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Innovation, Unemployment and Policy in the Theories of Growth and Distribution

Edited by Neri Salvadori and Renato Balducci

Innovation, Unemployment and Policy in the Theories of Growth and Distribution increases our understanding about the more relevant economic determinants and policy aspects of the interdependence between economic growth and income distribution.
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Chapter 13: Saving capitalism from capitalists: inequality, taxation and growth in a concentrated economy

Guido Cozzi


* Guido Cozzi 13.1. INTRODUCTION This chapter suggests an additional explanation for the negative correlation often found between inequality and growth, and the positive correlation between taxation and growth (see for example, Alesina and Rodrik, 1994, Persson and Tabellini, 1994; Perotti, 1996; Benabou, 1996): the corporate channel. Endogenous growth theory (for example, Shell, 1966, 1967, and 1970; Romer 1990; Grossman and Helpman, 1991a, 1991b and 1991c; Aghion and Howitt, 1992 and 1996) recognizes the importance of purposeful investment by firms in the research and development (R&D) of better products and processes as a major cause of the growth in the wealth of nations. Cumulated R&D investments generate higher profits and higher wages, in proportion to the productivity advances they bring about. While the models of ‘creative destruction’ (see Aghion and Howitt, 1998) develop and extend some important Schumpeterian insights, this chapter seeks to analyse the growth consequences of inequality and taxation in an economic framework perhaps more similar to what Schumpeter (1942) thought should prevail at an advanced stage of capitalism. In the economy of this chapter R&D is a routinized and incremental activity that gains a decisive competitive advantage from the firm’s production experience, longterm customer/seller or borrower/lender relationships, so that no potential rival would find it profitable to challenge the incumbent firm on its own terrain. Needless to say, there is ample empirical evidence of incremental and successful R&D carried out in large firms’ laboratories, as well as evidence of breakthrough innovations realized by small...

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