Session 2: Alternative views on the economy and income distribution

Introduction

Session 1 illustrated that growing the economy as a policy objective we should continue pursuing is a contested question within the discipline of economics. Similarly, the questions of how an economy is organised and how income is distributed within an economy are debated concerns within economics.

Figure 1: Economists of different schools of economic thought have different things to say about economic growth.

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This is a black-and-white cartoon illustration featuring four historical figures seated around a circular table, each engaging in a conversation while handling miniature buildings representing banks and other economic infrastructure. On the table, miniature cars and tiny figures are scattered among the buildings. The men are caricatures of prominent economists, each with distinct physical characteristics, making them easily identifiable by their historical images: Far left: Adam Smith – He has a powdered wig, commonly associated with 18th-century figures. Smith is shown holding a building labelled ‘BANK’ His hand gestures suggest he's explaining something. Second from left: Karl Marx – Marx has a large, thick beard and wild hair, a recognizable feature of his persona. He too holds a miniature building labelled ‘BANK’ and seems to be making a serious point. Second from right: Joseph Schumpeter – Schumpeter is shown as a bald man with sharp features. He holds a building marked ‘FOR SALE’. His expression looks serious as he engages in the discussion. Far right: John Maynard Keynes – Keynes has a well-groomed moustache and is dressed in a suit. He holds a small building in one hand and gestures with the other.

Figure 1: Economists of different schools of economic thought have different things to say about economic growth.

In neoclassical economics, the economy is made up of individuals, who are assumed to make different contributions to the production process. Economists of other schools of economic thought, however, ‘divide up’ the economy in different ways. Marxist economists, for example, conceptualise the economy as consisting of two distinct social classes, which are distinguished by the source of their income: on the one hand, there is the capitalist class consisting of people such as Jeff Bezos and other entrepreneurs who own machines, buildings and shares (capital) that generate profits or capital income for them that they can re-invest in the economy. On the other hand, there is the working class, consisting of people such as Amazon’s warehouse workers, who depend on their wage or labour income to live well. We refer to this (theoretical) division in national income as the distribution of ‘functional’ income into a capital (or profit) share and a labour (or wage) share. National income, then, consists of the sum of all labour income generated within an economy (earned by workers e.g., in the form of wages) and all capital income (i.e., profits and dividends made by entrepreneurs and shareholders).