ABSTRACT
In this chapter, I discuss the behavioral theory of the firm and induced economic growth, elaborated upon in Chapters 2 and 3, to cast better light on the complex relationship between economic growth and income distribution. Unlike conventional economic wisdom, the analytical predictions of the models presented here are consistent with the stylized facts of economic life. For, unlike the conventional model, the behavioral model does not predict that convergence in real per capita output should be taking place amongst nations through market forces (Chapters 2 and 3) or that there exists a fundamental trade-off between income equality and levels of per capita income and per capita income growth. Needless to say, these conventional analytical predictions have been challenged in the empirical literature. Moreover, given that significant doubt has been cast on the technology-cum-education explanation of increasing wage inequality, the model presented here attempts to address the question of changes in wage inequality and its relationship to economic growth as a function of behavioral and institutional variables, which many scholars now agree are largely responsible for contemporary changes in wage inequality. Income or wage inequality and changes therein need not be driven simply by technical or production function variables. In the behavioral model, changes in wage and income inequality can take place independent of technological change and changes in human capital formation. Moreover, increasing inequality is shown to be consistent with, and a potential cause of, lower levels of per capita income and higher levels of economic inefficiency. 1
