The Mistakes of the Marginal Productivity Theory of Income Distribution

Abstract

The debate that took place at the end of 19th and the beginning of 20th century on the neoclassical income distribution theory based on the marginal productivity of the production factors is well known. The debate evolved especially around the question whether the product is exactly exhausted through its distribution to the factors of production according to the value of their marginal products. This question is now considered resolved and closed by the proofs presented by Wicksell, Walras and later on by other distinguished economists (Chapman, Hicks etc). The purpose of this paper is to demonstrate that the proofs which were presented to support the product exhaustion theorem are mistaken and consequently the theory of income distribution on the basis of the marginal productivity of the production factors is wrong. Furthermore, this paper attempts to detect and explain the profounder reasons that presumably led to these mistakes, as well as to identify and propound the new relations that replace the wrong ones of the product exhaustion theorem. Last, it attempts to formulate the equilibrium of the whole economic system (demand, supply, production, factors of production etc) through a holistic-way equation system.