**Costs of production are prices **

As Robinson (1953) pointed out in her critique of the neoclassical production function **all the costs of production are prices** of the inputs used to produce a good or service, and any price is made up of wages and profits; the former and the latter are the payment of each factor of production, namely, **labor and capital**, respectively.

From the aforementioned we can deduce that **the total income distribution of a country** can be **split into wages, and profits.** Hence, such a distribution can be formulated as the following:

** Y= w + r **

From the equation above we can see that, given a **total** **income level Y**, when **wages w** rise the **profits r** drop, and vice versa. **It is true at least in the short term.**

It is noteworthy to point out that in a society **the total production equals the total income** because each good and service in the economy **required labor and capital to be produced** and paid for each of those factors of production, therefore, the total product in terms of value equal the total income (wages and profits). This time Y represents total income, although it can perfectly represent the total production of a society.

If the **number of workers and capital** are taken into account, the above mathematical expression can be written as follows.

** Y= w*L + r*K **

**Total income Y** equals the **wages w** times the **number of workers L** plus the** profits r** times the **amount of capital K** required to produce.

The only way to have more wages and more profits at the same time is through **increases in productivity.**

Mathematically, the formula below shows that keeping the same amount of labor and capital, we can get **more production per worker, and higher wages with higher profits** at the same time (note that the formula has not changed, it just was divided by the number of workers L to get **Y/L , which is production per worker**).

** Y/L = w*(L/L) + r*(K/L) **

Then,

**Y/L = w + r*(K/L)**

The **increase in labor productivity Y/L takes time** because it is the outcome of several variables such as **capital accumulation,** changes in the way **how the resources are managed,** **technical change** (better technology embodied in capital or intermediate goods), **learning-by-doing processes,** among other variables.

**In the short term, it is about who takes the biggest part**

At least in the short term, the struggle between labor and capital **to take a bigger chunk of the pie** will be characterized by the contradiction of such a distribution where **there are losers and winners,** a good example of a **zero-sum game.**

As it has been stated by the **orthodox theory** in a **mechanical way** the rise in productivity makes room for **both wages and profits to grow all together** with everyone happy.** Marx (1865) agreed that capital accumulation brings about the possibility for wages to grow,** nevertheless, asserted that such a win-win condition does not come up mechanically or spontaneously, because **the interest of each class** **(workers and capitalists)** remains and so does the contradiction; possibility of getting better payment is not a certainty and the **bargaining power** has great relevance in the income distribution.

**References**

Marx, Carl (1865). Value, Price, and Profit.

Robinson, Joan (1953). The Production Function and the Theory of Capital. http://theme.univ-paris1.fr/M1/hpe/HPEM1-TD4.pdf

Views: 722