Inequality and Economic Growth
Initial theories incorrectly stated that inequality had a positive effect on economic development. The marginal propensity to save was thought to increase with wealth and inequality increases savings and capital accumulation. However, it was determined much later that the analysis based on comparing yearly equality figures to yearly growth rates was flawed and misleading because it takes several years for the effects of equality changes to manifest in economic growth changes.
The credit market imperfection approach, developed by Galor and Zeira (1993), demonstrates that inequality in the presence of credit market imperfections has a long lasting detrimental effect on human capital formation and economic development.
The political economy approach, developed by Alesian and Rodrik (1994) and Persson and Tabellini (1994), argues that inequality is harmful for economic development because inequality generates a pressure to adopt redistributive policies that have an adverse effect on investment and economic growth.
Read more about this topic: Economic Growth
Famous quotes containing the words inequality, economic and/or growth:
“Nature is unfair? So much the better, inequality is the only bearable thing, the monotony of equality can only lead us to boredom.”
—Francis Picabia (1878–1953)
“The reality is that zero defects in products plus zero pollution plus zero risk on the job is equivalent to maximum growth of government plus zero economic growth plus runaway inflation.”
—Dixie Lee Ray (b. 1924)
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—Charles Horton Cooley (1864–1929)