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Economic inequality comprises all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. Economic Inequality generally refers to equality of outcome, and is related to the idea of equality of opportunity. It is a contested issue whether economic inequality is a positive or negative phenomenon, both on utilitarian and moral grounds.

Economic inequality has existed in a wide range of societies and historical periods; its nature, cause and importance are open to broad debate. A country's economic structure or system (for example, capitalism or socialism), ongoing or past wars, and differences in individuals' abilities to create wealth are all involved in the creation of economic inequality.

There are various Numerical index for measuring economic inequality. Inequality is most often measured using the Gini coefficient, but there are also many other methods.

Causes of inequality

There are many reasons for economic inequality within societies. These causes are often inter-related. Acknowledged factors that impact economic inequality include the labor, innate ability, education, race, gender, culture, wealth condensation, development patterns and personal preference for work, leisure and risk.

The labor market

A major cause of economic inequality within modern market economies is the determination of wages by the market. Inequality is caused by the differences in the supply and demand for different types of work. In a purely capitalist mode of production (i.e. where professional and labor organizations cannot limit the number of workers) the workers wages will not be controlled by these organizations, nor by the employer, but rather by the market. Wages work in the same way as prices for any other good (i.e. supply and demand). Employers who offer a below market wage will find that their business is chronically understaffed. Their competitors will take advantage of the situation by offering a higher wage to snatch up the best of their labor. For a businessman who has the profit motive as the prime interest, it is a losing proposition to offer below or above market wages to workers. .

Professional and labor organizations may limit the supply of workers which results in higher demand and greater incomes for members. However, limiting the supply of workers may cause unemployment in that particular field. In effect, some workers end up with higher than market wages at the expense of their newly unemployed co-workers. This creates an economic inequality in itself. Members may also receive higher wages through collective bargaining, political influence or corruption. .

A job where there are many willing workers (high supply) competing for a job that few require (low demand) will result in a low wage for that job. This is because competition between workers drives down the wage. An example of this would be jobs such as dish-washing or customer service. Competition amongst workers tends to drive down wages due to the expendable nature of the worker in relation to his or her particular job. There are some economic myths regarding this subject. For example, population growth and technological change are often blamed for economic inequality. For example, a critic might say "populations growth tends to increase the supply of all workers which may result in lower incomes, especially when combined with greater productivity per worker." This ignores the facts, however. This assumes that the world is a fixed economic pie and that any population growth results in fewer resources to go around. However, this has never been observed empirically. If this were the case we would see humans as a whole getting poorer and poorer over time, as populations have consistently increased over the course of history. This mistake is famously attributed to Thomas Malthus. In fact, humans have become far wealthier over the past few centuries, even in the poorest parts of the world. Many people who make this mistake lack a sense of historical perspective. For example, anyone who believes that Africa is poor today would be shocked to learn that historically, Africa along with the rest of the world was far poorer centuries ago compared to the Africa of today. As for technological progress being harmful because it makes workers more efficient, this is simply untrue and ignores all empirical evidence on the matter. According to Paul Romer, this conclusion is largely ignorant of the facts since this would assume that all the technological progress we've made in the past few hundred years has been to the detriment of human society. Technological progress increases the total amount produced by a society as well as the average amount produced by each member of a society. While some technological change does result in income inequality, the cumulative effect of technological change has been to make the poorest of society today better off than the poorest of society was years ago. For example, Romer explains that the average American has seven times more purchasing power today than he or she had in 1900.

A job where there are few able or willing workers (low supply) but a large need for the positions (high demand) will result in high wages for that job. This is because competition between employers for employees will drive up the wage. Example of this would include jobs that require highly developed skills, rare abilities, or a high level of risk. Competition amongst employers tends to drive up wages due to the nature of the job, since there is a relative shortage of workers for the particular position.

The final results amongst these supply and demand interactions is a gradation of different wages representing income inequality within society.

Innate ability

Many people believe that there is a correlation between differences in innate ability, such as intelligence, strength, or charisma, and an individual's wealth. Relating these innate abilities back to the labor market suggests that such abilities are in high demand relative to their supply and hence play a large role in increasing the wage of those who have them. Contrariwise, such innate abilities might also affect an individuals ability to operate within society in general, regardless of the labor market.

