If The Onion had a very wonky economics section, then I would hope the above headline would make the cut, at least for an article about the following paper (h/t Thoma) by Richard Suen of UC Riverside. Here’s the abstract:
This paper presents a dynamic competitive equilibrium model with heterogeneous time preferences that can account for the observed patterns of wealth and income inequality in the United States. This model generalizes the standard neoclassical growth model by including (i) a demand for status by the consumers and (ii) human capital formation. The first feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model succeeds in replicating the wealth and income distributions of the United States.
The person who posted this at the NEP-DGE blog then asks,
It is surprisingly difficult to replicate the distribution of wealth. One way to do it is by assuming heterogeneous preferences, but this requires more heterogeneity than what would be reasonable. Richard Suen gets here increasing returns to heterogeneity by adding human capital formation (richer people can get even richer) and wealth in the utility function (people want to hold wealth, not just consume it). Are these reasonable assumptions?
I suppose it says something about the discipline of economics that it is so wedded to simplistic assumptions that one even needs to ask whether the innovations that Suen makes are reasonable. Of course they are reasonable. I have no familiarity with this literature, but did it really take us this long to derive inequality in a neoclassical model? My headline should not be read as ripping on Suen; kudos to him for showing that even using the neoclassical’s toys, we can still obtain a result that reflects the real world and causes us to think about conditions that are otherwise ignored.
Of course, I’m sure there are other types of models that could obtain this result, perhaps ones that consider power or exploitation. However, those don’t get published in mainstream journals.