Debunking the distributional status quo

“In neoclassical theory, wages and profits are related to the marginal revenue products of labour and capital respectively. Going further, John Bates Clark and others suggested that the aggregate production function upheld a normative justification of the appropriation of profits by capitalists. These distributive shares of labour and capital were controlled by a ‘natural law’. Hence production functions were used in attempts to explain or justify the distribution of income between rival social classes under capitalism…

[T]he liberal economist John Atkinson Hobson…noted that with production functions, all (positive) factor inputs help to determine the output. In marginal analysis, other factors are held constant as one factor varies. But with positive values throughout, the variable factor still acts in combination with flows of other factors. Contrary to Hobson’s critics, this did not amount to a confusion of total with marginal productivity. Hobson simply pointed out that a marginal product is not produced by the varying factor alone. Identifying the marginal product of a variation in the services of one factor cannot suppress the causal impact of the other factors on output, even though their rate of flow is held constant. All the inputs act causally at every point: they are interdependent. Consequently, one cannot conclude that shares of output are attributable to separate factors.

Yet leading economists make this mistake. For example, in a text on price theory, Milton Friedman relayed the idea that ‘marginal productivity theory shows that each man gets what he produces’ (as long as there is sufficient market competition). He did not consider that the notion of one factor ‘getting what it produces’ is problematic. Production functions involve a combination of capital goods and labour as joint and interdependent inputs. Hence the very notion of one factor ‘getting what it produces’ is mistaken, even within the assumed terms of a standard production function. Furthermore, because of this interdependence of factors, justifications in Lockean terms of property rights over outputs fail: all input facts are ‘mixed’ with the output. Clark’s normative theory thus collapses, even if his production function survives.”

Geoffrey M. Hodgson (2019), Is There a Future for Heterodox Economics? p.21-2, 23-4.