Various studies have been conducted on the correlation between IQ scores and wealth/income. The book titled "IQ and the Wealth of Nations", written by Dr. Richard Lynn, examines this relationship with limited success; other peer-reviewed research papers have also been criticised harshly. In his book The Mismeasure of Man, Stephen Jay Gould claimed that testing intelligence is a flawed endeavor as the tests and the statistical models used to evaluate them are inherently flawed. There is also the highly contested study The Bell Curve which suggests that individuals at either extreme of the "intelligence spectrum" are left out of the main streams of society. These are usually individuals who are deemed "unsuccessful" in the light of sociability, according to the study.

Education

One important factor in the creation of inequality is variation in individuals' access to education. Education, especially in an area where there is a high demand for workers, creates high wages for those with this education. As a result, those who are unable to afford an education, or choose not to pursue optional education, generally receive much lower wages. During the mass high school education movement from 1910-1940, there was an increase in skilled workers which led to a decrease in the price of skilled labor. This decrease in wages caused a period of compression and decreased inequality between skilled and unskilled workers. Many economists believe that a major reason the world has experienced increasing levels of inequality since the 1980s is an increase in the demand for highly skilled workers in high-tech industries. They believe that this has resulted in an increase in wages for those with an education, but has not increased the wages of those without an education, leading to greater inequality.

Globalization

Trade liberalization may shift economic inequality from a global to a domestic scale. When rich countries trade with poor countries, the low-skilled workers in the rich countries may see reduced wages as a result of the competition, while low-skilled workers in the poor countries may see increased wages. Trade economist Paul Krugman estimates that trade liberalisation has had a measurable effect on the rising inequality in the United States. He attributes this trend to increased trade with poor countries and the fragmentation of the means of production, resulting in low skilled jobs becoming more tradeable. However, he concedes that the effect of trade on inequality in America is minor when compared to other causes, such as technological innovation, a view shared by other experts. Lawrence Katz estimates that trade has only accounted for 5-15% of rising income inequality. Some economists, such as Robert Lawrence, dispute any such relationship. Lawrence, in particular, argues that technological innovation and automation has meant that low-skilled jobs have been replaced by machine labor in wealthier nations, and that wealthier countries no longer have significant numbers of low-skilled manufacturing workers that could be affected by competition from poor countries.

Gender, race, and culture

The existence of different genders, races and cultures within a society is also thought to contribute to economic inequality. Some psychologists such as Richard Lynn argue that there are innate group differences in ability that are partially responsible for producing race and gender group differences in wealth (see also race and intelligence, sex and intelligence) though this assertion is highly controversial.

The idea of the gender gap tries to explain differences in income between genders. Culture and religion are thought to play a role in creating inequality by either encouraging or discouraging wealth-acquiring behavior, and by providing a basis for discrimination. In many countries individuals belonging to certain racial and ethnic minorities are more likely to be poor. Proposed causes include cultural differences amongst different races, an educational achievement gap, and racism.

Diversity of preferences

Diversity of preferences within a society often contribute to economic inequality. When faced with the choice between working harder to earn more money or enjoying more leisure time, equally capable individuals with identical earning potential often choose different strategies. This leads to economic inequality even in societies with perfect equality in abilities and circumstances. The trade-off between work and leisure is particularly important in the supply side of the labor market in labor economics.

Individuals in a society often have different levels of risk aversion. When equally-able individuals undertake risky activities with the potential of large payoffs, such as starting new businesses, some ventures succeed and some fail. The presence of both successful and unsuccessful ventures in a society results in economic inequality even when all individuals are identical.

Development patterns

A Kuznets curve


Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. Kuznets saw a curve-like relationship between level of income and inequality, now known as Kuznets curve. According to Kuznet, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality. Kuznets demonstrated this relationship using cross-sectional data. However, more recent testing of this theory with superior panel data has shown it to be very weak.

Wealth condensation

Wealth condensation is a theoretical process by which, under certain conditions, newly-created wealth concentrates in the possession of already-wealthy individuals or entities. According to this theory, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth. Over time, wealth condensation can significantly contribute to the persistence of inequality within society.

As an example of wealth condensation, truck drivers who own their own trucks often make more money than those who do not, since the owner of a truck can escape the rent charged to drivers by owners (even taking into account maintenance and other costs). Hence, a truck driver who has wealth to begin with can afford to buy his own truck in order to make more money. A truck driver who does not own his own truck makes a lesser wage and is therefore stuck in a Catch-22, unable to buy his own truck to increase his income.

