• Have you ever reflected on the fact that we all obtain our incomes by inducing other people to provide them?

Suppliers and demanders

• No one actually distributes income in our society in the sense of parceling it out.

  • People's incomes are the outome of many interacting decisions.

• We cannot treat distribution spearately from the process of exchange and production.

• One of the most important points to emphaisze in political economy is that policy choices are never about particular distributions, but always about the rules of the game, which engender a pattern of exchange and production.

• People make constrained choices.

• Economic theory explains the distribution of income as the product of the supply and demand for productive services.

  • An activity is productive if it enables people to obtain something for which they're willing to pay.

• A playboy heir who lives off dividends still contributes to current production by the activity of not consuming his capital.

• Most of the income that Americans receive annually does not derive from ownership of wealth in these forms but rather from the ownership of human capital

Capital and human resources

• Capital: produced means of production, or produced goods that can be used toproduce future goods.

  • Productive capital: machinery and buildings.

  • Human capital: knowledge and skills.

• Only when we include human capital in our definition of wealth can we say that the distribution of income depends on the distribution of wealth.

  • Inequality in the distribution of income arises primarily from unequal abilities to supply valuable human services.

Human capital and investment

• To what extent are the abilities that enable people to command high incomes produced rather than inherited or just stumbled upon?

• The prospect of a greater income excercises a constant and steady pressure on people to acquire capabilities that will permit them to supply more valuable services to others/

• Incentives do make a differenece

Property rights and income

• All property rights are limited in one respect or another

• Ownership is a bundle of sticks. Some sticks may be missing from the bundle

Actual, legal, and moral rights

• There are three types of rights:

  • Actual

  • Legal

  • Moral

• Because rights are social facts, they depend on the acceptance by others of the approriate obligations.

Expectations and investment

• People choose among alternative investments by considering not only the expected rates of return but also the confidence with which those returns can be expected.

• The most readily portable form of wealth is human capital

• The returns from investment decisions are future returns

  • Someone who discounts future events at a high rate will be present oriented.

People or machines?

• Technological innovations release labor resources from some employments and make them available for others.

The derived demand for productive services

• The demand for productive services is derived from the demand for the goods they produce

Who competes against whom?

• Buyers compete with buyers, and sellers with sellers.

Unions and competition

• The basic federal statute regulating union organization and collective bargaining makes the mistake of asserting in its preamble that unorganized workers need unions to help them compete against corporations.

  • But since workers compete against workers, this is the competition that affects wage rates.

• Workers cannot successfully insist on the wage they think they deserve if other workers are willing to suply very similar services at lower wage rates.

  • Unions are in part attempts to control this competition by excluding those who would work for less.

Poverty and inequality

• To increase the real incomes of the members of society, it is necessary to increase the production of real goods.

• The percentage of the population in poverty can be and has been greatly reduced, but often without any significant reduction in inequality.

Once over lightly

• The distribution of income is the result of the supply of and demand for productive services.

• The production of productive resources is investment, or the creation of capital. One very important form of capital is human capital, or productive capabilities generated by investment and embodied in human beings. The production of human capital is an important consideration, because monetary income is primarily earned in the United States, even by the wealthy, through supplying the services of human resources.

• The amount and nature of the investment that will occur in a society depend on established and accepted property rights, because property rights determine what consequences people can expect from the actions that are open to them.

• Lower rates of time preference encourage investment over consumption. Greater uncertainty about future returns from investment will prompt the discounting of future income at higher rates and consequently will lead to less investment.

• The demand for productive services of any kind will not be perfectly inelastic. A greater quantity will be demanded at lower prices and a lesser quantity at higher prices, because there are substitutes for any productive service.

• Potential users of productive services decide on the amount they will demand by comparing the marginal-benefit/marginal-cost ratios of alternative procedures for achieving their purposes.

• The demand for productive services, and hence their price, is partly dependent on the demand for the goods they produce. But the price of productive services also affects the cost of producing particular goods, their prices, the quantities demanded, and thus the demand for those productive services.

• Suppliers of productive services don't compete against buvers of those services. Suppliers compete against other suppliers, buyers against other buyers. The quest for higher incomes produces attempts to suppress competition, because what a seller can obtain and what a buyer must pay will depend on the alternative opportunities that competitors are providing.

• While economic growth in the United States dramatically reduced the percentage of the population living in poverty through the first three-quarters of the twentieth century, the poverty rate has pretty much stabilized and even increased somewhat during the last quarter of the century. The last quarter of the century has also been marked by small but steady increases in income inequality. The principal causes appear to be greater increases in the supply of less skilled and less schooled workers along with greater increases in the demand for more highly skilled and more extensively schooled workers.

• Social cooperation on any extensive scale requires relatively stable property rights because it presupposes the ability to predict the consequences of decisions.