investments which individuals make in their own “human capital” to maximize their opportunities.

Some of these proposed reasons are used to support government redistributions (inheritance and other taxes) or social engineering (public education, etc.) in the hope of increasing equality. Others of these reasons favor the voluntary, spontaneous order of the marketplace and a tolerance for whatever income distributions or inequalities the market produces without government intervention. The unanswered ethical questions are whether or not economic inequalities are unfair in themselves and, if so, why? One of the unanswered economic questions is how can one measure psychic and subjective “income” (beauty, love, admiration, etc.) or hidden sources of material income.

Ability as the cause of personal income distribution has been among the oldest theories. Vilfredo Pareto showed that incomes were distributed not normally but lognormally (skewed towards inequality). The Cambridge School (England), and more recently American Cambridge (Harvard-MIT), have sought explanations in inheritance and institutional organization. With roots in Ricardo and Marx through A. C. Pigou and J. M. Keynes, the Cambridge Theory (expounded by Lord Kaldor, and by Luigi Pasinetti) distinguishes between different savings propensities among social classes and income sources. Kaldor's model of substantial differences in long-run propensities to save by different income classes was refuted in Milton Friedman's A Theory of the Consumption Function (1957).

Public Income Distribution theories seek to find what are the effects of taxation or coercive distribution of incomes. Empirical studies suggest redistribution comes either from upper to lower income classes, or from lower to upper classes. However, Director's Law as stated by George Stigler [Journal of Law and Economics 13 (April 1970)], is based on the fact that the state is used to redistribute income to those who control the state. Stigler concludes that in democracies the middle classes control the state and are therefore the beneficiaries of coercive redistribution.

Based on Pareto's lognormal or skewed income distribution conclusion, some economists have explained that additional talents or abilities tend to multiply a person's productivity (a lognormal rather than additive effect). Some have found relationships between ability and education, ability and responsibility, as well as ability and the future-oriented aptitude for saving or capital accumulation. Harold Lydall has emphasized “the D-factor'—drive, doggedness, determination—as having a multiplicative effect on income.

One interesting fact (A.R. Thatcher's study) is that income distribution among homogeneous manual workers is an unequal as that of the whole population—and has remained so since 1886. In the end, therefore, the ability theory—which sees a person's abilities as the cause of income differences—remains a strong competitor with modern, sophisticated theories, such as the human capital theory.

Milton Friedman's individual choice theory is rooted in the differences among people in their attitudes toward risk—risk preferences. In Friedman's analysis, dynamic societies are characterized by very few high risk-takers and large majorities of the risk-indifferent or risk-averters. Mounting poverty occurs in societies that increasingly tend to prefer the risks of less income (or savings) and the higher utility of nonmonetary advantages. Such choices are influenced by the costs or rewards introduced by coercion, taxation, subsidies, and public transfers of income.

Taking off from Friedman, the Chicago School has developed a more refined Human Capital Theory of income distribution. Human Capital Theory emphasizes that investment in oneself is the result of rational, optimizing decisions (by individuals or their parents). Such decisions are made on the basis of estimates of the probable present value of alternative life style income streams, discounted at some appropriate rate. People with higher ability invest more in themselves, do so at younger ages, and earn higher rates of return on their human capital. The Human Capital Theory has been attacked by the “screening theories” of the Cambridge School: schooling does not teach but merely “screens” those with desirable traits, making schooling an elitist rather than an equalizing device.

Ideological values lie behind the whole issue of income distribution: should society by pass the market's voluntary patterns of production and distribution and allow government to coercively determine the “laws” of distribution at will?

IV

Values