Distribution of Wealth and its Effects on Economic Growth - Literature review Example

Distribution of Wealth and its Effects on Economic Growth Introduction The contemporary economic world faces a challenge at the point regarding the sharing the wealth a nation equitably. In line with this, economists, philosophers, and scientists agree that distribution of wealth that a nation created is essential for long-term growth of a country. Nonetheless, the point of departure between these agreeing line of thoughts involve the approaches to use while distributing wealth that a nation created. A number of theories and legends provide the way that nations should distribute the national cake, which are historical in nature and applicable to the contemporary society. Nonetheless, despite the established consideration in the distribution of the economic pie that guide public discourse, there are new and emerging scientific and economic approaches that are proving to be popular in shaping and guiding the approaches to distribution of the national cake. Greek philosophers were instrumental in laying the groundwork for the distribution of nation’s wealth, which was long before the birth of the discipline of economics as currently known. In line with this, it is common knowledge that philosophers such as Plato and Plutarch defined the level of differences that should result from the rich and the poor and the consequences of these differences. Conversely, the revolution age was responsible for the establishment of government’s policies that redistributed wealth (Acemoglu and Robinson 190). Closer to contemporary economic society, the economic scientists who developed economics perspectives that advocated for various approaches of sharing and distributing the national wealth in a way that ensured equitable and equity in distribution of wealth. This expose elucidates on different ways that a nation’s distribution of wealth affects the economic growth. Distribution of Wealth and Economic Growth Stiglitz identified two approaches towards the distribution of a nation’s wealth with each approach differing in perspective and consequences, which are in terms of the growth of a nation’s economy (387). In the first approach, Stiglitz identifies that nations can adopt an approach that focuses on a high ratio of capital and labor. In this approach, Stiglitz noted the ability of a nation to enhance stability in its economic growth while focusing on equitable distribution of resources in the country in the long-term. Conversely, the other approach proposed by Stiglitz identified a small capital-labor ratio, which he defined as developing an economy that was unstable in the end. Besides, this approach was responsible for the downward spiral of the economy of a nation. In line with this, Stiglitz’s model identifies a nation that maintains a balance between the wealthy and the poor becoming increasingly wealthy while the poor became increasingly impoverished as one on the way towards instability. In this case, Stiglitz noted that such a nation became more unstable economically since there was unequal distribution of the wealth that the nation created. Hence, only a few individuals obtained the little wealth the nation created with the poor becoming poorer while the wealthy became wealthier. Hence, the nation that maintained such a state of equilibrium also maintained the capital-labor ratio that resulted to these discrepancies on wealth. On the other hand, there are economists who point out that skewed distribution of wealth also contributed to economic growth. In this regard, these economists posit that the skewed distribution in which the wealthier became wealthier while the poor became poorer contributed to economic development and growth. In line with this, Aghion, Caroli, and García-Peñalosa identified unequal distribution of wealth as one of the fact that contributes to economic growth based on three different postulations (1630). In the first postulation, Aghion, Caroli, and García-Peñalosa noted the propensity of the rich to save more financial resources and other resources that contributed to economic growth than the poor. In effect, the rich went ahead to use their savings to engage in economic activities that enhanced the development and growth of a nation’s economy. Secondly, the authors noted that the investment projects that contributed to the economic development of a nation involved massive investments, which the rich can afford due to the skewed nature of economic distribution. In line with this, it is evident that the rich fuel the economic growth of most developing nations. In this regard, it is common knowledge that most developing nations have skewed distribution of wealth and are predominantly characterized by the poor becoming poorer while the rich become richer. The third assumption proposed that the redistribution of wealth diminished the inducement to accumulate capital. In this regard, the taxes that nations levied on capital lowered the rate at which capital contributed to any returns. As usual, there are economists and authors who will dispute these assumptions. However, their dispute is contrary to the assumptions by Aghion regarding unequal distribution that was skewed towards the rich, which helps to spur a country’s economic growth. In this case, these economists posit that the best distribution of wealth should be skewed towards the poor, especially in developed nations since they will be able to engage in local productive activities that spurred economic growth. According to Todaro, the savings and extra earnings that the rich received did not find their way into productive activities that developed the economy of their country (70). In this regard, the rich spent their savings on investment projects in other nations and they spent the money to buy luxurious items, which do not spur economic growth of their countries of origin. In contrast, Todaro noted that the poor people in a country tend to engage in productive activities that contributed to the growth of the economy using their savings. In effect, Todaro noted that an equitable distribution of wealth would ensure that the poor people in a nation engaged in many productive activities that enhanced the improvement of productive incentives, health, and education, which are the most important sectors that define economic growth. A discussion about equal distribution of wealth is not complete without a discussion about the political process of a country. In this regard, it is evident that a nation that practiced democratic governance supported growth-enhanced policies that contributed to economic growth. On the other hand, it is common knowledge that a suppressive regime inhibited polices that developed measures that enhanced the economic growth of a nation (Alesina and Rodrick 470). Nonetheless, there lacked a clear connection between democratic governance and equitable distribution of wealth. In effect, it is important for future research to investigate the relationship between the democratic process of a nation and the distribution of a country’s wealth. Conclusion To recap, there is an intricate relationship between the economic growth of a nation and the distribution of wealth of the nation. In line with this, great thinkers, scientists, and economists have not come to an agreement on the best approach to take while distributing the wealth that a nation created since they have different approaches depending on the model that they used. In effect, future researchers should focus on carrying out an investigation of the best model to follow while distributing the wealth created by a nation. Nonetheless, despite the model that different approaches followed, it is evident that the theory presented above proved that wealth distribution had an impact on the economy of the country. In this regard, the manner of distribution might spur or inhibit a country’s economic growth. In addition, the different approaches by experts indicate that disparities that lead to unequal distribution of wealth contributed to economic decline while enacting measures that enhanced equitable distribution of wealth contributed to economic growth. Briefly, the literature in the abovementioned suggests that there exists a link between distribution of wealth and the economic growth of a nation. However, there are no specifics to conclude that equality in distribution supports economic growth or works against growth. Nonetheless, some form of equitable distribution of wealth contributes to the economic growth of a nation. Works Cited Aghion, Philippe, Eve Caroli, and Cecilia García-Peñalosa. “Inequality and Growth: The Perspective of the New Growth Theories.” Journal of Economic Literature 35 (1999): 1615-1660. Alesina, Alberto, and Dani Rodrick.“Distributive Politics and Economic Growth.” The Quarterly Journal of Economics 109.2 (1994): 465-490. Print. Stiglitz, Joseph E. “Distribution of Income and Wealth among Individuals.” Econometrica, 37.3 (1969):382-397. Print. Todaro, Michael P. Economic Development. London: London, 1997. Print. Read More