2. Some Basic Facts about Inequality
Inequality and poverty are distinct but related concepts. To be poor means that an individual has insufficient resources to be able to function at a socially acceptable level (Sen 1999
). National poverty levels are generally measured as the percentage of the population that has income or wealth below a benchmark thought to represent the minimum needed for an individual to flourish. In the United States, poverty thresholds were established in the 1960s on the basis of the cost of a nutritionally adequate but plain food consumption basket. The original thresholds have been adjusted for inflation but are applied equally across the entire country despite great variation in cost of living from one city or state to the next (Stiglitz 2013
). The U.S. poverty rate fell from about 22% in the early 1960s to a low of 11% in the mid-1970s after which it has varied between 11% and 15% depending on the state of the economy (Census 2017b
). The World Bank has tracked global poverty levels for many years based on an original income threshold of one U.S. dollar a day. More recently, the benchmark for extreme poverty has been adjusted to reflect the purchasing power of national currencies and to take account of inflation with extreme poverty currently defined as an income of less than 1.90 international dollars a day. One of the principal objectives of the United Nations Millennium Development Goals was to reduce by 2015 the incidence of extreme poverty in developing countries by half relative to 1990 when it was 43.4%. This goal was actually achieved by 2008 and the extreme poverty rate in 2013 had fallen further to 12.6% (World Bank 2017
). While poverty is an important social problem, it is not the focus of this paper, which is on the effects of economic inequality. Economic inequality measures the position of individuals or groups relative to others in society. In general, it will be the case that the people at the bottom of the income distribution will be both relatively and absolutely poor but one could imagine a society in which absolute poverty had been eliminated even though relative poverty (inequality) was still prevalent.
The inequality that is of interest in this paper has to do with the way in which desirable things, such as income, wealth, prestige, well-being and so on, are distributed across a given population. Economic inequality includes the distribution of both income and wealth and, while these economic variables are of no intrinsic value, they do tend to be positively related to such inherently valuable attributes as good health, longevity, education, and general satisfaction and happiness. This is true of happiness only up to a certain point, however. Skidelsky and Skidelsky
) discuss several studies showing that happiness increases with rising income up to a threshold after which continued income increases add nothing to the level of happiness or life satisfaction (see also Deaton 2013
and Payne 2017
). On the other hand, it is clear that those with higher incomes tend to have better health, more education and a greater ability to participate in the social and political lives of their communities. While money does not buy everything (Sandel 2012
), income distribution can generally serve as a proxy for the distribution of a wide range of desirable things. There is at least one type of inequality, however, that is not well represented by disparities in income and wealth. Therborn
) labels this type of inequality “existential,” pointing to unequal socio-economic positions as a result of racial, gender, or other types of discrimination based on personal characteristics. This type of inequality seems to transcend inequalities of income or wealth. In the United States, an African-American man will lead a very different life from that of a European-American man even if they are the same age and have the same education, income, wealth, IQ, and health, simply because of the persistent effects of racial discrimination. While the focus of this paper is on inequality in the distribution of income and wealth, it will be necessary to pay some attention to existential (also referred to as “horizontal”) inequality as well.
Interest in inequality is not a new phenomenon. In 1753, the Dijon Academy in France organized a competition for the best essay on the question: “What is the origin of inequality among men, and is it authorized by natural law?” (Rousseau  2011
). The winning essay was submitted by Jean-Jacques Rousseau who argued that prior to the invention of agriculture and the subsequent creation of property and laws to protect individual property rights, human beings lived in a state of “moral equality” (Rousseau  2011, p. 95
). Rousseau observed that there could be physical differences among human beings in the state of nature but believed that moral or political inequality arose only with the creation of the state.
But from the moment one man needed the help of another, as soon as it was thought to be useful for a single person to have provisions for two, equality disappeared, property was introduced, labor became necessary, and vast forests were changed into smiling fields which had to be watered with the sweat of men, and in which slavery and misery were soon seen to germinate and grow with the crops.... Metallurgy and agriculture were the two arts whose invention produced this great revolution.
