ABSTRACT
In this article, Hamilton asks two fundamental questions: First, what determines the average level of living in a society; and second, what determines who will live in relative poverty and who in relative plenty? He finds the answers given by orthodox economists to be wrong. Institutionalists, he claims, give the right answers, and he explains them. As usual, Hamilton gives a rich contextual background to his explanations. Such attention to context is a characteristic of institutional analysis. Hamilton points out that neoclassical economists and even Marxists attribute the average level of living in a society to the capital accumulated by its members. Veblen provided the appropriate correction to this shared misconception when he explained that a society’s average level of living was a result of the state of the industrial arts in the community. The correct answer to this first question is the level of technology, not the quantity of capital. Neoclassical economists answer the second question – who enjoys plenty and who suffers poverty? – primarily with the marginal productivity theory of income distribution. However, Hamilton points out that their answer is circular. A person is paid little or much because their productivity is small or large, but their productivity is measured by their pay. The correct answer is that relative income is determined by relative status ranking. High status is paid high income. Low status is paid low income. The income distribution is a product of the institutional structure of status.
