Academic journal article Journal of Economic Development

Middle-Class Consensus, Social Capital and the Fundamental Causes of Economic Growth and Development

Academic journal article Journal of Economic Development

Middle-Class Consensus, Social Capital and the Fundamental Causes of Economic Growth and Development

Article excerpt

This paper analyzes a heterogeneous-agents endogenous-growth model incorporating both transaction costs and social capital. An individual can either become an active part of the society's middle-class networks of trust and mutual co-operation, thus making a positive contribution to overall social capital. Alternatively, the individual can stay socially disintegrated and free-ride on the community's social capital. Due to the existence of asymmetric information, agents face a moral-hazard problem on the credit market which gives rise to transaction costs and can be alleviated by private, governmental or social governance structures. An increase in inequality and shrinking of the middle class depresses the community's social capital, which, in turn, weakens the informal social governance system and increases economy-wide transaction costs. As a result a more unequal distribution lowers the economy's growth rate.

Keywords: Social Capital, Inequality, Middle Class, Economic Growth, Distribution

JEL classification: D3, O41, Z13

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

One of the most important issues in economics is the problem of economic growth and development. What sustains economic growth over long periods of time? Why do some countries grow rapidly while other countries stagnate? And where do the huge differences in income per capita and worker productivity which can be observed across countries in the world come from?1 The latter question is particularly puzzling, since neoclassical growth theory tells us that economies around the world should actually converge - either (if all economies were intrinsically the same) in an absolute sense or (if economies differ in various respects), at least, in a conditional sense, i.e., in relation to their respective long-run equilibria. All of the three questions above can be answered at two distinct levels: with respect to the mechanics, i.e., proximate causes, or with respect to the fundamental causes of economic growth, respectively.2 According to the "mechanics" of economic growth, persistent cross-country differences in income per capita or economic growth rates are explained by countries' different propensities to save, incentives to work, access to technology, or different government policies. Such conventional textbook explanations remain unsatisfactory, however, in at least two respects: First, instead of solving it, they merely move the "mystery of economic growth" (Helpman, 2004) to another, more fundamental level. If, e.g., differences in savings rates across countries determine cross-country income or growth-rate differences, then why do some societies save more than others? A more satisfactory answer will have to look at more fundamental social structures that determine development outcomes (see e.g., Park, 2008).

Secondly, even after we account for the accumulation of physical and human capital, large differences in income per capita remain across countries. Investment in research and development explains a certain part of this cross-country variation, particularly in industrial economies. But still substantial variation in growth remains after accounting for both accumulation and R&D investment.3 The question is: Why? Again, to answer this question, we are lead to look more closely at fundamental characteristics of societies.

In this vein, the present paper puts forward two interacting elements of the social structure as fundamental causes of economic growth and development: the existence of a broad middle class the members of which share with each other a fairly homogenous set of social orientations ("middle-class consensus"), and the social capital built by social interactions and informal relationships within this middle class.

Accordingly, this paper is related to two recent strands of literature: First, there is the literature on the economics of social capital which will be dealt with in some detail in section 2 below; secondly, there is the literature on the role of the middle class -or, more generally, of distribution- for economic development. …

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