As another example of wealth condensation, savings from the upper-income groups tend to accumulate much faster than saving from the lower-income groups. Upper-income groups can save a significant portion of their incomes. On the other hand, lower-income groups barely make enough to cover their consumptions, hence only capable of saving a fraction of their incomes or even none. Assuming both groups earn the same yield rate on their savings, the return on upper-income groups’ savings are much greater than the lower-income groups’ savings because upper-income groups have a much larger base.

Related to wealth condensation are the effects of intergenerational inequality. The rich tend to provide their offspring with a better education, increasing their chances of achieving a high income. Furthermore, the wealthy often leave their offspring with a hefty inheritance, jump-starting the process of wealth condensation for the next generation. However, it has been contended by some sociologists such as Charles Murray that this has little effect on one's long-term outcome and that innate ability is by far the best determinant of one's lifetime outcome.

Inflation

Some Austrian school economists have theorized that high inflation, caused by a country's monetary policy, can contribute to economic inequality. This theory argues that inflation of the money supply is a coercive measure that favors those who already have money, thus aggravating inequality. They cite examples of correlation between inflation and inequality and note that inflation can be caused independently by "printing money", suggesting causation of inequality by inflation.

Mitigating factors

There are many factors that tend to constrain the amount of economic inequality within society. These factors may be divided into two general classes: government sponsored, and market driven. The relative merits and effectiveness of each approach is a subject of heated debate.

Proponents of government sponsored approaches to reducing economic inequality generally believe that economic inequality represents a fundamental injustice, and that it is the right and duty of the government to correct this injustice. Government sponsored approaches to reducing economic inequality include:

  • Public education - to increase the supply of skilled labor and reduce income inequality due to education differentials;


  • Progressive taxation, where the rich are taxed more than the poor - to reduce the amount of income inequality in society.


  • Minimum wage legislation - to raise the income of the poorest working group. This is debated as it may also cut the least skilled out of the employment market entirely.




Proponents of free markets point out that these measures usually backfire, as the growth of government would create a privileged class such as the nomenklatura in the Soviet Unionmarker who use their position within the government to gain unequal access to resources, thereby reducing economic equality. Others argue that free markets without these measures allow the already privileged to control the political life of a country as it did in Brazil where the country's military dictatorship (1964-1985) allowed the country to become the most economically unequal in South America.

There are also some market forces which work to reduce economic inequality:

  • In a market-driven economy, too much economic disparity could generate pressure for its own removal. In an extreme example, if one person owned everything, that person would immediately (in a market economy) have to hire people to maintain his property, and that person's wealth would immediately begin to dissipate. (García-Peñalosa 2006)


  • By a concept known as the "decreasing marginal utility of wealth," a wealthy person will tend not to value his last dollar as much as a poor person, since a poor person's dollars are more likely to be spent for essentials. This could tend to move wealth from the rich to the poor. This is also known as the "trickle down effect."


Effects of inequality

Social cohesion

Research has shown a link between income inequality and social cohesion. In more equal societies, people are much more likely to trust each other, measures of social capital suggest greater community involvement, and homicide rates are consistently lower.

One of the earliest writers to note the link between economic equality and social cohesion was Alexis de Tocqueville in his Democracy in America. Writing in 1831:

Among the new objects that attracted my attention during my stay in the United States, none struck me with greater force than the equality of conditions. I easily perceived the enormous influence that this primary fact exercises on the workings of society. It gives a particular direction to the public mind, a particular turn to the laws, new maxims to those who govern, and particular habits to the governed... It creates opinions, gives rise to sentiments, inspires customs, and modifies everything it does not produce... I kept finding that fact before me again and again as a central point to which all of my observations were leading.


In a 2002 paper, Eric Uslaner and Mitchell Brown showed that there is a high correlation between the amount of trust in society and the amount of income equality. They did this by comparing results from the question "would others take advantage of you if they got the chance?" in U.S General Social Survey and others with statistics on income inequality. Similarly, a 2008 article by Andersen and Fetner finds a strong relationship between economic inequality within and across countries and tolerance for 35 democracies.

