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
capital markets, through the political system, and through social circumstances –
by the distribution of wealth in important ways. More unequal societies tend to develop
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
potentials. Both theory and empirical evidence suggest that these incomplete realizations
economic potential are not of concern only to those who care about equity per se.
affect aggregate economic potential, and therefore aggregate output and its rate
The inverted-U relationship between growth and inequality suggested by Kuznets has
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
or empirically. But its very liveliness attests to the importance of the question.