Income Distribution in Macroeconomic Models

Income Distribution in Macroeconomic Models

Income Distribution in Macroeconomic Models

Income Distribution in Macroeconomic Models

Excerpt

This book focuses on two main sets of issues. The first relates to the dynamics of aggregate variables when the population is heterogeneous. Under which conditions are the dynamics of capital accumulation affected by the distribution of income and wealth? When is a more equal distribution of income and wealth beneficial or harmful for accumulation and growth? The second set of issues refers to the dynamics of the distribution of income and/or wealth. How does the distribution of income and wealth evolve in a market economy? When does the gap between rich and poor people in market economy increase over time? Conversely, under which conditions will this gap tend to disappear eventually?

ISSUES

Interest in the distribution of income used to be central in economics. Classical economists were concerned with the issue of how an economy’s output is divided among the various classes in society, which, for David Ricardo, was even “the principal problem of Political Economy.” While classical economists were primarily interested in the functional distribution of income among factors of production (wages, profits, and land rents), in modern societies distributional concerns focus at least as much on the personal (or size) distribution of income. In contrast to its paramount importance in nineteenth-century classical economics, however, income distribution became a topic of minor interest in recent decades. Atkinson and Bourguignon (2001, 7265) note that “in the second half of the century, there were indeed times when interest in the distribution of income was at a low ebb, economists appearing to believe that differences in distributive outcomes were of second order importance compared with changes in overall economic performance.”

This is especially true regarding macroeconomics and growth theories. While early growth models in the post-Keynesian tradition were still strongly concerned with distributional issues (see, in particular, Kalecki 1954 and Kaldor 1955, 1956), subsequent “new classical” theoretical developments removed distribution from the set of macroeconomic issues of interest. Crucial progress in microfounding behavioral relationships in terms of optimal choices and expectations accompanied heavy reliance on “representative agent” modeling strategies. The distribution of income and wealth across consumers was viewed as a passive outcome of aggregate dynamics and market interactions, and little attention was paid to . . .

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