Robert Putnam, professor of political science at Harvardmarker, established links between social capital and economic inequality. His most important studies (Putnam, Leonardi, and Nanetti 1993, Putnam 2000) established these links in both the United Statesmarker and in Italymarker. On the relationship of inequality and involvement in community he says:

Community and equality are mutually reinforcing… Social capital and economic inequality moved in tandem through most of the twentieth century. In terms of the distribution of wealth and income, America in the 1950s and 1960s was more egalitarian than it had been in more than a century… [T]hose same decades were also the high point of social connectedness and civic engagement. Record highs in equality and social capital coincided. Conversely, the last third of the twentieth century was a time of growing inequality and eroding social capital… The timing of the two trends is striking: somewhere around 1965-70 America reversed course and started becoming both less just economically and less well connected socially and politically. (Putnam 2000 pp 359)


In addition to affecting levels of trust and civic engagement, inequality in society has also shown to be highly correlated with crime rates. Most studies looking into the relationship between crime and inequality have concentrated on homicides - since homicides are almost identically defined across all nations and jurisdictions. There have been over fifty studies showing tendencies for violence to be more common in societies where income differences are larger. Research has been conducted comparing developed countries with undeveloped countries, as well as studying areas within countries. Daly et al. 2001. found that among U.Smarker States and Canadianmarker Provinces there is a tenfold difference in homicide rates related to inequality. They estimated that about half of all variation in homicide rates can be accounted for by differences in the amount of inequality in each province or state. Fajnzylber et al. (2002) found a similar relationship worldwide. Among comments in academic literature on the relationship between homicides and inequality are:

  • The most consistent finding in cross-national research on homicides has been that of a positive association between income inequality and homicides. (Neapolitan 1999 pp 260)
  • Economic inequality is positively and significantly related to rates of homicide despite an extensive list of conceptually relevant controls. The fact that this relationship is found with the most recent data and using a different measure of economic inequality from previous research, suggests that the finding is very robust. (Lee and Bankston 1999 pp 50)


Population health



Recently, there has been increasing interest from epidemiologists on the subject of economic inequality and its relation to the health of populations. There is a very robust correlation between socioeconomic status and health. This correlation suggests that it is not only the poor who tend to be sick when everyone else is healthy, but that there is a continual gradient, from the top to the bottom of the socio-economic ladder, relating status to health. This phenomenon is often called the "SES Gradient". Lower socioeconomic status has been linked to chronic stress, heart disease, ulcers, type 2 diabetes, rheumatoid arthritis, certain types of cancer, and premature aging.

There is debate regarding the cause of the SES Gradient. A number of researchers (A. Leigh, C. Jencks, A. Clarkwest - see also Russell Sage working papers) see a definite link between economic status and mortality due to the greater economic resources of the wealthy, but they find little correlation due to social status differences.

Other researchers such as Richard Wilkinson, J. Lynch, and G.A. Kaplan have found that socioeconomic status strongly affects health even when controlling for economic resources and access to health care. Most famous for linking social status with health are the Whitehall studies - a series of studies conducted on civil servants in Londonmarker. The studies found that although all civil servants in England have the same access to health care, there was a strong correlation between social status and health. The studies found that this relationship remained strong even when controlling for health-affecting habits such as exercise, smoking and drinking. Furthermore, it has been noted that no amount of medical attention will help decrease the likelihood of someone getting type 2 diabetes or rheumatoid arthritis - yet both are more common among populations with lower socioeconomic status. Lastly, it has been found that amongst the wealthiest quarter of countries on earth (a set stretching from Luxembourgmarker to Slovakiamarker) there is no relation between a country's wealth and general population health - suggesting that past a certain level, absolute levels of wealth have little impact on population health, but relative levels within a country do.

The concept of psychosocial stress attempts to explain how psychosocial phenomena such as status and social stratification can lead to the many diseases associated with the SES Gradient. Higher levels of economic inequality tend to intensify social hierarchies and generally degrade the quality of social relations - leading to greater levels of stress and stress-related diseases. Richard Wilkinson found this to be true not only for the poorest members of society, but also for the wealthiest. Economic inequality is bad for everyone's health.

The effects of inequality on health are not limited to human populations. David H. Abbott at the Wisconsin National Primate Research Center found that among many primate species, less egalitarian social structures correlated with higher levels of stress hormones among socially subordinate individuals.

