Abstract
Institutionalist and neoclassical views on income distribution are characterized by different assumptions about the inequality - savings - economic progress relationship. By questioning the neoclassical arguments, the paper promotes the attitude that economic progress results not from savings as ?abstain from current consumption? but from society?s ability to continuously develop technological arts and crafts. Empirical analysis of panel data from OECD countries using a dynamic GMM model shows a positive relationship between income concentration and aggregate savings, but there is no robust evidence of a positive relationship between aggregate savings and economic progress. Furthermore, we find robust evidence that technology and human capital are the key determinants of economic progress, implying that accumulation of physical and human capital is more important for economic progress than accumulation of financial capital.
Highlights
The hypothesis, which may be derived from the presented conceptual framework, is that concentration at the top of the income distribution has a positive impact on aggregate savings, but instead of aggregate savings technological progress and human capital are key drivers of economic progress
This is in the line with life cycle hypothesis (Franco Modigliani and Richard Brumberg 1954) according to which propensity to save depends on age in a way that the peak of savings is reached at the working age, while young age and retirement is associated with dissaving
The key determinant of investment and economic progress is technology, but technology that is related to diffusion of innovations and/or knowledge
Summary
A large literature has examined the relationship between income inequality and economic progress from neoclassical and heterodox perspectives. Stockman (2013) argue that income inequality is associated with government policies that tend to favour the elite over the masses This argument differs from that given by Thomas Piketty (2014), who see growing income inequality as a natural product of market forces and institutions, explained by the circumstances under which the return on capital exceeding the rate of economic growth. Following Peach’s call (1987) for more empirical studies concerning the distribution issues within the institutionalist framework, Park (1996) developed the casual model to explain the relationship among income inequality, socio-political instability, and economic progress from the institutionalist perspective. Our contribution to the literature relies on providing the robust econometric evidence in favour of institutionalist over neoclassical view on relationship between income distribution and economic progress by questioning the widespread neoclassical assumptions about savings as abstinence from consumption and about accumulation of financial capital as a determinant of economic progress
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