A New Paradigm for Economic Policy
New Directions in Modern Economics series
Edited by Claude Gnos and Sergio Rossi
Chapter 4: Labour, wages, and non- wage incomes
The main contemporary schools of economic thought (neoclassics and new-Keynesians) base their theories of income distribution on Cobb–Douglas production functions, whose structure hinges on the idea that the income shares pertaining to labour and to capital are determined by technological criteria. In this view, these schools assume that factors’ real incomes are equal to their marginal productivity. As factors receive, in output terms, what they supply in the form of productive services, their incomes are supposedly nothing other than these same services transformed in output. This means that each individual agent holds the wealth that makes up his income even before any production activity takes place. This view stems from production being considered as if it were a relative exchange between productive services and physical outputs. In other words, mainstream economists argue that the supply of productive services by agents depends on the real income that is offered to them. Another idea that these strands of thought share is that they describe the activity of our monetary production economies in two disjoint areas: one space where real values are formed; the other space where monetary or nominal values are determined. From this dichotomy, it ensues that mainstream authors handle distribution as if there were two separate measurements of output, the real measurement of incomes not always coinciding with their monetary measurement. Hence, the variance between the two forms of expression of a given output, which supposedly breeds illusions in the minds of economic agents, is allegedly capable of disrupting the economy’s ‘natural’ equilibrium.
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