Allocation, Distribution, Scale, and Depth
By Daniel O'Connor of Integral Ventures, LLC
One of the important contributions of the ecological economists to the overall economic dialogue has been their emphasis on this notion of economic scale, which they generally define as a measure of the physical volume of matter-energy throughput, or the efficiency with which the economy is using the sources and sinks of the ecosystem. When they introduce the idea of scale, they typically do so in contrast to the more widely accepted ideas of economic allocation and distribution. As they see it, economics must address the perennial questions of allocation, distribution, and scale, seeking the appropriate means via market, state, etc. to the desired ends of efficient allocation, fair distribution, and sustainable scale. (Herman Daly, Beyond Growth, 45-60; Robert Costanza, et.al., Ecological Economics, 80-83) Clearly, there are some value judgments being expressed in the crisp adjectives they choose to define their desired ends, so I will often adopt a more transparently normative, but deliberately ambiguous term like right allocation, right distribution, and right scale.
As I presented in Sustainable Growth, I think we can benefit from the recognition of a fourth facet to economic development: that of economic depth. The easiest way to grasp economic depth is to imagine growth in economic output, absent any growth in economic scale (i.e., steady-state scale) and independent of any growth in money supply (so real, non-monetary output). What's left is growth in economic depth, or the depth dimension of the growth in economic output. We talk around the concept all the time without really defining it, using terms like knowledge economy, intellectual capital, experience goods, organizational learning, trust, and innovation, which are all just different components of this economic depth. Anyway, as I have tried to demonstrate, the recognition of economic depth can reconcile the apparently irreconcilable visions of those who (accurately) recognize the ecological limits to economic scale and those who (accurately) recognize the potential for economic growth beyond these ecological limits. Thus, we have to consider right depth in relation to right scale, right distribution, and right allocation.
This brings me to the critical question regarding the relationships among these four concepts: allocation, distribution, scale, and depth. Can they be reconciled with each other and incorporated into a single model of the economy?
As I understand it, allocation may be defined as the channeling of the various factors of production into the different types of production required to generate the particular mix of products that households demand. Thus, allocation describes exactly what gets created in fulfillment of our collective value functions. As an apparent complement, distribution focuses our attention on the particular mix of people who consume this product by virtue of the incomes they have earned for the factors of production they contributed to the prior production of the goods now being consumed. Therefore, distribution describes exactly who gets what we've all created. It may be an over-simplification, but it seems that allocation and distribution together answer this essential economic question: exactly who gets exactly what?
Reflecting on the integral model of sustainable economic growth presented below, it seems like allocation describes the details of the clockwise cycle of production and consumption--specifically, the way factors of production are allocated by firms to the production of a specific mix of products to satisfy the households. Distribution then describes the details of this same cycle of production and consumption, this time the way it is distributed among different people. Of course, most economists will refer to distribution in money terms, such as the distribution of income and wealth. But this is just referencing the counter-clockwise cycle of money that flows in direct proportion to the flow of production and consumption that it funds. This money flow can be described in terms of its distribution across people as well as its allocation across products.
If this is a reasonable way to interpret these over-used yet under-defined terms, then this integral model of sustainable economic growth frames the ideas of allocation and distribution just as it does scale and depth.
Exploring the model more closely, the ratio of depth/scale represented by the yellow/green checkerboard pattern in the cycle of production and consumption can now be seen more clearly as a variation on the allocative process that determines precisely what we create through our economy. While economists might illustrate allocation by reference to a one-dimensional list of shoes, guns, butter, etc., we can also illustrate it in terms of a depth/scale ratio, or a continuum from relatively scale-intensive goods to relatively depth-intensive goods, like coal-powered electricity to solar-powered electricity.
Likewise, the ratio of depth/scale represented by the same yellow/green checkerboard pattern in the cycle of production and consumption can also be seen as a variation on the distributive process that determines precisely who gets what we create through this economy. We can illustrate this version of distribution by contrasting the depth/scale ratios across different people or populations, measuring the extent to which each of us is participating in the aggregate depth/scale pattern of production and consumption. Thus, we have relatively scale-intensive to relatively depth-intensive people, populations, households, and firms.
Theoretically, we can generate economic allocation and distribution histograms using a variety of different criteria, from aggregate money prices to conventional demographics to alphabetical order--take your pick. Choosing to sort by depth/scale across products (allocation) and people (distribution), with cross-referencing between the two, establishes a clear integration of all four facets of economic action.
This adds a whole new significance to the perennial question: exactly who gets exactly what? There is no way to answer this question without at least implicitly answering the related question of depth/scale. Nor is it possible to analyze scale and depth without simultaneously dealing with allocation and distribution. To a great extent, the significant challenges associated with the measurement and evaluation of scale and depth are rooted in more fundamental challenges with the measurement and evaluation of allocation and distribution.
Furthermore, these are not only macroeconomic issues to be dealt with in the aggregate. They are also microeconomic issues that originate simultaneously at the margin. For example, when a householder takes a job at a firm to produce a particular product in return for income, s/he is through this single act of exchange simultaneously participating in the larger patterns of allocation (of resources across different products) and distribution (of incomes across different people). With the next act of exchange, s/he spends this income on some mix of products and in so doing s/he translates the prior income distribution into a product distribution across people, while simultaneously funding a part of the next round of resource allocation across products. In each case, it is a single act of exchange between two people that simultaneously contributes to the larger patterns of allocation and distribution, each measured in either input/output or money terms. What few economists acknowledge is that each act of exchange also contributes directly to the larger patterns of economic scale and depth. The depth/scale ratios of the product created by the firm at which this householder is employed, the products subsequently purchased by the householder, and even the firm and household itself are impacted by each of these exchanges.
As I commented the other day, when we look deeply at how singular acts of market exchange actually happen, we discover that each and every one of them has direct implications for allocation, distribution, scale, and depth, whether or not our economic worldview includes these added complications.
This leaves open the next critical question regarding the relationships between right allocation, right distribution, right scale, and right depth. What is right? Who decides?
© 2006 by Daniel J. O'Connor. All Rights Reserved.
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