Utility, economic welfare, and distributive efficiency

Economic inequality is thought to reduce distributive efficiency within society. That is to say, inequality reduces the sum total of personal utility because of the decreasing marginal utility of wealth. For example, a house may provide less utility to a single millionaire as a summer home than it would to a homeless family of five. The marginal utility of wealth is lowest among the richest. In other words, an additional dollar spent by a poor person will go to things providing a great deal of utility to that person, such as basic necessities like food, water, and healthcare; meanwhile, an additional dollar spent by a much richer person will most likely go to things providing relatively less utility to that person, such as luxury items. From this standpoint, for any given amount of wealth in society, a society with more equality will have higher aggregate utility. Some studies (Layard 2003;Blanchard and Oswald 2000, 2003) have found evidence for this theory, noting that in societies where inequality is lower, population-wide satisfaction and happiness tend to be higher.

Economist Arthur Cecil Pigou discussed the impact of inequality in The Economics of Welfare. He wrote:
Nevertheless, it is evident that any transference of income from a relatively rich man to a relatively poor man of similar temperament, since it enables more intense wants, to be satisfied at the expense of less intense wants, must increase the aggregate sum of satisfaction. The old "law of diminishing utility" thus leads securely to the proposition: Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view, will, in general, increase economic welfare.
In addition to the argument based on diminishing marginal utility, Pigou makes a second argument that income generally benefits the rich by making them wealthier than other people, whereas the poor benefit in absolute terms. Pigou writes:
Now the part played by comparative, as distinguished from absolute, income is likely to be small for incomes that only suffice to provide the necessaries and primary comforts of life, but to be large with large incomes. In other words, a larger proportion of the satisfaction yielded by the incomes of rich people comes from their relative, rather than from their absolute, amount. This part of it will not be destroyed if the incomes of all rich people are diminished together. The loss of economic welfare suffered by the rich when command over resources is transferred from them to the poor will, therefore, be substantially smaller relatively to the gain of economic welfare to the poor than a consideration of the law of diminishing utility taken by itself suggests. -- Arthur Cecil Pigou in The Economics of Welfare


Schmidtz (2006) argues that maximizing the sum of individual utilities does not necessarily imply that the maximum social utility is achieved. For example:

A society that takes Joe Rich’s second unit [of corn] is taking that unit away from someone who .
.
. has nothing better to do than plant it and giving it to someone who .
.
. does have something better to do with it.
That sounds good, but in the process, the society takes seed corn out of production and diverts it to food, thereby cannibalizing itself


Economic incentives

Many people accept inequality as a given, and argue that the prospect of greater material wealth provides incentives for competition and innovation within an economy.

Some modern economic theories, such as the neoclassical school, have suggested that a functioning economy entails a certain level of unemployment. These theories argue that unemployment benefits must be below the wage level to provide an incentive to work, thereby mandating inequality and that additionally, it is impossible to lower unemployment down to zero. Hypotheses such as socialism, dispute this positive role of unemployment.

Many economists believe that one of the main reasons that inequality might induce economic incentive is because material wellbeing and conspicuous consumption are related to status. In this view, high stratification of income (high inequality) creates high amounts of social stratification, leading to greater competition for status.One of the first writers to note this relationship was Adam Smith who recognized "regard" as one of the major driving forces behind economic activity. From The Theory of Moral Sentiments in 1759:

[W]hat is the end of avarice and ambition, of the pursuit of wealth, of power, and pre-eminence? Is it to supply the necessities of nature? The wages of the meanest labourer can supply them... [W]hy should those who have been educated in the higher ranks of life, regard it as worse than death, to be reduced to live, even without labour, upon the same simple fare with him, to dwell under the same lowly roof, and to be clothed in the same humble attire? From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us ( Theory of Moral Sentiments, Part I, Section III, Chapter II).


Modern sociologists and economists such as Juliet Schor and Robert H. Frank have studied the extent to which economic activity is fueled by the ability of consumption to represent social status. Schor, in The Overspent American, argues that the increasing inequality during the 1980s and 1990s strongly accounts for increasing aspirations of income, increased consumption, decreased savings, and increased debt. In Luxury Fever Robert H. Frank argues that people's satisfaction with their income is much more strongly affected by how it compares with others than its absolute level.

Economic growth

Several recent economists have investigated the relationship between inequality and economic growth using econometrics.

In their study for the World Institute for Development Economics Research, Giovanni Andrea Cornia and Julius Court (2001) reach policy conclusions as to the optimal distribution of income. They conclude that too much equality (below a Gini coefficient of .25) negatively impacts growth due to "incentive traps, free-riding, labour shirking, [and] high supervision costs". They also claim that high levels of inequality (above a Gini coefficient of .40) negatively impacts growth, due to "incentive traps, erosion of social cohesion, social conflicts, [and] uncertain property rights". They advocate for policies which put equality at the low end of this "efficient" range.

