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Quotation of the Day…

… is from pages 64-65 of the 1903 3rd edition of Edwin Cannan’s Elementary Political Economy:

It is true that each individual’s income is generally produced by the co-operation of many individuals, but it is not true that the co-operation carried on by means of exchange creates a joint or aggregate income which has to be divided among the cooperators.

DBx: Cannan offers this observation in that part of his book in which he warns of the misunderstanding lurking in phrases such as “the distribution of wealth” and “the distribution of income.” In a market economy, wealth and income are not distributed; they are earned by each recipient (or gotten by gift or bequest from the producers of the portions of income and wealth that are gifted or bequested).

The resulting pattern at any particular time of earned, gifted, and bequested monetary wealth or income can, of course, be arrayed from lowest to highest and the resulting array called “the” distribution of wealth or income. But here the term “distribution” is a noun – and, further, it’s a noun that does not refer to the verb “to distribute” (or at least not to this verb describing real-world differences in wealth or income). Confusion arises, however, because talk of “the distribution of wealth” or “the distribution of income” too easily gives the impression that the measured, statistically reported array of wealth or incomes is the result of some action described by the verb “to distribute.”

This confusion is only heightened by talk of wealth or income redistribution. Talk of wealth or income redistribution is talk of the consequences of an activity. “Redistribution” here always refers to the consequence of the action described by the verb “to redistribute.”

The above-quoted passage from Cannan warns us also against falsely supposing that a nation’s economy is akin to the operation of a business firm. Unlike for a firm such as Apple Inc., there is for a market economy no overall concrete purpose and, hence, no plan. Workers, entrepreneurs, investors, and firms in a market economy are not inputs into some giant and planned production process that, should all work according to design, generates profitable results for the economy. Instead, a market economy is what Hayek called an order while a firm is an organization. These two different modes of human cooperation differ from each other categorically.

I suspect that much of the anger or upset that proponents, from the left and right, of ‘redistribution’ feel toward differences across persons or households in income or wealth arises from these ‘redistributionists” false belief that the national economy is a giant firm. These ‘redistributionists’ don’t understand that the gains (and losses) of each participant in a market economy depend exclusively upon how well that participant better enables his or her fellow citizens to pursue their individually chosen plans. And not only do the gains of each producer in a market economy reflect that producer’s productivity – and hence are not decrements from the income or wealth of others – such gains are also not the result of any design or plan. Therefore, for the economically literate person there is nothing at all unfair or unjust in even huge differences in the incomes earned, and the wealth possessed, by individuals or households within a market economy.

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