Marx and Solow

For all the justified criticism one can have about the work of Karl Marx and the economic system that resulted from it, old Karl was onto something. The Industrial Revolution saw the rise of a new class, the capitalist, that generates a smaller share of its income from manual work and instead uses its brain and capital. That is in terms of welfare a positive evolution, were it for the fact that workers hardly had it better compared to their previous agricultural life and thus did not get a share of the new riches. What especially irked Karl Marx was the lot of the workers could not improve, either because they were not getting a larger share of income, or because there was no path to become capitalists themselves in large numbers, something later termed as a lack of social capilarity.

Jørgen Heibø Modasli finds some of these features in a model inspired by the Solow growth model, augmented by incomplete markets that require that one cannot borrow to become a capitalist entrepreneur and that the entrepreneur can only work for himself. This introduces a non-convexity and quickly a two-class system emerges, with workers not having any reason to save much as they have no chance to become capitalists. Also, the class division persists over time, even when credit and capital markets improve.

Yet, this is not entirely convincing. Indeed, economies with less incomplete markets, say, the United States, should see less inequalities, and inequalities should have declined over time as markets developed. This is hardly what we can see in the United States, where access to credit is widespread, yet income inequalities are high and growing, and social capilarity is largely absent.