Robert Barro wrote a paper arguing that inequality reduces growth in poor countries and promotes growth in rich ones. [45396] A number of other researchers have derived conflicting results, some concluding there is a negative effect of inequality on growth and others a positive. Patrizio Pagano used Granger causality, a technique that can determine two way interaction between two variables, to attempt to explain these previous findings. Pagano's research suggested that inequality had a negative effect on growth while growth increased inequality. The two-way interaction largely explains the contradiction in past research.

Perspectives regarding economic inequality

There are various schools of thought regarding economic inequality.

Marxism

Marxism favors an eventual society where distribution is based on an individual's needs rather than his ability to produce, social class, inheritance, or other such factors. In such a system inequality would be low or non-existent.

Meritocracy

Meritocracy favors an eventual society where an individual's success is a direct function of his merit, or contribution. Therefore, economic inequality is beneficial inasmuch as it reflects individual skills and effort, and detrimental inasmuch as it represent inherited or unjustified wealth or opportunities. From a meritocratic point of view, measuring economic equality as one parameter, not distinguishing these two opposite contributing factors, serves no good purpose.

Liberalism

Classical liberals and libertarians generally do not take a stance on wealth inequality, but believe in equality under the law regardless of whether it leads to unequal wealth distribution. Ludwig von Mises (1996) explains:
The liberal champions of equality under the law were fully aware of the fact that men are born unequal and that it is precisely their inequality that generates social cooperation and civilization.
Equality under the law was in their opinion not designed to correct the inexorable facts of the universe and to make natural inequality disappear.
It was, on the contrary, the device to secure for the whole of mankind the maximum of benefits it can derive from it.
Henceforth no man-made institutions should prevent a man from attaining that station in which he can best serve his fellow citizens.


Libertarian Robert Nozick argued that government redistributes wealth by force (usually in the form of taxation), and that the ideal moral society would be one where all individuals are free from force. However, Nozick recognized that some modern economic inequalities were the result of forceful taking of property, and a certain amount of redistribution would be justified to compensate for this force but not because of the inequalities themselves. John Rawls argued in A Theory of Justice that inequalities in the distribution of wealth are only justified when they improve society as a whole, including the poorest members. Rawls does not discuss the full implications of his theory of justice. Some see Rawls's argument as a justification for capitalism since even the poorest members of society theoretically benefit from increased innovations under capitalism; others believe only a strong welfare state can satisfy Rawls's theory of justice.

Classical liberal Milton Friedman believed that if government action is taken in pursuit of economic equality that political freedom would suffer. In a famous quote, he said:

A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.


Arguments based on social justice

Patrick Diamond and Anthony Giddens (professors of Economics and Sociology, respectively) hold that
pure meritocracy is incoherent because, without redistribution, one generation's successful individuals would become the next generation's embedded caste, hoarding the wealth they had accumulated.


They also state that social justice requires redistribution of high incomes and large concentrations of wealth in a way that spreads it more widely, in order to "recognise the contribution made by all sections of the community to building the nation's wealth." (Patrick Diamond and Anthony Giddens, 27 June 2005, New Statesman)

Claims economic inequality weakens societies

In most western democracies, the desire to eliminate or reduce economic inequality is generally associated with the political left. One practical argument in favor of reduction is the idea that economic inequality reduces social cohesion and increases social unrest, thereby weakening the society.

There is evidence that this is true (see inequity aversion) and it is intuitive, at least for small face-to-face groups of people. Alberto Alesina, Rafael Di Tella, and Robert MacCulloch find that inequality negatively affects happiness in Europe but not in the United States.

Ricardo Nicolás Pérez Truglia in "Can a rise in income inequality improve welfare?" proposed a possible explanation: some goods might not be allocated through standard markets, but through a signaling mechanism. As long as income is associated with positive personal traits (e.g. charisma), in more heterogeneous-in-income societies income not only buys traditional goods (e.g. food, a house), but it also buys non-market goods (e.g. friends, confidence). Thus, endogenous income inequality may explain a rise in social welfare.

