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 economic growth, inequality and, inequality, economic and/or growth:
“Economic growth may one day turn out to be a curse rather than a good, and under no conditions can it either lead into freedom or constitute a proof for its existence.”
—Hannah Arendt (1906–1975)
“All the aspects of this desert are beautiful, whether you behold it in fair weather or foul, or when the sun is just breaking out after a storm, and shining on its moist surface in the distance, it is so white, and pure, and level, and each slight inequality and track is so distinctly revealed; and when your eyes slide off this, they fall on the ocean.”
—Henry David Thoreau (1817–1862)
“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)
“Freedom is the by-product of economic surplus.”
—Aneurin Bevan (1897–1960)
“Of all the wastes of human ignorance perhaps the most extravagant and costly to human growth has been the waste of the distinctive powers of womanhood after the child-bearing age.”
—Anna Garlin Spencer (1851–1931)