Inequality and Economic Performance. A Brief Overview to Theories of Growth and Distribution

Income and wealth distributions can no longer be seen as mere outcomes of the general equilibrium of an economy. The central processes that determine resource allocation – through capital markets, through the political system, and through social circumstances – are influenced by the distribution of wealth in important ways. More unequal societies tend to develop larger groups of people who are excluded from opportunities others enjoy – be they a better education, access to loans, or to insurance – and who therefore do not develop their full productive potentials. Both theory and empirical evidence suggest that these incomplete realizations of economic potential are not of concern only to those who care about equity per se. They also affect aggregate economic potential, and therefore aggregate output and its rate of growth. The inverted-U relationship between growth and inequality suggested by Kuznets has not survived recent empirical scrutiny terribly well. Instead, it is gradually being replaced by a perception that the main flow of causation may be in the other direction, with inequality hampering the rate and quality of economic growth. The debate is not over, either conceptually or empirically. But its very liveliness attests to the importance of the question.

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