Rousseau’s response to the original question posed by the Dijon Academy was that the origin of inequality is the development of the political and legal authority induced by these two revolutions. He also argued that inequality cannot be justified by natural law (Rousseau  2011, p. 95
Contemporary thinkers, such as Therborn
(2013, p. 38
), agree with Rousseau that inequality is not a natural condition but rather something that is socially constructed. Pringle
) detects rising inequality in pre-agrarian societies but other analysts endorse Rousseau’s argument that the invention of agriculture led to the creation of states and legal institutions which in turn gave rise to socially-constructed inequality (Boix 2015
, Deaton 2013
) shows that even in a Hobbesian state of nature (a war of all against all), it is possible for a stable equilibrium to arise without the creation of a state. But this equilibrium is fragile and can only hold over time if there is a high degree of equality. This matches the archaeological record, which establishes that early hunting and gathering communities, the dominant socio-economic structure for about 95% of human history, were quite egalitarian albeit extremely violent (Pinker 2011
). This way of life was disrupted by the invention of agriculture (the Neolithic Revolution), which led to disparities in resource holdings and rising inequality that resulted in more violent conflict. Boix
) shows that in some circumstances, people were able to band together to establish republican states with police and armies to control both internal and external violence. In other cases, authoritarian monarchs took on the task of assuring security in return for fealty from their subjects. Morris
) claims that human value systems depend on the underlying social organization arguing that hunting and gathering led to egalitarian societies with a lot of violence, while agrarian societies tended to have high inequality with a greater reluctance to resort to violence to settle disputes, and industrialized societies wound up with somewhat greater equality and a decline in the value attached to violent resolution of conflicts.
Following the Neolithic Revolution, the majority of people worked on small farms earning subsistence incomes that were just barely enough to reproduce the population and maintain society. Malthus (Malthus  2004
) believed that the tendency for population to grow more rapidly than food supplies meant that average incomes would always be driven down to the subsistence level. His observation matched the historical record prior to the publication of his essay in 1798 quite well. The Industrial Revolution (approximately 1760 to 1840), however, led to extraordinary changes that resulted in an exponential increase in average incomes with the result that almost everyone in high-income countries and a great many in low- and middle-income countries now earn incomes that are much greater than would be required for basic subsistence despite the fact that population today is more than seven times the world population in 1800. Based on data from The Maddison Project
), average real income growth in Malthus’s native Britain between 1000 and 1820 was only 0.12% per year compared with 1.28% between 1820 and 2010. While the difference may seem small, it has resulted in an eleven-fold increase in real average incomes in the United Kingdom over the past 200 years compared with a less than three-fold increase over the previous 820 years.
In addition to increases in average incomes, better health, increased longevity and greater food availability, the Industrial Revolution also led to much greater economic inequality as a result of two factors. First, industrialization was geographically concentrated in Western Europe and North America so that the income disparities between those countries and the rest of the world increased dramatically. Second, as the Nineteenth Century unfolded, the concentration of income and wealth in the highly industrialized countries increased giving rise to such historical periods as the Gilded Age (1865 to 1914) in the United States and the Belle Époque (1871 to 1914) in France. Milanovic
) sees global economic inequality as a combination of inequality within countries and inequality between countries. Based on data from the World Bank
), the richest ten percent of households in the United States have almost 18 times the income of the poorest ten percent. In Norway, the richest ten percent have a little less than 6 times the income of the poorest ten percent so income disparities in Norway are lower than in the United States. Average income in the United States and Norway (adjusted for inflation and purchasing power) is, respectively, about 34 and 42 times that of Ethiopia, which illustrates the great between-country disparities that characterize the world today (World Bank 2017
) reports estimates of the degree of inequality among all the people of the planet that are much higher than in any single country and argues that most of global inequality is explained by the very high disparities between countries. Shin
) reports that “the 85 richest people in the world have as much wealth as the 3.5 billion poorest,” which suggests that the global wealth distribution is even more concentrated than the global income distribution.
