Microeconomic Analysis (Routledge Revivals)

Essays in Microeconomics and Economic Development

David Currie, David Peel, Will Peters, David Currie, David Peel, Will Peters

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317214885
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

First published in 1981, this book brings together a collection of essays on microeconomics and development presented at the conference of the Association of University Teachers of Economics. Topics covered include the intergenerational transfer of economic inequality, a review of the recent development in the theory of equity in the economy's distribution and production process, labour and unemployment, market structure and international trade, taxation and the public sector, Third World industrialisation and Indian agriculture. This book will be of interest to students of Economics and Development Studies.

1. AN EQUILIBRIUM THEORY OF THE DISTRIBUTION OF INCOME AND INTERGENERATIONAL MOBILITY

Gary S. Becker

It is a privilege to be invited to address your Association, and a special privilege to give this lecture that honors Harry Johnson, a colleague for many years at the University of Chicago. The economics profession acclaims Harry Johnson for his outstanding contributions to economic science, especially to trade theory and macroeconomics. I developed enormous admiration also for Harry’s courage. I refer partly to his courage in coping with debilitating physical afflications during the last few years of his life. Harry continued writing, editing, teaching, travelling, and his other hectic activities to the end.

I refer also to his mental courage: Harry did not trim his views to court popularity. Whether in Britain, the United States, Canada, or elsewhere, Harry wrote and said bluntly what he believed, no matter how many people were annoyed or uncomfortable. Mental courage is a scarce resource in all endeavours and certainly has been of great value in the progress of economics.

My subject tonight is the distribution of income. Harry Johnson wrote wisely on this subject as on so many others. Since he stressed the importance of parents in determining the opportunities of their children, I would like to believe that he would approve of the theme of this paper, which is the influence of the family on the distribution of income.

I. Introduction¹

More than a decade ago, one of us wrote

How does one explain then that in spite of the rapid accumulation of empirical information and the persisting and even increasing interest in [the distribution of income],….economists have somewhat neglected the study of personal income distribution during the past generation? In my judgment the fundamental reason is the absence, despite ingenious and valiant efforts, of a theory that both articulates with general economic theory and is useful in explaining actual differences among regions, countries, and time periods. [Becker 1967, p. 1]

Although the “just” distribution of income has since received an enormous amount of attention (see, for example, Rawls 1971 and Okun 1975), a satisfactory theory of the actual distribution has not been developed.

A full analysis of the distribution of income should include both the inequality in income between different generations of the same family - what is usually called intergenerational “social” mobility - and the inequality in income between different families in the same generation. Sociologists have been mainly concerned with intergenerational mobility and economists with inequality within a generation because they have held divergent views about the forces generating inequality. Sociologists have emphasized the role of an individual’s forebears in the determination of his “socioeconomic” status through their influence on his background, class, or caste (see Boudon 1974 or Blau-Duncan 1967). On the other hand, most models of inequality by economists have neglected the transmission of inequality through the family because they have assumed that stochastic processes largely determine inequality through distributions of luck and abilities (see Champernowne 1953 or Roy 1950).

Two recent analytical developments suggest that a unified approach to inter-generational mobility and inequality is possible. The human capital model shows that inequality can result from maximizing behavior without major reliance on luck and other stochastic forces.² The economic approach to social interactions (Becker 1974, Becker-Tomes 1976, Tomes 1978) views an individual not in isolation but as part of a family whose members span several generations. Members contribute to the production of family income and to the care of children who continue the family into the future.

The central decision-makers in this essay are infinitely long-lived families with mortal members in each generation. The current generation can increase their consumption at the expense of future generations, but are discouraged from doing do by their concern for the interests of their children and perhaps of other future family members. This link between generations of the same family is buttressed by family “endowments” transferred from parents to children, including a family’s caste, religion, race, “culture”, genes, and reputation for honesty and reliability.

Our theory incorporated the human capital approach to inequality because parents maximize their utility by choosing optimal investments in the human and non-human capital of children and other members. Moreover, the theory recognizes that endowments and market rewards depend on luck, so that incomes are partly determined by the interaction between luck and maximizing behavior.

We show that the inequality in family incomes and inter-generational mobility over time approach equilibrium levels that depend on luck and various family parameters, especially the “inheritability” of endowments and the propensity to invest in children. They also depend, sometimes in surprising ways, on the rate of economic growth, taxes and subsidies, foresight about the incidence of “disturbances”, discrimination against minorities, and family reputations. For example, even a progressive tax-subsidy system might raise the inequality in disposable incomes, and discrimination against blacks has raised their inter-generational mobility and reduced their incomes.

T...