It has also been argued that economic inequality invariably translates to political inequality, which further aggravates the problem. Even in cases where an increase in economic inequality makes nobody economically poorer, an increased inequality of resources is disadvantageous, as increased economical inequality can possibly lead to a power shift due to an increased inequality in the ability to participate in democratic processes.

The main disagreement between the western democratic left and right, is basically a disagreement on the importance of each effect, and where the proper balance point should be. Both sides generally agree that the causes of economic inequality based on non-economic differences (race, gender, etc.) should be minimized. There is strong disagreement on how this minimization should be achieved.

Arguments that inequality is not a primary concern

The acceptance of economic inequality is generally associated with the political right. One argument in favor of the acceptance of economic inequality is that, as long as the cause is mainly due to differences in behavior, the inequality provides incentives that eliminate poverty for all, by pushing the society towards economically healthy and efficient behavior. Capitalists see free competition and individual initiative as crucial to economic prosperity and accordingly believe that eliminating poverty through economic freedom is more important than equalizing poverty through redistribution.

Policy can be considered good if it makes some wealthy people wealthier without making anyone poorer (i.e. a policy which offers a Pareto improvement), even though it increases the total amount of inequality. According to this point of view, discussions of inequality absent any information about absolute levels of wealth are specious, because one population's "poor" may be better off than another's "well-off."

A third argument is that capitalism, especially free market capitalism, results in voluntary transactions among parties. Since the transactions are voluntary, each party at least believes they benefit from the transaction. According to the subjective theory of value, both parties will indeed benefit the transaction (assuming there is no fraud or extortion involved).

A fourth argument is that if we are interested in welfare, we should be interested in consumption, not income. Consumption is generally far more equal than income.

A fifth argument is that published income inequality numbers do not reflect welfare transfers. That is, if the US government completely redistributed income, this would have no impact on the Gini coefficient. This means that the "problem" of income inequality is never impacted by redistribution at all.

See also



References

  1. http://econc10.bu.edu/economic_systems/Theory/Classical/why_was_malthus__wrong.htm
  2. http://www.johannorberg.net/?page=globisgood
  3. http://www.reason.com/news/show/28243.html
  4. Income inequality and homicide rates in Canada and The United
  5. http://www.wider.unu.edu/publications/policy-briefs/en_GB/pb4/_files/78807311723331954/default/pb4.pdf
  6. http://www.bancaditalia.it/pubblicazioni/econo/temidi/td04/td536_04/td536en/en_tema_536.pdf
  7. New Statesman - NS Essay - 'Accumulation of wealth is unjust where it arises not from hard work and risk-taking enterprise, but from ''brute luck'' factors such as returns from property. Inheritance is a form of brute-luck inequality'
  8. CEPR Discussion Paper Abstracts
  9. Ricardo Truglia - Web Site
  10. The relation between economic inequality and political inequality is explained by Robert Alan Dahl in the chapters The Presence of a Market Economy (pp. 63), The Distribution of Political Resources (pp. 84) und Market Capitalism and Human Dispositions (pp. 87) in On Political Equality, 2006, 120 pages., Yale University Press, ISBN 978-0-300-12687-7


Notes

  1. gives some criticisms of this paper.


General references

Books
  • Wiemer Salverda, Brian Nolan, Timothy M. Smeeding (editors, 2009): The Oxford Handbook of Economic Inequality. Oxford University Press. ISBN 978-0-19-923137-9
  • Patrick Diamond and Anthony Giddens (2005), The New Egalitarianism, Polity Press
  • A.B. Atkinsons and F. Bourguignon (1998), Handbook of Income Distribution, Elsevier
  • Peter Lambert (2002). Distribution and Redistribution of Income. Manchester University Press, 3rd edition. ISBN 0-7190-5732-9
  • Richard Lynn and Tatu Vanhanen (2002), IQ and the Wealth of Nations, University of Helsinki, Westport, CT: Praeger. ISBN 0-275-97510-X
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  • Richard Wilkinson and Kate Pickett (2009), The Spirit Level: Why more equal societies almost always do better, Allen Lane, ISBN-978-1-846-14039-6


Papers
  • .


  • Andersen, Robert and Tina Fetner. 2008. ‘Economic Inequality and Intolerance:
Attitudes toward Homosexuality in 35 Democracies,’ American Journal of PoliticalScience, 52 (4):942-958.



External links

This paper describes the relationship between poverty and inequality and discusses some of the evidence found. Written by Fernando Bonilla.




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