Do inequalities restraint growth?

Do inequalities restraint growth?

On an ethical point of view, it is certain that inequality among people should be reduced as much as possible. Indeed, there is no logical reason why some people could afford more comfort and welfare than others.

In a utopian society with perfect economic equality, people would earn the exact value of their marginal product and thereby would provide the efficient amount of effort. In this case, there would be no need to worry about the gap that would not exist between the poor and the rich. But because of socioeconomic and political reasons, the world population is unfortunately extremely heterogeneous in terms of earnings. Even though purchasing power is not a sine qua non condition for happiness, having a certain amount of money to live a better life is definitely a primary need.

But if we now think in purely economic terms, are inequalities favourable or unfavourable to the economic growth? Is the decrease of inequalities between people an essential key for developing countries to get to the same economical maturity level as developed countries?

According to the Lewis model about economic growth, the American economist S. Kuznets has demonstrated that countries need to go through a certain number of steps in order to achieve their development.

The hypothetical Kuznets curve represents the level of inequality in a country as a function of his level of income per capita, which is normally increasing with time. According to this theory, developing countries begin with a lower level of inequality because the whole population has an agricultural activity. On a second step, inequalities start to increase considering that the modern sector is developing and attracts some people who move from the rural to the urban population. In the end, inequalities should be reduced when the modern sector absorbs all the population and a certain level of average income is reached. Human capital replaces physical capital as a source of growth.

But as a critique of this theory and based on the thinking of T. Picketty in his book « Le Capital au XXIe siècle », we have to keep in mind that inequalities increased in developed countries during the last 30 years.

Furthermore, it is certain that rich people have a better opportunity to spare and then to invest their money to become even richer, but above all they increase economic growth. According to this logic, it would be more efficient for a country to have a few rich people than only people with average income.

On the other hand, dispersed incomes imply that a considerable part of the population does not have the capacity to invest in human capital and as a result cannot expand their productivity.

Finally, the question is not directly related to economic growth, but more about if we should establish redistribution and social policies to reduce inequalities or if at some point inequalities reduce themselves.

As a conclusion, it is relevant to notice that as it has been discussed in the Academia Engelberg the main purpose for the different countries in the world may not be the economic growth in the future anymore. The focus will probably be put on a more equitable and sustainable society.