The most commonly used measure of inequality is the Gini coefficient which can take values from zero (perfect equality in which everyone has the same income or wealth) to one (perfect inequality in which one person has everything while everyone else has nothing). Gini coefficients for disposable income after taxes and transfers in high-income countries generally range from about 0.26 (Norway) to 0.41 (United States). South Africa appears to have the most unequal income distribution in the world with an estimated Gini coefficient of 0.64 (World Bank 2017
). Another way to measure inequality is to estimate the share of total income or wealth held by the richest percentile (top one percent) or decile (top ten percent) of the population. Piketty
), and Atkinson
) use measures such as these to trace the evolution of income and wealth inequality over the Twentieth Century for France, the United Kingdom, the United States, and a few other countries. Their results show that both wealth and income inequality fell during the Twentieth Century but began rising after 1975. Piketty
) also finds that about 60% of the total wealth in France, and 70% of the total in the United Kingdom and the United States is owned today by the richest ten percent. These levels are not much different from those recorded during the Gilded Age and Belle Époque.
Some writers suggest that mounting inequality can give rise to forces that subsequently lead to its decline. Sitaraman
) suggests that the Progressive Era (1890 to 1920), which contributed to lower inequality in the United States in subsequent years, was triggered by the high income and wealth disparities of the Gilded Age. Milanovic
) and Piketty
) point to other factors that led to reductions in inequality in the course of the Twentieth Century. Milanovic
(2016, p. 56
) divides these factors into benign forces such as widespread education, public policies, changes in the age structure of the population and technological change, and malign forces such as wars, epidemics and civil conflicts. In a somewhat more pessimistic assessment, Scheidel
) argues that increasing inequality is a fundamental characteristic of civilized societies that is only slowed by wars, revolutions, civil disorder in failed states, and widespread disease outbreaks. Whatever the causal mechanisms, the degree of economic inequality in most high-income countries declined from the very high levels reached at the beginning of the Twentieth Century until about 1975 after which it began to rise once again (Piketty 2014
; Milanovic 2016
; Stiglitz 2013
; Galbraith 2016
; Deaton 2013
Simon Kuznets (Kuznets 1955
) laid the foundation for much subsequent research on inequality. Based on the very limited data he was able to find, he concluded that inequality follows a pattern, first rising as average incomes increase along with economic growth and then reaching a peak and beginning to decline as average incomes continue to rise. He referred to this pattern as the “long swing” (Kuznets 1955, p. 18
) but it is more commonly known as the “Kuznets curve.” The logic of this hypothesis is that as countries industrialize, inequality increases until the country reaches an income level that allows it to establish a social safety net and universal education both of which tend to lower inequality. As more income data became available, however, the evidence tended to disconfirm the Kuznets hypothesis. Milanovic
(2016, p. 50
) has proposed an alternative representation of the evolution of inequality suggesting that, rather than a single curve in the shape of an inverted “U”, there is a sequence of Kuznets curves which he labels “Kuznets waves”. He argues that China, where economic inequality has increased substantially since about 1980, is approaching the top of its first Kuznets wave while the United States has completed its first wave and is now climbing a second. Milanovic
) and other writers on inequality note that the evolution of inequality in relation to economic growth is not mechanistic. Rather, it is driven by events such as wars and social unrest as well as by the specific policies pursued in various countries. The actions of labor unions in the United States during and after the Progressive Era were important in lowering inequality after World War II and their decline beginning in the 1980s has been an important factor in the more recent rise in U.S. inequality. Milanovic
) is not entirely confident that the second Kuznets wave currently being traced out in in the United States and other countries will reach a peak and begin to decline as was the case for the first wave. Along with other analysts, he argues that future reductions in economic inequality will only occur if robust policy interventions are initiated to strengthen the bargaining power of workers, raise skill levels, and protect the economic interests of the middle class.
