The New Economics of Income Distribution

The New Economics of Income Distribution

Introducing Equilibrium Concepts into a Contested Field

Friedrich L. Sell

With the increased interest in the role of inequality in modern economies, this timely and original book explores income distribution as an equilibrium phenomenon. Though globalization tends to destroy earlier equilibria within industrialized and developing countries, new equilibria are bound to emerge. The book aims at a better understanding of the forces that create these new equilibria in income distribution and examines the concept at three distinct levels: market equilibrium, bargaining equilibrium and political economy equilibrium. In particular, the author addresses the question of how the main factor markets of labour and capital are related to income distribution.

Chapter 2: Various concepts of equilibrium in economics

Friedrich L. Sell

Subjects: economics and finance, welfare economics

Abstract

In a decentralized economy, plans of the involved agents can be coordinated either by the market process – that is, by adjustable prices and the flexible response of demand and supply – or by the contract seeking forces driven by bargaining agents or by the voting power of the electorate. ‘Various concepts of equilibrium in economics’, we put forward the idea that market, contractual and political economy outcomes are rather a by-product of the distributional contest, which is in the background of all economic actions. This view disagrees with the traditional conviction that income distribution is a sort of by-product of market processes, bargaining situations or elections. The chapter illustrates all three channels for the income distribution contest by taking the example of bandwagon and snob effects in the goods market equilibrium, the efficient exchange of goods between households in the bargaining framework and the rational partisan business cycle, which can explain equilibrium values for unemployment and the inflation (rate).

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