The Effect of Technological Change on the Distribution of Income

Introduction The effect of technological change on the distribution of income is becoming widely recognized and documented based on its effects on patterns of local and international trade. Technological innovations affect the patterns of local and international trade because of increased efficiency in production. There is a huge literature on technological innovations and transfer of technology as it relates to local and international trade.Advertising We will write a custom essay sample on The Effect of Technological Change on the Distribution of Income specifically for you for only $16.05 $11/page Learn More Interestingly, world trade has not fully adopted the literature and policies on technological transfer in spite of the vast information on the outcomes of technological innovations (Krugman, 1979, p. 253). In the appraisal of the effects of technological change on the distribution of income, two economic issues arise, which are efficiency and equi ty (Scobie Posada, 1978, p. 87). To begin with, technological change has led to an increased efficiency in production that scholars attribute to increased income. The increase in efficiency, as measured by increased work output, results from adoption of new technological innovations (David Otsuka, 1994, p. 12). Moreover, technological innovations lead to increase product life cycle attributable to product development and improvement. The increase in output leads to a higher income measure in Gross Domestic per Product (G.D.P). The change in technology has led to increase industrialization and urbanization, which raises concerns of equity on the structure of industrial distribution of income. The development of industrialization as accompanied by technological change leads to rural-urban migration. The total income distribution of the whole population is a sum of the income distribution of the rural and urban populations. Therefore, it is deducible that the urban population has hig her average per capita income than the rural population. Moreover, the gap in percentage share of income distribution is to some extent higher in the urban population than the rural population (Kuznets, 1995, p. 5). One can understand the income distribution using three concepts, which are functional distribution, extended functional distribution, and size distribution. Functional distribution is relative to the concern of primary production factors such as land, capital, and labour. Technological change lies in the extended functional distribution of income that relates to the mode of production. Lastly, size distribution is attributed to income levels of society. This essay paper uses the extended functional approach of income distribution to discuss the effects of technological change on the distribution of income.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More The Extended Functional A pproach Most economic theories rely on the extended functional approach of income distribution. The aggregations to the extended functional approach vary between different countries depending on the country itself and the problem under study such as technological effects on income distribution (Adelman Robinson, 1989, p. 965). The Orthodox Marxian view of the extended functional approach is that it would be a political interest if major conflicts in politics would rely on the nature of main assets possessed. The modern Marxists consider various views of the extended functional distribution and argue on which version suitable (Adelman Robinson, 1989, p. 965). The income distribution is based on various groups in developing countries, which include rural and urban group, the industry based group, and importers and exporters. However, there is no difference among various groups in the simple model of the extended functional approach. Thus, it cannot represent economic pressure on pol icies of developing countries. However, the extended functional distribution approach gives a good platform for analysing the policy conflicts that give a better understanding of the relationship between the economies and politics of the developing countries. The extended functional approach relies on several models to address its concerns. To begin with, there is the classical view model of the extended functional approach that originally rested on the distribution of power and income amongst the elite in rural areas and rising manufacturing groups in urban areas (Adelman Robinson, 1989, p. 965). The classical view rests on the characteristics of production; yet, Ricardo later made much contribution on the development of the theory. Ricardo’s theory of distribution creates a distinction between the market wage rate and natural wage rate (Adelman Robinson, 1989, p. 966). The market wage rate varies with demand and supply of labour while the market wage rate is the long-run equilibrium of market rate fluctuation. In his view, the capital accumulation is a cause of labour employment. Thus, accumulation determines the net income. Decline on Agricultural returns lead to a reduction in profits. Technological innovations could stop the decline in Agricultural returns. However, the innovations are also subject to decline. Thus, a fall in Agricultural return could be a temporary phenomenon. The classical view does not relate the demand of products to the functional distribution. Thus, distribution is entirely a technological and sociocultural trend. Politics will influence development strategies, as well as the development of organisational structure in the economy. Hence, functional distribution depends on political and economic choices in addition to technological change.Advertising We will write a custom essay sample on The Effect of Technological Change on the Distribution of Income specifically for you for only $16.05 $11/page Learn More Secondly, the dual economy model by Lewis helps one to understand the relationship between labour and supply. In the model, Lewis makes assumption of a constant supply of labour in the agricultural sector in a developing country. Therefore, the market