Non-Neutral Technological Progress and Income Distribution—Piketty’s Fundamental Laws in a Neoclassical Two-Sector Model

Abstract

This paper discusses the theoretical validity of Thomas Piketty’s fundamental laws about income distribution in the context of a standard neoclassical growth model. We take Uzawa’s two-sector growth model as the platform of our analysis, as it allows us to make a distinction between the technological elasticity of factor substitution of the production function and the aggregate distributive elasticity of substitution. We examine the properties of the non-steady growth path through both analytical and numerical investigations. We conclude that some of the numerical simulations corroborate Piketty’s theory without assuming that the economy is on a steady growth path. However, if the elasticities of factor substitution in the individual sectors are less than one as many empirical studies show, then the economy approaches the state where all products are completely distributed to workers. This contradicts Piketty’s diagnosis about the current distributional inequality. In addition, the aggregate income distribution is stable for a relatively long time, and differences in the initial conditions are preserved during this period. This means that the comparative statics of the steady states might not present an adequate description of the economy’s behavior in a period of time that is practical. Our final evaluation of Piketty’s proposition is that it is better understood as a theory inferred from historical data and not one necessarily deduced from standard neoclassical growth theory.