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The Lucas Critique basically just says that if you want to use broad correlations, you should make sure that the microfoundations which drive those correlations
by yummyfajitas 13y ago
The Lucas Critique basically just says that if you want to use broad correlations, you should make sure that the microfoundations which drive those correlations still apply.
Unfortunately the relation of r to g tells us very little about meritocratic goals. Suppose that the growth rate r is driven entirely by startup founders building gigantic companies (or lotteries, which would be mathematically equivalent), which cease growing after the founder dies. Then you could have r be huge, inequality would be huge, and everything would be entirely meritocratic.
- mrow84 13y agoI think that the quantity I offered suggests why there might be a correlation between inequality growth and (r - g), independent of the mechanisms that underlie the returns on capital and labour, and inequality. In words, when r > g, the income distribution tends towards the capital distribution, and when r < g the income distribution tends towards the labour distribution. The relationship between this point and meritocracy is that average returns on capital are approximately "unearned" - you can get close to the market rate of return with minimal effort, whereas returns on labour are positively earned, by your labour. So when r < g the limiting case is for income to match labour, i.e. effort. Note that this by no means inhibits the possibility of greater returns to intelligent capital investment (something that you definitely want to keep) - the point is that you control average returns to stop capital domination fostering inequality.