Must-Read: Ravi Kanbur and Joe Stiglitz: Wealth and Income Distribution: New theories Needed for a New Era

Must-Read: Ravi Kanbur and Joe Stiglitz: Wealth and Income Distribution: New theories Needed for a New Era: “Kaldor (1957) put forward a set of stylised facts on growth and distribution…

…for mature industrial economies… the constancy of the share of capital…. Kuznets (1955) put forward a second set… that while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialised economies mature. These empirical formulations brought forth a generation of growth and development theories whose object was to explain the stylised facts…. However, the Kaldor-Kuznets stylised facts no longer hold…. Bringing these facts centre stage has been the achievement of research leading up to Piketty (2014).

It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital….Piketty… the empirical observation that the rate of return to capital, r, systematically exceeds the rate of growth, g…. What Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function…. There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalised value of other rents….

We need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality…. We need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality…