Question

This week has covered various perspectives, orthodox and heterodox, on who gets paid how much and why. Recognizing that income inequality is a fact of modern capitalist economies (as well as any other type of economy), discussions on the topic often focus on whether or not that inequality is morally objectionable; however, in economics we're concerned first and foremost with understanding the causes of that inequality. As you've learned in this module, neoclassical theory tends to relate a person's income to her contribution--her 'productivity'--with the assumption that a profit maximizing firm wouldn't pay someone more than what they contributed to the bottom line. Heterodox economists, on the other hand, often take a more holistic approach, understanding incomes as the result of different classes conflicting and cooperating in various ways that determines the distribution of what the economy produces. Use one (or both) of these perspectives to explain a particular topic or example of your choice concerning the distribution of income. How does that perspective help us understand the underlying causes of 'who gets paid how much and why'? What are the limitations of that perspective in addressing the issue generally?

Answer 1

According to neo-classical economists, more the productivity of an individual more is the income he/she earns. Thus income is ultimately earned based on the profit a firm gains and the value its final product gains. Specific sectors which are in demand are paid a higher amount based on the economic situation such as technological companies which are in greater demand and shorter supply. They are paid a much higher value than the sectors which are in greater supply such as agricultural and arts and crafts. Thus according to this perspective the more people work and turn productive, the more is the income one earns, such as tech companies which are in greater demand and work hard, their final value is higher which increases the level of wages they earn. However there are several limitations to this approach such as firm owners which have gained their ownership and stake based on the family line, they do not contribute much to the bottom line as they don't work in the firm, even then they often earn a higher wage then the workers who are being more productive and working hard. Thus there is discrepancy which cannot be addressed by just stating that the more you work, more you earn, there are exceptions to this approach which have raised the level of inequality in this world to a great extent.