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Trade-off between aggregate efficiency and interregional equity
TRADE-OFF BETH’EEN AGGREGATE EFFICIESCY AND INTERREGIO%AI, EQl’ITI A RepI?
Rccwcd
Januq
I977
worker is paid for his marginal productivity, and (21 the reward per \vorker should be used as the basis of measuring the wclfarc in a region. It is customarily assumed that there are only two factors of production, capital and labor, and that production technology is identical among different regions [Ohlin (1933) is a typical case]. However, natural conditions for production differ from region to region and they must have impact on productivity. In other words, if capital and labor are taken as the sole factors of production, the production function must differ among regions. This is one of the assumptions used in my earlier paper (1967). In empirically examin;ng production by region. I (1973b and 1975. ch. 3) have given explicit consideration to the productive role of the social overhead capital (SOC). This is a further generalization of the net &issical production function. Empirical analysis in Mera (1973h) proved tl .t SOC has an identifiable productivity in all of the three major sector5 of 111~ economy. The confirmation of the productive role of SOC has a profound implication for the distribution of income to factors as discussed ieh~. Another important issue in production is returns to scale. The cmventional neoc!assical economics assumes constant returns to scale in production. This is a convenient assumption, but my analysis (1973b) as well as others [for example, Sveikanskas (19751~ demonstrates that the assumption does not hold. Specifically, diseconomiex of scale \\crc identified to cxiht in the primary sector and economies of scale in the secondary and tcrtiq sectors. If all sectors were taken together. economics of scale \\‘cre idcntificd for a fixed geographic area. As to the question of distribution. the neoclassical tlworg IIcllds ll1il1 workers are paid at a rate which is identical to their marginal producti\it!. Similarly.
capitalists
in\xst
until
the marginal
roturn
hcco~iw~
CC~WI 10 rhc
cost of capital. As long as the production function is in constant returns to scale end no public sector is invol\;ed in production. this distribution criterion just exhausts output. However, at least two ohsiii&s hale IXCII identified above: the production function is not in constant returns to scale and there is the third factor of production, i.e.. SOC. SOC does not directI\ r claim a share in output. Its’share‘ might be, at the first round. taken by either IIK owners of capital or workers or both at so1111: lwoportion~. III a(ldition, 111~ fact that the production function is not in ~~~nstilnt rcturlla 10 h,cilIc necessarily leads to a breakdown of the marginal produoti\ity I~~l~thusis or income distribution. For these two reasons. it is not rcasonablc IO ilss\lmc that workers are actually paid for their labor at the rate which A CCIII;II 10 their marginal productivity. In addition, from the empirical point of view, the marginal producti\,lty hypothesis of wage determination is at least challenged by a number of alternative hypotheses such as the ability to pay, the degree of concentration, the size of the plant, the unionization and more generally the institutional
sottinps.” Ths marginal productititr: hypothAx can hardl: be considered as the acccptcd thcrwy that satisfxtoril~ csplainr rc;ll \\iapc plr~nwnt. The second proposition requires of the economy a special characteristic in its constituents. i.e.. the constituents in the economy can be divided into a small group of capitalists and a large group of laborers. Howxer. it is hard to make clear distinctitln bctwccn capitalists and laborers in the present, developed market-oriented cconomilx For example. household income and expenditure survey conducted in Japan divides househo& into workers’ and non-workers’ households.” The data presented in it for 1973 reveals that the households headed by a worker of the age of 35 lo 39 years had the average savings only t4’:,, below the avcragc SW ings held hp corresponding non-acrrkers’ houschvlds. i.c.. Y I .h million 8crws X 2. I millicrn.J Thus. it cu hi At! thilt the cli~ssici~l dichotomy has apparcntl~ lwt much cd its \;tlidit). The situation is similar in other dc\chpcd wuntrk. 1'11~s. I do 1101SW ilIly r~i~~<~niIbiC basis for this proposition. In fact. the diminishing distinction between capitalists and laborers can in part bc explaiwul by incrcasin g humall cilpirill which is embodied in workers. Naluridly. the quantity of IllImatl ciipilal posw$sed bj iI worker wollld ~~ff:~t the rc\vi;rd 11~’rwxiws. For this rcawn. thz avcrilpe re\vitrd per worker is capcctcd to differ anwng rcgicws. C~CII under ptxfwt ccjmpaition and pcrfat rnobilit~ OT factors. iis I 11~ii\CragC.s~t~k (4 hnn~iln apital WNIM bc diffcrcnt Th~rcfow. L‘\c~ if I~C‘ return to plt~?;icitl capital is t()tiill) i\lllt~ll~ r&w;. rli~wrded. inconir: disparil~ would rcllli~ill as long ;Ir llicrc is di~pority ilrllimg rqions in Ihc’ i~\N;Q!C block of hunl;rll kxpit;ll. !klv r’\pAiwnl I;v lllc Icing(lu73Cl Cilll ;IlSO IX! run implic;Uion krf iwoni~ Cl~Wlli~i~lii~ll in MCril nilc’rprcted in Ihis lichl.
