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Rationing and the Distribution of Income

Not everyone does equally well under a system of price rationing. The system discriminates in favor of some by giving them large amounts of goods and services, and against others to whom it gives very little. We call the first group the rich and the second group the poor.

People with skill and ability, luck, and willingness to work hard do well under a system of price rationing. They are either able to sell their labor to others for high amounts, or produce and sell things (goods, services, or ideas) that others value highly. Some who do well have had the luck to inherit wealth, usually from an ancestor who had skill, ability, and willingness to work hard. There are others who do well because they evade the rules of the system, using deceit and force to obtain wealth and income. The poor, on the other hand, are those who for some reason do not have anything to sell that others value highly.

Although income is the obvious way to measure how well people do under a system of price rationing, it is not the only item that matters. Some people know how to use their money better than others. Some people can "stretch" the dollar or "make it go a long way." People must pursue their goals in a world of uncertainty and partial knowledge. People do better under a system of price rationing if they can distinguish a product of high quality from one of low quality, buy when and where prices are lower, and buy only those items that best lead to their goals.

Interest in the extent to which a price system discriminates for and against people extends back to the early economists and continues today. John Stuart Mill reflects the views of the classical economists (who were the dominant school of economic thought for a century after 1776). In his Principles of Political Economy, first published in 1848, he explains: "Writers on Political Economy profess to teach, or to investigate, the nature of Wealth, and the laws of its production and distribution." 1 Mill decided that the production and distribution of wealth were distinct subjects, and "[t]he distribution of wealth, therefore, depends on the laws and customs of society." 2

Two things are worth noting at this point. First, Mill is using the word "laws" in two distinct ways in these quotations. In the first use, he means a regularity; in the second, he is talking about legal requirements. Second, most economists have decided Mill was wrong when he said that production and distribution can be separated. Instead, they are two sides of a single coin.

Mill spent two chapters discussing how to remedy low wages. His final solution was in the tradition of Malthus and Ricardo: the problem would go away if the poor had fewer children.

The question of poverty was at least as interesting to Alfred Marshall. At the very beginning of his Principles of Economics, he states that the question of whether poverty may be extinguished "gives to economic studies their chief and their highest interest."3 Marshall and those who came before him had a different emphasis from that which has dominated the second half of the twentieth century. They had faith that economic growth was the road to elimination of poverty. Today, there is more faith that redistribution, that is, taking from the rich and giving to the poor through taxation and transfers, may be a solution. The dispute over whether growth or redistribution is the better way to help the poor is a major dividing line in contemporary politics.

A system of price rationing will distribute goods less equally than will alternative systems such as those using queuing or coupons. Many people consider this inequality a major shortcoming of a market economy, and most critics of market systems emphasize this characteristic. Defenders of market systems, on the other hand, tend to downplay rationing issues, and instead focus on the ability of a market economy to coordinate information and incentives. These are tasks that markets seem to perform very well in comparison to the ways other systems do them.

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1Volume 1 (New York: The Colonial Press, 1900), p. 1.

2Ibid., p. 197.

3 Principles of Economics, 8th ed. (New York: The Macmillian Company, 1920), p. 4.

Copyright Robert Schenk