Editing Economic growth (section)

=== Theories ===
{{Further|Economic inequality|Effects of economic inequality}}

The prevailing views about the [[Social inequality and economic growth|role of inequality]] in the growth process has radically shifted in the past century.<ref>Galor, Oded (2011). "Inequality, Human Capital Formation, and the Process of Development". ''Handbook of the Economics of Education.'' Elsevier.</ref>

The classical perspective, as expressed by Adam Smith, and others, suggests that inequality fosters the growth process.<ref name="BergOstryEE">{{Cite journal|last1=Berg|first1=Andrew G.|last2=Ostry |first2=Jonathan D.|year=2011 |title=Equality and Efficiency|journal=Finance and Development|volume=48 |issue=3 |url=http://www.imf.org/external/pubs/ft/fandd/2011/09/berg.htm|access-date=July 13, 2014 |publisher=International Monetary Fund}}</ref><ref name="BergOstrySD">{{cite journal|last1=Berg |first1=Andrew|last2=Ostry|first2=Jonathan|year=2017|title=Inequality and Unsustainable Growth: Two Sides of the Same Coin|journal=IMF Economic Review|volume=65|issue=4|pages=792–815 |doi=10.1057/s41308-017-0030-8 |s2cid=13027248|url=http://www.imf.org/external/pubs/cat/longres.aspx?sk=24686}}</ref> Specifically, since the aggregate saving increases with inequality due to higher property to save among the wealthy, the classical viewpoint suggests that inequality stimulates capital accumulation and therefore economic growth.<ref>{{cite journal|last=Kaldor|first=Nicoals|year=1955|title=Alternative Theories of Distribution |journal=Review of Economic Studies|volume=23|issue=2|pages=83–100|doi=10.2307/2296292|jstor=2296292}}</ref>

The [[Neoclassical economics|Neoclassical perspective]] that is based on [[representative agent]] approach denies the role of inequality in the growth process. It suggests that while the growth process may affect inequality, income distribution has no impact on the growth process.

The modern perspective which has emerged in the late 1980s suggests, in contrast, that [[income distribution]] has a significant impact on the growth process. The modern perspective, originated by [[Galor-Zeira model|Galor and Zeira]],<ref name=":4">{{Cite journal|last1=Galor|first1=Oded|last2=Zeira|first2=Joseph|date=1993|title=Income Distribution and Macroeconomics|journal=The Review of Economic Studies|volume=60|issue=1|pages=35–52 |doi=10.2307/2297811|jstor=2297811|citeseerx=10.1.1.636.8225}}</ref><ref name=":5">{{Cite journal|last1=Galor|first1=Oded|last2=Zeira|first2=Joseph|date=1988|title=Income Distribution and Investment in Human Capital: Macroeconomics Implications|journal=Working Paper No. 197 |publisher=Department of Economics, Hebrew University}}</ref> highlights the important role of [[Homogeneity and heterogeneity|heterogeneity]] in the determination of aggregate economic activity, and economic growth. In particular, Galor and Zeira argue that since credit markets are imperfect, inequality has an enduring impact on [[human capital]] formation, [[Aggregate income|the level of income]] per capita, and the growth process.<ref>{{Cite web|url=https://www.brown.edu/Departments/Economics/Faculty/Oded_Galor/pdf/WB.pdf |title=The Effect of Distribution on Growth|last=The World Bank Group|date=1999}}</ref> In contrast to the classical paradigm, which underlined the positive implications of inequality for capital formation and economic growth, Galor and Zeira argue that [[Economic inequality|inequality]] has an adverse effect on [[human capital]] formation and the development process, in all but the very poor economies.

Later theoretical developments have reinforced the view that inequality has an adverse effect on the growth process. Specifically, Alesina and Rodrik and Persson and Tabellini advance a political economy mechanism and argue that inequality has a negative impact on economic development since it creates a pressure for distortionary redistributive policies that have an adverse effect on investment and economic growth.<ref name=":6">{{cite journal |last1=Alesina|first1=Alberto|last2=Rodrik|first2=Dani|year=1994 |title=Distributive Politics and Economic Growth|journal=Quarterly Journal of Economics|volume=109|issue=2 |pages=65–90|doi=10.2307/2118470|jstor=2118470 |url=http://dash.harvard.edu/bitstream/handle/1/4551798/alesina_distributive.pdf}}</ref><ref name=":7">{{cite journal|last1=Persson|first1=Torsten|last2=Tabellini|first2=Guido|year=1994|title=Is Inequality Harmful for Growth?|journal=American Economic Review|volume=84|issue=3|pages=600–21|jstor=2118070}}</ref>

In accordance with the credit market imperfection approach, a study by Roberto Perotti showed that inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel found no support for the political economy mechanism.<ref name=":8">{{cite journal|last=Perotti |first=Roberto|year=1996|title=Growth, Income Distribution, and Democracy: What the Data Say |journal=Journal of Economic Growth|volume=1|issue=2|pages=149–87|doi=10.1007/BF00138861 |s2cid=54670343}}</ref> Consequently, the political economy perspective on the relationship between inequality and growth have been revised and later studies have established that inequality may provide an incentive for the elite to block redistributive policies and institutional changes. In particular, inequality in the distribution of land ownership provides the landed elite with an incentive to limit the mobility of rural workers by depriving them from education and by blocking the development of the industrial sector.<ref>{{Cite journal|last1=Galor|first1=Oded|last2=Moav|first2=Omer|last3=Vollrath|first3=Dietrich|date=2009 |title=Inequality in Landownership, the Emergence of Human-Capital Promoting Institutions, and the Great Divergence|journal=Review of Economic Studies|volume=76|issue=1|pages=143–179|doi=10.1111/j.1467-937X.2008.00506.x|pmid=23946551|pmc=3740999}}</ref>

A unified theory of inequality and growth that captures that changing role of inequality in the growth process offers a reconciliation between the conflicting predictions of classical viewpoint that maintained that inequality is beneficial for growth and the modern viewpoint that suggests that in the presence of credit market imperfections, inequality predominantly results in underinvestment in human capital and lower economic growth. This unified theory of inequality and growth, developed by Oded Galor and Omer Moav,<ref>{{Cite journal|last1=Galor|first1=Oded|last2=Moav|first2=Omer|date=2004|title=From Physical to Human Capital Accumulation: Inequality and the Process of Development|journal=Review of Economic Studies |volume=71|issue=4|pages=1001–1026|doi=10.1111/0034-6527.00312|citeseerx=10.1.1.561.4168}}</ref> suggests that the effect of inequality on the growth process has been reversed as human capital has replaced physical capital as the main engine of economic growth. In the initial phases of industrialization, when physical capital accumulation was the dominating source of economic growth, inequality boosted the development process by directing resources toward individuals with higher propensity to save. However, in later phases, as human capital become the main engine of economic growth, more equal distribution of income, in the presence of credit constraints, stimulated investment in human capital and economic growth.

In 2013, French economist [[Thomas Piketty]] postulated that in periods when the average annual rate on return on investment in capital (''r'') exceeds the average annual growth in economic output (''g''), the rate of inequality will increase.<ref>{{cite book|title=Capital in the Twenty-first Century.|last1=Piketty|first1=Thomas|date=2014|publisher=Brilliance Audio|isbn=978-1491534656}}</ref> According to Piketty, this is the case because wealth that is already held or inherited, which is expected to grow at the rate ''r'', will grow at a rate faster than wealth accumulated through labor, which is more closely tied to ''g''. An advocate of reducing inequality levels, Piketty suggests levying a global [[wealth tax]] in order to reduce the divergence in wealth caused by inequality.