Mera, K.. 1973b, Regional production functions and social olcrhcad capnal: An analysis of the Japanese case, Regional and tlrban Economics 3, no. 2. May, 157-186. Mera, K., 1973c, Trade-off between aggregate eficicncy and interregional equity: The c,~se of Japan, Regional and Urban Economics 3. no. 3, Aug., 273-299. Mera, K., 1975, Income distribution and regional development (University of Tokyo Press. Tokyo). Ohlin, B., 1933, lnterregional and international trade (Cambridge, Harvard University Press, Cambridge, MA). Sasaki, K., 1978, Trade-ofl‘ between aggregate efliciency and interregional equity: A comment, Regional Science and Urban Economics, this issue. Starrett, David, 1976, Social institutions, imperfect information. and the distribution of Income. Quarterly Journal of Econor ‘cs 90. no. 2. May. 261. 284. Sveikanskas, L.A., 1975. The productivity of cities, Quarterly Journal of EcorDmics X9. no. 3, Aug., 393413. Wachter, Michael L., 1970, Relatibr wage equations for U.S. manufacturing mdustri.\ 1947 1967, Review of Economics and Statistics 52. no. 4. Nov.. 405 410.
Rccwcd
Januq
I977
worker is paid for his marginal productivity, and (21 the reward per \vorker should be used as the basis of measuring the wclfarc in a region. It is customarily assumed that there are only two factors of production, capital and labor, and that production technology is identical among different regions [Ohlin (1933) is a typical case]. However, natural conditions for production differ from region to region and they must have impact on productivity. In other words, if capital and labor are taken as the sole factors of production, the production function must differ among regions. This is one of the assumptions used in my earlier paper (1967). In empirically examin;ng production by region. I (1973b and 1975. ch. 3) have given explicit consideration to the productive role of the social overhead capital (SOC). This is a further generalization of the net &issical production function. Empirical analysis in Mera (1973h) proved tl .t SOC has an identifiable productivity in all of the three major sector5 of 111~ economy. The confirmation of the productive role of SOC has a profound implication for the distribution of income to factors as discussed ieh~. Another important issue in production is returns to scale. The cmventional neoc!assical economics assumes constant returns to scale in production. This is a convenient assumption, but my analysis (1973b) as well as others [for example, Sveikanskas (19751~ demonstrates that the assumption does not hold. Specifically, diseconomiex of scale \\crc identified to cxiht in the primary sector and economies of scale in the secondary and tcrtiq sectors. If all sectors were taken together. economics of scale \\‘cre idcntificd for a fixed geographic area. As to the question of distribution. the neoclassical tlworg IIcllds ll1il1 workers are paid at a rate which is identical to their marginal producti\it!. Similarly.
