Distribution Theory – Definition, what it is and concept

The classical theory of distribution is based on the classical value theory, to explain how the total product of an economy is distributed among workers (wages), capitalists (benefits) and landowners (income).

First of all, it should be noted that in this article we do not include Karl Marx as a member of the classical economy, because rather he was a critic of the classical economy, whose main exponents were Adam Smith and David Ricardo. Marx founded a different stream of thought: the maximum, which would be the theoretical basis of socialism.


According to Smith

In primitive society, the worker’s product constitutes his salary, as a natural reward for his physical and intellectual effort.

In primitive society, there were no employers with whom to share the product of such work. But, in the capitalist society, the owners of the work are involved, as well as the owners of the land and the owners of the capital (work instruments and machines).

Therefore, the total production must be distributed among these three population segments. Workers are paid with the salary, to the owners of the land with the rent and to the owners of the capital with the Benefits.

As workers have lost autonomy in production, they do not have part of the surplus. They are seen as input more, one more cost. Saying cost it is what we call salary.

Smith evidences that salary determination is given by a negotiation process between employers and workers. And in this confrontation, employers win because they have greater economic power. The employer’s need is not as great as that of the employer’s worker.

So, for Smith, the salary is not determined by the work incorporated, but by the negotiation between workers and employers

According to Ricardo

The natural price of labour is the cost of the food basket and products necessary for the subsistence and perpetuation of workers.

Thus, the increase in salary will depend on the increase in the price of the basic goods basket. This basket is influenced by historical, social and moral factors. Thus, the price may vary over time and especially from one country to another.

Like Smith, Ricardo noted that the surplus does not pay workers, because wages are part of consumption productive. Salary is understood as an obligation of the capitalists to keep those who work and provide their
the effort to manufacture merchandise.

If the workforce were produced by the division of labour could apply the theory of classical value determined by merchandise prices from labour, land and capital involved in its production. However, the hand labour is not produced with labour, land and capital (unless it is the hand of slave work).

To get out of this complication, Ricardo makes a turn to affirm that the value of work depends on the amount of work needed to produce the subsistence of the workers. So, for Ricardo the salary is not determined by labour supply and demand, but for the price of subsistence.


According to Smith

The benefit is the percentage of the net product that corresponds to the owners of capital. Capital – It is the commercial value or price of the inputs used in production.

The owners of capital deserve compensation for their audacity to invest a part of their wealth and thereby give work to other people in order to produce, transport and sell merchandise. Nevertheless, Smith makes it clear that benefits are not a type of salary that remunerates to administration work but corresponds entirely to the amount of Capital involved in the production.

For Smith, the rate of profit (another way to call benefits) is given for the abundance of capital. In places or activities where there is little capital, the profit rate is higher; and where there is a lot of capital, the rate is less.

According to Ricardo

The benefit is the compensation for the capitalist who owns the tools and machinery necessary for the work to be effective. The capitalist wants to sell his products and reinvest the profit to replenish its capital and increase it to produce more and follow a dynamic of continuous accumulation.

Unlike landowners, who spend their income on consuming luxury goods, the capitalists invest almost all of its benefits. Therefore, the basis of economic growth of a capitalist society is its entrepreneurs.

For Ricardo, the rate of profit depends inversely on the rate of wages. For him, it is clear that if the subsistence prices are high, the employer will have to pay more to the workers so that they can survive and their profit will be lower.


According to Smith

As soon as the land becomes property privately, landowners demand an income for the use of their land, even if they don’t work it. Said payment is delivered in monetary or in species.

Smith points out that there are more demanded lands and others less demanded This depends on the entrepreneur who wants to lease them
achieves a gross profit that covers the income and salaries The most demanded lands will provide income to the landowner, the others almost never will. Thus, a fledgeling income is glimpsed in Smith differential.

According to Ricardo

Rent is the part of the product that the landowner is paid for the use of land wealth. Nevertheless, he states that the earth is not uniform in quality.

According to Ricardo, it starts to produce in the most fertile and closest lands, for which no rent is paid. As the population level increases, the border has to be extended agricultural and less fertile land must be used, which must be improved and that’s why rent is paid.

Ricardo warned that, if the population continued to increase so rapidly, more and more land would be required and due to the increase in demand, subsistence prices would rise considerably. Then, he concluded that if grain importation from other countries was not facilitated, wages and incomes would rise. This would cause a steady decline in profits until reaching a steady-state, where the economy would permanently stagnate and capitalism would run out.

The formalization of Sraffa

The Italian economist Piero Sraffa, in his great work in 1960 entitled “Problems of today and of Tomorrow” He made the mathematical formalization of the classical theory of value and distribution.

He summarizes the capitalist economic system in the following three equations:

Productive consumption = subsistence + inputs
Gross Product = Subsistence + inputs + income + benefits
Net product (surplus) = gross product – productive consumption = income + benefits