wage and natural wage are constantly equal and the workers in the industrial sector are paid wage that is higher than the Agricultural subsistence wage. Reinvestment in other parts Agricultural sector leads to increased national income attributed to labour wage being constant. As a result, the income distribution is dependent on the wages shared between the agricultural sector and the modern sector. Moreover, the distribution of national income depends on the ratio of the population to land and technology use. The growth of income from subsistence farming results from increased land rates that are attributed to increase competition due to population growth. There is unfair distribution of income because the benefits of te chnological use are accrued to land and industry owners. In the evaluation of the rate of land investment to increased income, Fai and Ranis focused on labour issues using a mathematical model. The model explains that when the excess supply of labour goes to the industrial sector, their wages increase. There is no loss in both sectors as the investment rate takes a U-turn in relation to turning the point of absorption of labour ( Adelman, Robinson,1989, p. 968). Moreover, there is the Marxian model that gives an ethical judgement of the functional distribution theory. According to Adelman and Robinson (1989, p. 969), the Marxian model connects to the neoclassical economist theory, which indicates the value of the product, is related to the value of each production factor. The model, as Adelman and Robinson point out, postulates that the returns to the capital in addition to wages should be part of the labour because the capital is same as congealed labour. In the model, a capitalis tic view of labour payment, which it does not reflect the marginal product Adelman and Robinson (1989, p. 969). However, it relates to cycles of a sociocultural defined level of substance. The difference between the wage bill and total income gives the surplus value that can reflect the rate of labour exploitation. The productivity of capital increases with an increase in the capital-labour ratio, as population growth is exogenous. The rate of capital accumulation is dependent on income distribution between wage earners and profit takers as the wage earners do not make savings. As a result, the rate of capital accumulation also determines the rate of technical change, labour employment, and functional distribution of income in the subsequent periods. Furthermore, the Neo-Keynesian models of extended functional distribution can be used to explain the effects of technological use on income distribution attributed to capital accumulation and choice of growth rate. In a fixed growth rat e, the rate of investment is constant and thus adjustments should be made in the income distribution between savers and non- savers. In practice, the rate of investment is not a function of the mode of savings postulated by the model.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Kaldor suggests that the rate of development is dependent on capital and the capital is related to the supply of savings for investment. Moreover, technological adaptation affects the rate of investment and consequently the distribution of income ( Adelman, Robinson,1989, p. 969). In addition, the availability of natural resources and scarcity of wage goods also affect the rate of investment. The inflation rates will also affect the incomes of low-income earners. The growth of the output of the agricultural sector constrains the rate of industrial growth. The developments in the natural sense worsen the income distribution of the poor in the society because urbanisation that leads to a reduced income in rural areas. In case of inflation, a shift in production costs is shared along the production chain. Thus, the income of the poor in the society goes down. Lastly, the neoclassical model of the extended functional approach explains the functional distribution of income (Adelman Rob inson, 1989, p. 970). The approach focuses on the role of capital as a major factor of production giving a great emphasis on time factor. Moreover, the role of entrepreneurship in production is included thereby incorporating the risk factor in production. This approach from the Austrian school suggests that each factor of production has a marginal product cost that relates to thrift and risk bearing outcomes. The approach justifies the Marxian view on exploitation of labour in its marginal revolution to neoclassical theory. Walrasian provides a model of competitive equilibrium of the neoclassical model in that a Pareto optimum is attained when the marginal costs of all products are paid. The markets held clear that there is no exploitation of any individual in the production chain. In a purely competitive equilibrium, the implications of distributions are optimal or rather undesirable (Adelman Robinson, 1989, p. 970). Several policies can alter the distribution of income based on t he initial change of distribution, post-equilibrium transfer of income, and a combination of the of pre and post equilibrium adjustments to market prices and taxes. In a static society, people should not incur costs because of inefficiency in production. In addition, there should be lump-sum transfers and distortion incentives for efficiency and equity in tradeoffs. Evidence and Analysis The approach of extended functional distribution of income is quite relevant in discussing the effect of technological change on income distribution because it disaggregates income distribution by sector and mode of production. The mode of production relates to technological changes in developing and developed economies (Galor Zeira, 1993, p. 37). To begin with, technological change affects the distribution of income based on various sectors of the economy. Technological change affects income distribution in the agricultural sector because of the replacement of human labour with machines, which led to an increase in unemployment rate. Making an argument based on the classical view of the approach, the ownership of the production factors shifts to the