capitalists
in\xst
until
the marginal
roturn
hcco~iw~
CC~WI 10 rhc
cost of capital. As long as the production function is in constant returns to scale end no public sector is invol\;ed in production. this distribution criterion just exhausts output. However, at least two ohsiii&s hale IXCII identified above: the production function is not in constant returns to scale and there is the third factor of production, i.e.. SOC. SOC does not directI\ r claim a share in output. Its’share‘ might be, at the first round. taken by either IIK owners of capital or workers or both at so1111: lwoportion~. III a(ldition, 111~ fact that the production function is not in ~~~nstilnt rcturlla 10 h,cilIc necessarily leads to a breakdown of the marginal produoti\ity I~~l~thusis or income distribution. For these two reasons. it is not rcasonablc IO ilss\lmc that workers are actually paid for their labor at the rate which A CCIII;II 10 their marginal productivity. In addition, from the empirical point of view, the marginal producti\,lty hypothesis of wage determination is at least challenged by a number of alternative hypotheses such as the ability to pay, the degree of concentration, the size of the plant, the unionization and more generally the institutional
sottinps.” Ths marginal productititr: hypothAx can hardl: be considered as the acccptcd thcrwy that satisfxtoril~ csplainr rc;ll \\iapc plr~nwnt. The second proposition requires of the economy a special characteristic in its constituents. i.e.. the constituents in the economy can be divided into a small group of capitalists and a large group of laborers. Howxer. it is hard to make clear distinctitln bctwccn capitalists and laborers in the present, developed market-oriented cconomilx For example. household income and expenditure survey conducted in Japan divides househo& into workers’ and non-workers’ households.” The data presented in it for 1973 reveals that the households headed by a worker of the age of 35 lo 39 years had the average savings only t4’:,, below the avcragc SW ings held hp corresponding non-acrrkers’ houschvlds. i.c.. Y I .h million 8crws X 2. I millicrn.J Thus. it cu hi At! thilt the cli~ssici~l dichotomy has apparcntl~ lwt much cd its \;tlidit). The situation is similar in other dc\chpcd wuntrk. 1'11~s. I do 1101SW ilIly r~i~~<~niIbiC basis for this proposition. In fact. the diminishing distinction between capitalists and laborers can in part bc explaiwul by incrcasin g humall cilpirill which is embodied in workers. Naluridly. the quantity of IllImatl ciipilal posw$sed bj iI worker wollld ~~ff:~t the rc\vi;rd 11~’rwxiws. For this rcawn. thz avcrilpe re\vitrd per worker is capcctcd to differ anwng rcgicws. C~CII under ptxfwt ccjmpaition and pcrfat rnobilit~ OT factors. iis I 11~ii\CragC.s~t~k (4 hnn~iln apital WNIM bc diffcrcnt Th~rcfow. L‘\c~ if I~C‘ return to plt~?;icitl capital is t()tiill) i\lllt~ll~ r&w;. rli~wrded. inconir: disparil~ would rcllli~ill as long ;Ir llicrc is di~pority ilrllimg rqions in Ihc’ i~\N;Q!C block of hunl;rll kxpit;ll. !klv r’\pAiwnl I;v lllc Icing(lu73Cl Cilll ;IlSO IX! run implic;Uion krf iwoni~ Cl~Wlli~i~lii~ll in MCril nilc’rprcted in Ihis lichl.
Mera, K.. 1973b, Regional production functions and social olcrhcad capnal: An analysis of the Japanese case, Regional and tlrban Economics 3, no. 2. May, 157-186. Mera, K., 1973c, Trade-off between aggregate eficicncy and interregional equity: The c,~se of Japan, Regional and Urban Economics 3. no. 3, Aug., 273-299. Mera, K., 1975, Income distribution and regional development (University of Tokyo Press. Tokyo). Ohlin, B., 1933, lnterregional and international trade (Cambridge, Harvard University Press, Cambridge, MA). Sasaki, K., 1978, Trade-ofl‘ between aggregate efliciency and interregional equity: A comment, Regional Science and Urban Economics, this issue. Starrett, David, 1976, Social institutions, imperfect information. and the distribution of Income. Quarterly Journal of Econor ‘cs 90. no. 2. May. 261. 284. Sveikanskas, L.A., 1975. The productivity of cities, Quarterly Journal of EcorDmics X9. no. 3, Aug., 393413. Wachter, Michael L., 1970, Relatibr wage equations for U.S. manufacturing mdustri.\ 1947 1967, Review of Economics and Statistics 52. no. 4. Nov.. 405 410.