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 6: Income distribution and economic growth

Friedrich L. Sell

Subjects: economics and finance, welfare economics


In ‘Income distribution and economic growth’, we describe the interaction between innovators (advancing prey) and pursuing imitators (pursuing hunters). Imitators are given the role of ensuring that the (new) technological knowledge created by innovators is being diffused. Innovators see to it that their own production methods are more cost-effective, thus causing a profit disparity among vendors. This attracts imitators onto the market whose investments cause the new knowledge to be diffused while also triggering an erosion of the profit disparity that existed before. However, with the disappearance of ‘difference profits’, real investment decreases too, and financial investment becomes more attractive. If difference profits increase again due to the occurrence of autonomous technological progress, profit dispersion will, as a result, increase again. The system moves towards a point where a minimum in the real investment quota is reached. From there on, the investment quota will increase again as a result of high pioneer profits and increases in dispersion of profits. We demonstrate possible bargaining equilibria between unions and firms – which have contradictory views on benefits and costs of a high rate of wage increases/a high dispersion of wage increases. We present a social optimization model in which income distribution and economic growth are jointly determined in political equilibrium. Both a quite equal as well as an extremely unequal distribution of personal incomes are of disadvantage to economic growth. In the empirical test of our approach, we first identify the Kuznets curve. Thereafter, we look for conditional convergence among ‘rich countries’ and conditional divergence for ‘poor countries’. Hence, our empirical findings support the hypothesis of a non-linear relationship between the Gini coefficients, on the one hand, and the per capita real growth rates of income, on the other hand.

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