Sunday, December 30, 2018

According to Menger, Income Is Not Distributed; It Is Produced

The Marginalist Revolution solved another quagmire in economic theory: Menger taught a new generation of economists that production and distribution could once again be linked together. The demand of consumers ultimately determines the final prices of consumer goods, which in turn sets the direction for productive activity. Final demand establishes the prices of the cooperative factors of production--wages, rents, and profits--according to the value they add to the production process. In short, income is not distributed, it is produced, according to the value added by each participant. Under this new brand of microeconomics, profits and use are directly connected through their marginal utility. Prices reflect the consumer's most highly valued (marginal) utility, and profit-driven production seeks to meet those needs.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.


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