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Solow meets Marx: Economic growth and the emergence of social class

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  • Heibø Modalsli, Jørgen

    () (Dept. of Economics, University of Oslo)

Abstract

This paper reconciles neoclassical models of economic growth ("Solow") with the formation of social classes during economic transition ("Marx"). An environment with missing capital markets and no labor divisibility is shown to lead to a steady state with no aggregate inefficiencies, but a very polarized wealth distribution. When capital cannot be rented, people must choose between self-production, potentially including hiring workers, and wage employment. As the first path is more profitable for the rich than the poor, inequality increases. The model is calibrated to illustrate polarization and increasing inequality in early modern Europe, starting from a continuous pre-industrial wealth distribution. During the early industrializing period, when labor markets operate and capital markets do not, inequality increases and a distinct working class emerges. Even if capital markets later improve, the polarization is persistent. The mechanism also has relevance for modern developing countries, where capital market access is limited. If a substantial amount of capital is needed in order to earn the market return, the poor have few incentives to save.

Suggested Citation

  • Heibø Modalsli, Jørgen, 2011. "Solow meets Marx: Economic growth and the emergence of social class," Memorandum 21/2011, Oslo University, Department of Economics.
  • Handle: RePEc:hhs:osloec:2011_021
    as

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    File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2011/Memo-21-2011.pdf
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Marx and Solow
      by Economic Logician in Economic Logic on 2011-10-07 18:30:00

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    Cited by:

    1. Modalsli, Jørgen Heibø, 2011. "Polarization, Risk and Welfare in General Equilibrium," Memorandum 27/2011, Oslo University, Department of Economics.

    More about this item

    Keywords

    Inequality; polarization; social class; economic growth; capital market frictions;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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