Focus on economic growth or investments? The neoclassical versus the post-Keynesian economics debate
Neoclassical economists focus on inequalities in productivity among individuals. They start from the moment when inequalities in talents/endowments have already been distributed. As some individuals are more productive than others, income inequalities are justified. The more productive you are, the more you earn. Neoclassical economists warn against the costs of income redistribution. People need incentives to work hard and to be competitive. That is why inequality is not a bad thing: it helps people to become competitive. This does not mean that neoclassical economists are in favour of unequal opportunities or access to education. Their argumentation simply starts after the distribution of talents/endowments has already taken place. For neoclassical economists, trickle-down occurs as long as people work enough. They earn money they can spend, which gives other people work.
Other economists focus more on the inequality between labour and capital. They all agree that the rich save more than workers do. Economists like Ricardo and Marx take existing income distribution as their starting point. The way incomes are distributed determines saving patterns, which in turn determines the level of investments. Saving by the rich ensures capital accumulation, which is good for growth as it makes investment possible.1 So some wealth trickles down on the basis of investments.
Post-Keynesian economists like Nicholas Kaldor consider investments independent from income distribution. More investment leads to more profit. And more profit influences income distribution. Post-Keynesians dispute the argument of Ricardo and Marx that saving leads to more investment. Saving does not lead to economic growth; it is investment that leads to economic growth, to a bigger cake (which does not mean that everyone necessarily gets a more equal share of it).
- Kaldor, N. (1955), “Alternative Theories of Distribution,” Review of Economic Studies, 23(2), 83-100.