Distributional Aspects of Economic Systems

This paper proposes a methodology to jointly analyze the distributions of capital and labor and of saving and consumption across the population. Hinging on the novel concept of income composition inequality and on its technical assessment through a specific indicator, this paper classifies economic systems by bringing together these two distributions in a two-dimensional box. Economic systems can be classified as Kaldorian Systems or as Representative Agent Systems depending on their position in the box. In Kaldorian Systems, the rich individuals save capital income and the poor individuals consume labor income. In Representative Agent Systems, all individuals are identical in terms of ownership and behaviors. The paper illustrates this methodology via an empirical application to the European context, in which two major clusters of economic systems – Mediterranean and Northern European – emerge. Furthermore, this paper illustrates how the classification proposed can be useful in understanding a country’s long-run performance in terms of capital accumulation, inequality and growth.