Here is a point that seems rather obvious to me, but I have not seen it in the literature of economics or the mainstream press: Income distribution must have a large influence on economic stability. Why? For several reasons. First, human wants have different time scales and different degrees of necessity associated with them. People in lower income brackets need to spend proportionally more of their money on basic necessities such as food, shelter, and clothes. These are not totally immune to fluctuations, but much less so than say, whether a billionaire decides to buy another yacht or a fifth home. Second, people in lower income brackets tend to spend proportionally much more of their money in predictable, stable, and nearby locations. They are much more likely to buy what they need locally in contrast to the extremely wealthy. Third, people in lower income brackets will tend to spend proportionally more of their money in the same ways over time when compared with people with huge amounts of money. This is related to the first point above but slightly different. Even if a billionaire spends, say, a million dollars a month, there is little reason to suppose that it will be spent the same way from month to month. One month, it might be a small boat. The next month, it might be artwork. The next month, it might be mink coats and so on. Precisely because these are “luxuries” there is great fluctuation in terms of what is “in” and what is not “in.”
As the productive capacity of the nation (or the world) tries to adjust to these fleeting tastes, there is, of course, far less efficiency in the economy as well. If mink coats are all the rage one month, then, it may encourage people to go into mink farming. But the next month, it might be considered out of fashion to wear the pelts of dead animals so all the mental and physical effort (as well as associated capital) becomes essentially wasted and must be redirect. By contrast, if a farmer grows wheat, that wheat is likely to end up in bread purchased by poor people month after month. (By the way, wealthy people can eat bread as well).
Income distribution has another large impact on economic efficiency as well. We may conceptually divide the economy into that segment which actually produces something useful to human beings and that segment which protects and divides productive goods and services. On the one hand, there is, for example, the land, effort, and capital that go into producing wheat and subsequently bread. On the other hand, there is the time and effort that goes into putting an electric fence, guards, and dogs around the means of production and distribution. But more than that, there is also in this category the time and effort and capital that go into advertising the particular brand of bread and more broadly, the huge amount of time, effort, and capital that goes into convincing people that they should be electing people to protect the interests of billionaires. Nothing in this latter category is actually productive use of resources although it is obviously seen as being in the interests of the few. Of course, one also sees that historically, extreme inequalities of income distribution are often the precursors of war and rebellion which have their own huge negative impacts on stability and efficiency. Unfortunately, some (though thankfully not all) of today’s extremely wealthy think that they are “too smart” to allow this to happen; that they will use the media to convince people that huge income inequalities are really good for everyone. Sigh. Where is Aesop when we really need him?