) also points out that while inequality is increasing in many high-income countries, there are some low- and middle-income countries, such as China, that appear to be closing the gap in per capita incomes. Capital is scarce in most developing countries and should, therefore, fetch high returns. This should attract foreign investment stimulating economic growth so that these countries begin to catch up with the high-income countries in a process referred to as “convergence.” Convergence may also result from the importation of technological innovations developed in other countries. Milanovic
) argues that future global inequality will depend on the extent of this convergence and the degree to which within-country inequality increases. Table 1
shows that there has been some convergence in recent years between high-income countries and developing countries in East Asia and the Pacific although most other regions still lag well behind the high-income countries. Most foreign investment is still carried out among high-income countries rather than flowing from rich countries to poor and many technological innovations are still under intellectual-property rights protection limiting their dispersion. Another explanation for the lack of convergence in some regions is that many developing countries do not have effective legal institutions governing contracts, intellectual property, quality standards, and corruption (Acemoglu and Robinson 2012
Many explanations for the current increases in economic inequality have been offered. Autor
) and Deaton
) all point to skills-biased technological change as a major cause. Technological innovations in recent years have often led to the replacement of unskilled workers with computerized machines that require highly skilled operators. The result is that demand for skilled workers has increased driving up their wages while the opposite effect occurs for unskilled workers increasing the disparities in labor income. Skills depend on education so wage inequalities may also reflect differences in educational opportunities. Although many believe that globalization and competition from low-wage foreign workers are important factors in the rise in economic inequality, numerous economic analysts consider their effects to be far more ambiguous than is commonly thought (Galbraith 2016
; Milanovic 2016
). Social changes, such as assortative mating, may also contribute to rising inequality. Assortative mating is the practice of marriage between similar people. It is more likely today for a high-income earner to marry another high-income earner than was the case in the past. The result is that some households have very high income from the two highly paid people while others have to rely on the much lower earnings of one or two low-wage workers (Galbraith 2016
). Another social change is the decline of labor unions and the reduction of the bargaining power of workers with low or moderate skills. Stiglitz
) argues that much of the rise in inequality is due to various market imperfections and government policies that reinforce them. In particular, he believes that a major cause of rising inequality is rent-seeking, the practice of using resources not for the production of goods and services but rather to convince policy-makers to introduce economic distortions that benefit special interests at the expense of everyone else. Regressive taxation polices and inadequate social safety nets also contribute to rising inequality and in many countries, racial, ethnic, and gender discrimination may amplify the effects of the other factors (Troutt 2013
). Most income gains of the past three decades in the United States appear to have gone to the very rich, many of whom receive very high incomes while middle-class wages have stagnated. Median real income for males in the United States in 2015 was 2.8% below its level in 2001 (Census 2017a
) points to luck as an important factor in the generation of the extremely high incomes currently enjoyed by the rich.
3. Arguments that Economic Inequality Is Not a Threat to Social Justice or Economic Stability
While the majority of analysts appear to believe that economic inequality is a significant issue requiring some form of remediation, some disagree. Many of these critics are associated with conservative think tanks such as the Heritage Foundation, the Manhattan Institute, the Cato Institute or the American Enterprise Institute (Furchtgoff-Roth 2014
; Mayer 2015
; Azerrad and Hederman 2012
; Hassett and Mathur 2012
). The fact that many of the worries about inequality carry with them implicit criticisms of capitalist economic systems may be one of the reasons conservative writers, who generally favor laissez-faire capitalism, have felt compelled to seek ways to counter arguments about the harmfulness of inequality. Another reason may be the fear that policies to reduce economic inequality may cause significant damage to the economy or to favored groups such as high-income innovators or productive business enterprises. One response to those who see rising inequality as a problem is to deny that there has been any increase in inequality (Winship 2014
). To support this claim, the writers often challenge the data used to measure economic inequality arguing that the statistics used by others do not actually measure what they think they do or that statistical analyses showing rising inequality are mistaken (Winship 2014
; Armour 2014
) concedes that inequality may be rising but argues that increases in economic inequality are unimportant because everyone is now better off than in the past as a result of robust economic growth. The problem with arguments of this nature is that data on income and earnings show pretty clearly that incomes for the poor and middle class have stagnated over the past forty years in many countries with most of the benefits of economic growth flowing to the top income earners and wealth holders (Stone et al. 2016
; Milanovic 2016
; Piketty 2014
Another challenge to the conventional wisdom is the suggestion that consumption expenditures are a better indicator of inequality than income (Hassett and Mathur 2012
; Furchtgoff-Roth 2014
; Azerrad and Hederman 2012
; Wilkinson 2009
). The logic of this position is based on the notion of “permanent income”, which recognizes that income varies across a lifetime. Younger people with low incomes can borrow to maintain a desired level of consumption, paying off their debts when their incomes increase during the next stage of life. As working adults, these individuals not only pay off debts incurred earlier but begin to save for retirement. When they stop working, they can draw on these savings to maintain their desired level of consumption. In other words, borrowing and saving can smooth out consumption over a lifetime so consumption expenditures are a better indicator of well-being than income. Hassett and Mathur
) find that inequality in the consumption of both durable and non-durable goods is less than inequality as measured by income. Meyer and Sullivan
) analyze the distribution of consumption expenditures and income in the United States finding that while income inequality has risen over the past 50 years, consumption inequality only appears to have increased for top earners. Overall they find that income inequality has increased more than consumption inequality. Other analysts find that inequalities in income and consumption expenditures in the United States evolved in similar fashions prior to the recession of 2008–2009 but have diverged in later years (Fisher et al. 2013
). Brzozowski et al.
