Introduction

Abstract

For many decades, it has been proclaimed that economic development and technological progress should be on top of the political agenda. However, there also have been worries that fast growth would lead to socially unacceptable levels of income/wealth inequality and even to increased poverty (i.e. to a decline not only of the relative position of a bottom share of the population but also of its absolute position). The European welfare states which are in place today may be regarded as a recognition of these concerns. However, large-scale redistribution measures have increasingly come under attack. One argument to cut welfare expenditure is that redistribution of income and wealth towards the poor distorts savings and investment decisions (since, for instance, a tax on human or physical capital income reduces the return to capital). It has also been suggested that an unequal society serves to provide individual incentives to work hard, to accumulate skills and to undertake risky projects, since the marginal benefit per unit of effort in these activities is high when the income ladder to climb is steep.¹ Moreover, under certain conditions, if the marginal propensity to save is rising in income, a more unequal distribution of income boosts savings and thus possibly investment and growth.² Because of these arguments, it has been concluded that redistribution has a negative impact on growth.

See Welch (1999) for a recent discussion, approving this view.

See Bourguignon (1981) for a welfare analysis of stationary egalitarian and unegalitarian income distributions in a neoclassical growth model in which convex saving functions are assumed.