Power in economics: growth, inequality and politics

Abstract

We study the economy-wide implications of economic power. We examine the distribution of bargaining power between the owners of capital (“the capitalists”) and the owners of human capital (“the workers”) and its effects on fundamental economic variables, including economic growth, efficiency, and inequality. We introduce an integrated theory of distribution which combines the marginal and Nash theories of distribution, where factor returns are determined in a context of capital market imperfections. We show that all the fundamental economic variables, including economic power, are in fact dependent on political conditions. Explicit recognition of economic power as a key factor allows us to integrate economic and political conditions in a natural way, where economic power constitutes the fundamental linkage between politics and economics. Political conditions determine an equilibrium for the fundamental economic variables and these variables, in turn, affect the subsequent political equilibrium. We show that the performance of the economy is likely to be cyclical because of the cyclical behavior of the political conditions and vice versa, political cycles are in part originated in economic cycles.