Bounded Learning by doing, inequality, and sustained growth: A middle-class perspective

This paper presents a theory of demand-driven economic growth whereby the middle class plays a prominent role in determining technical progress, while at the same time being a growth outcome. Emphasis is placed on the development and implementation process rather than on the innovation process. The entire income distribution affects the composition of demand and both the speed and extent of the learning process, which remains within an intermediate range of activity sectors for which there is middle-class-led consumption. Our framework exhibits an inverted-U relationship between inequality and growth, which has implications for growth-enhancing strategies by means of income redistributions.