land elites and manufacturers. With technological change, there is a shift from subsistence farming to commercial farming. As a result, there is increased privatisation in the agricultural sector with the ownership of the large-scale farms and businesses being dominated by rich and wealthy individuals (Stiglitz, 1969, p. 384). Moreover, technological change leads to increase industrialization and urbanisation. Thus, rural to urban migration is evident. The total income distribution is an average of the rural and urban population. It is clear that the income share of the people in rural areas is lower than the urban sector population. Despite the increased employment rates that result from technological change, there is increased work output of the workers because of increased efficiency in production. Using the model of a dual ec onomy, one can conclude that technological change leads to decline in income distribution as the large share of income goes to the property owner and manufacturers. The functional distribution of income tends to have a ‘U’ move against the wage earners. Therefore, there will be a decrease in the national income. It arises from land ownership taxes since the sharing of the national product depends on the ratio of the population to the land and technological use. The benefits of technical change in agricultural production accrue to the landowners and manufacturers creating inequality in the distribution of income (Kumar Russell, 2002, p. 529). On the other hand, technological change may have a minimal effect on the distribution of income based on the Marxian model. The change in factors of production is directly proportional to the value of products. The shift of the cost of production from the producers to consumers invalidates shifts in patterns of income distribution related to technological change. Technological change is dependent on the capital accumulation that arises from the distribution of income between the wage earners and the profit. As determined, the wage earners do not make saving. Furthermore, technological change affects the rate of investment, which has effects on income distribution between the savers and non-savers based on the Neo-Keynesian model. The choice of the growth rate of the economy determines the distribution of income. Technological change leads to an increased growth rate of investments. In turn, the percentage of income shared increases. Technological change, therefore, creates a gap in the income distribution between the rural sector and the urban sector where technology has been adopted (Card, 2002, p. 733). Lastly, the change on income distribution is dependent on initial investment, post-equilibrium transfer of income, and adjustment of prices through taxes and subsidies at pre and post equilibrium transfers b ased on the neoclassical approach of extended income distribution. Technological change is a part of the post-equilibrium transfer of income (Cutler, Katz, 1992, p. 548). Technological change leads to increased efficiency of production and reduced time of production. With the payment of the marginal product of technological change being a factor of production, there is Pareto equilibrium of income distribution. Therefore, nobody is worse off in income distribution. However, the effects of competition because of technological change lead to inequality in distribution of income. Conclusion In the recent past, people could not question anything to do with technology. This followed since its rate of change was insignificant. However, recently, the case has been different. There has been a huge change in technological advancement that has in turn attracted questions about the relationship of this change and income distribution. Does technological change bring about equality in the distr ibution of income? The paper sought to answer this question. Therefore, in conclusion, technological change generally leads to inequality in the distribution of income. In spite of increased total income because of technological change, there is a disparity in the distribution of income with the distribution of income per capita being somehow higher in urban areas than in the rural areas. The percentage gap in the distribution of income tends to be higher in urban areas as compared to the rural areas because technological change is dependent on the use of new skills. The percentage share of income is, therefore, higher on the skilled labour than on the unskilled labours. The effect of technological change on income distribution is now clear using the functional approach of income distribution. Reference List Adelman, I., Robinson, S. (1989). Income Distribution and development. Berkeley: University of California press. Card, D. (2002). Skill-Biased Technological Change and Rising W age Inequality. Journal of Labor Economics,20 (4) , 733. Cutler, D., Katz, F. (1992). Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980’s. Trends in Norwage Inequality,82 (2) , 548-551. David, C., Otsuka, K. (1994). Modern Rice Technology and Income Distribution in Asia. Philippines: Int. Rice Res. Inst. Galor, O., Zeira, J. (1993). Income Distribution and Macroeconomics. The Review of Economic Studies, 60(1) , 35-52. Krugman, P. (1979). A Model of Innovation, Technology Transfer and World Distribution of income. Journal of Political Economy, 87 (21) , 253-254. Kumar , S., Russell, R. (2002). Technological Change, Technological Catch-up, and Capital Deepening: Relative Contributions to Growth and Convergence. American Economic Review Journal, 93(3) , 529-537. Kuznets, S. (1995). Economic Growth and Income Inequality. The American Economic Review, 45 (1), 1-28. Scobie, G., Posada, T. (1978). The Impact of Technical Change on Income Distr ibution: The Case of Rice in Colombia. American Journal of Agricultural Economics,60(1), 86-88. Stiglitz, J. (1969). Distribution of Income and Wealth Among Individuals. Econometrica, 37 ( 3) , 382- 397. This essay on The Effect of Technological Change on the Distribution of Income was written and submitted by user Ingrid Mccray to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.