Personal Distribution and Functional Distribution

In this article we will discuss about Personal Distribution and Functional Distribution.

The term ‘distribution’ in economics refers to personal distribution and functional distribution of income. Personal distribution relates to the forces governing the distribution of income and wealth among the various individuals of a country. Under personal distribution, we study the pattern of the distribution of national income and the shares received by the different classes.

What is the share of the wage-earning class, of the entire class, and of the entrepreneurial class in the national income?

Why is the share of the wage-earning class in the national income lower than the other classes?

Why is the wage of one person higher (or lower) than the other?

Why is the rent of one piece of land or house higher (or lower) than the other?

These and other similar problems are studied under personal distribution of income. In other words, under personal distribution of income we study the problem of inequality of income and wealth, its effects, and measures to remove or lessen inequalities.

In the words of Jan Pen:

“Personal distribution (or: the ‘size distribution of income’) relates to individual persons and their incomes. The way in which that income was acquired often remains in the background. What matters is how much someone earns, not so much whether that income consists of wage, interest, profit, pension or whatever. And further special attention is paid to income recipients as a collective body, in which regular patterns are sought.”

Functional distribution or ‘factor share distribution’ explains the share of total national income received by each factor of production. In other words, it relates to the distribution of rewards for the services of the factors of production. Rent, wages, interest and profit are the rewards for the services of land, labour, capital and organisation respectively.

Algebraically, it can be stated as: P = f (А, В, C, D,), where the total output P is a function ‘f’ of A land, В labour, С capital, and D organisation.

Thus functional distribution studies the forces underlying the determination of the prices and shares of the various factors of production.

To quote Jan Pen again:

“In functional distribution, we are no longer concerned with individuals and their individual incomes, but with factors of production: labour, capital, land and something else that may best be called ‘entrepreneurial activity’. The theory examines how these factors of production are remunerated. It is primarily concerned with the price of a unit of labour, a unit of capital, a unit of land, and being therefore an extension of price theory. It is sometimes called the theory of factor prices.”

Despite these apparent differences between personal distribution and functional distribution, there is a close relation between the two. The personal distribution in a country is ultimately affected by its functional distribution of income. If the rewards to the factors of production are just and equitable, the distribution of personal income is also just and equitable. As a result, individual incomes are high.

There is great demand for products and services leading to more investment, more employment, and to increased production and national income. Higher personal incomes mean higher standard of living and greater efficiency in production.

On the other hand, if the functional distribution of income is unjust and is based on the exploitation of factors of production, the personal distribution of income is also unjust and inequitable.

As a result, the majority of people will be poor. There will be diminution of economic and social welfare, and loss of peace and prosperity in the country due to a continuous struggle between the rich and the poor.