So in his view, growth reduced inequality.
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The next generation of classical economists brought new and more dramatic perspectives to growth and inequality. Any efforts to feed or otherwise assist the poor were actually counter-productive; the poor would just breed faster. By this logic, growth increased inequality, because the bottom remained stuck. This view, while pleasing to the elite, would have horrified the humane Adam Smith.
Imagine you are a farm operator. How much more would you be willing to pay the owner of a fine flat parcel down in the valley over a remote, steep parcel you could use for next to nothing? That extra payment is your rent—income to the landowner for the mere fact of holding legal title to land.
Note that location is usually the most important component of land quality. As population grows, he said, the economy must expand onto lower and lower quality land.
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Only improved technology and gains from trade can stave off collapse. Hence, Ricardo vigorously advocated free trade. In the final generation of classical economists , two—Karl Marx and Henry George —attacked inequality with such force as to provoke a powerful backlash.
Inequality & Growth
He focused on exploitation of workers by capitalists, among whom he now included landlords. However, like Ricardo, he predicted that growing inequality would lead eventually to a collapse of the capitalist system, and its replacement by a new socialist society. In effect, Marx said growth increases inequality, leading to revolution followed by equality.
Just as marginal land determines rent, he said, it also determines wages—because a worker will not accept wages lower than what he could earn for himself on marginal land. But the greater the inequality of ownership of land and other natural resources the lower will be the quality of marginal land—and hence the lower the wages. Conventional wisdom about the relationship between income distribution and economic development has been subjected to dramatic transformations in the past century.
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While Classical economists advanced the hypothesis that inequality is beneficial for economic development, the Neoclassical paradigm, which had subsequently dominated the field of macroeconomics, dismissed the Classical hypothesis and promoted the viewpoint that the study of income distribution has no importance for the understanding of macroeconomic activity and the growth process. A metamorphosis in these perspectives has taken place in the past two decades. Theory and subsequent empirical evidence have demonstrated that income distribution has a significant impact on the growth process.
While many economists often start working on a topic at the same time, much of the credit for pioneering this line of enquiry must go to Oded Galor and Joseph Zeira. In contrast to the representative agent approach that has dominated the field of macroeconomics for several decades, Galor and Zeira analyze the role of heterogeneity in the determination of macroeconomic behavior.
The research demonstrated that in the presence of capital markets imperfections and local non-convexities in the production of human capital, income distribution affects aggregate output in the long run, as well as in the short-run. Kei-Mu Yi, Discussion Papers.
(DOC) Neo-Classical Theory of Development | abir goldar - moatrenurualsnud.ga
Richard E. Baldwin, Richard E. Ronald W. Jones, Robert C.
The Classical Theory of Economic Growth
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