Friday, February 22, 2013

Production Factors are Remunerated according to their Marginal Utility

It is sometimes said that the distribution of the proceeds of production takes place according to the contribution of the factors of production to the total product. Labor receives what is to be imputed to labor; the capitalist receives what is to be imputed to capital. But this is an antiquated and over-simplified way of expression. In reality, the worker, equipped with a certain amount of capital, produces a certain amount of goods—no doubt more than he would have produced without capital equipment. But once labor is so equipped, it is impossible to find out how much of the product is to be imputed to labor and how much to capital. The product is just the result of productive labor. The only thing which can be discovered is how much the product has increased by the addition of the last unit of capital. We can calculate the so-called marginal productivity of capital.
The marginal productivity of capital determines not only the amount of capital used at a given supply of capital; it also determines what part of the total product is branched off and accrues to the capitalists in the form of interest payments. This part is by no means equivalent to the total amount by which production has increased owing to the use of capital. It is less because in accordance with the law of diminishing returns the marginal productivity of capital is less than its intra-marginal productivity. The benefits of the intra-marginal productivity of capital accrue to the workers in the form of higher wages. They cannot be distinguished from the productivity of labor as such.

Common Sense Economics

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