The theory of
distribution or the theory of factor pricing deals with the
determination of the share prices of four factors of production,
viz., land, labor, capital and organization.
Four Factors of Production, in Economics:
(i) The share of land,
is named as Rent.
(ii) The share of
labor as Wages.
(iii) The share of
capital as Interest.
(iv) The share of
organization as Profit.
factors of production in cooperation with one another
produce annually a net aggregate of commodities, material and
non-material. This we name as national income. The
national income is to be shared among the four factors of
production which have contributed to this production. In
the theory of distribution, we are chiefly concerned
wrath the principles according to which the price of each factor
of production is determined and distributed.
In the words of
of distribution or the pricing of factors accounts for
the sharing of the wealth produced by a community among the
agents or the owners of the agents which have been active in its
Functional and not Personal. I would like to make it clear that
the pricing of factor of production discussed here is functional
and not personal. By this we mean that when the reward of each
factor is distributed, it is not paid to an individual but to
the agents or factors of production. The individual may
represent in his person as landlord (if he used his own land),
the labor (if he works himself), the capitalist (if he has
contributed his capital) and. the entrepreneur (if be organizes
the business). The price of land, labor, capital and
organization which is termed as rent, wages, interest and profit
is in fact their functional income. They are the costs from the
point of view of the firm but income from the point of view of
factors of production.
Separate Theory of Factor Pricing?
It is often pointed
out that the price of a factor of production is determined, like
the price of a commodity, by the equilibrium of forces of demand
and supply, If the demand of the particular factor rises, other
things remaining the same, its price goes up and vice versa.
The other economists who differ with this view are of the
opinion that the theory of value is not applicable in its
entirety to the pricing of factor of production. They believe
that on the side of demand there is similarity between the two,
because the value of a particular commodity and the price of a
factor of production are governed by marginal utility and
marginal productivity respectively. But on the side of supply,
much difference exists between them. On the side of supply, the
price of a particular commodity is determined by its marginal
cost of production. But in ease of labor or an acre of land or a
unit capital, it is not possible to ascertain exactly its costs
of production. The other dissimilarity between the two is that
the supply of a factor of production cannot be readily adjusted
as we can do in the case of a commodity. For example, if the
demand of a particular type of labor increases or the rent of
land rises-up, it will not be possible
to increase their supply immediately.
the words of Marshall:
"Free human beings are not brought up to their work on the same
principle of a machine, a house of a slave. If they were, there
would he very little difference between the distribution and the
exchange side of value".
Thus, we come to the conclusion that though the value of
the commodities and the prices of the factors of production are
determined by demand and supply yet, due to some differences of
the factors of production on the side of supply, there is a need
for a separate theory of distribution.