) attribute lower increases in consumption inequality compared to income inequality in Canada to the effects of the Canadian social safety net. This result suggests that the smoothing of consumption expenditures was due to Canada’s welfare policies rather than the use of borrowing and saving as suggested by the permanent-income hypothesis.
In contrast, after making adjustments to data on consumer expenditures to take account of the different types of goods consumed by households with different levels of income, Aguiar and Bils
) find that inequality measured by consumption expenditures actually tracks income inequality very closely. Attanasio et al.
) also find that measurement errors in the U.S. Consumer Expenditure Survey may account for the apparent lower increases in consumption inequality as compared to income inequality and, after further analysis, conclude that consumption and income inequality have increased by about the same amounts in recent years. In later work Attanasio and Pistaferri
) point to further evidence that income and consumption inequality have increased at similar rates in the United States arguing that the increase in income inequality is mirrored by greater inequality in the well-being of American citizens. Note that income is used for three things: consumption, savings and taxes. Studies of income inequality usually are based on measures of disposable income that reflect the effects of government taxes and transfers. As shown by Fesseau and van de Ven
), upper-income households in OECD countries have much higher savings than low- or middle-income households. As a result, measuring inequality in consumption expenditures misses an important part of overall inequality. For lower-income households, income may be the same as consumption expenditures while for higher-income households, consumption expenditures are likely to be much less than their income as a result of their savings. In addition, whether borrowing and saving can effectively equalize consumption expenditures depends on how well credit markets function. Piketty
) notes that these markets, like other markets involving inter-temporal transfers, such as those for insurance, are plagued with moral-hazard and adverse-selection problems that reduce their effectiveness in resource allocation across time.
A common argument found in the writings of those who oppose efforts to reduce economic inequality is that equality of opportunity is of greater importance than equality of outcomes. Watson
) argues that the processes that lead to unequal outcomes may be unjust but the outcomes themselves can be neither fair nor unfair. This perspective is similar to the libertarian position advanced by Nozick
) who argues for procedural justice based on just initial acquisition and just exchange. Following Locke (Locke  1993
(1974, pp. 174–78
) suggests that an individual can justly acquire property by “mixing his labor” with an unowned object while leaving enough of the resource to insure that those excluded from its use do not have their situations worsened. Property acquired in this manner can then be exchanged voluntarily through sale, inheritance, gift-giving and so on. As long as the exchanges of justly acquired property are uncoerced, the procedures for arriving at a final distribution are just and that outcome is just no matter how unequal it may be. Watson
) suggests that economic inequality can arise from three sources, only one of which (fraud or theft) is malign. Winning the lottery or becoming rich through invention of a new product or procedure may lead to greater economic inequality but inequality caused by these factors is perfectly fair. Wilkinson
) echoes this argument suggesting that if inequality stems from malignant activities, the problem is not the resulting inequality but, rather, the malignant activities.
For an unequal distribution of income or wealth to be considered fair, these writers need to identify causal mechanisms that have led to the unequal outcomes and that are not unfair. For Nozick
), the causal mechanism is a set of procedures (just acquisition and just exchange) that is deemed to be fair even if the result is great inequality. For others, the solution to problems of inequality is to guarantee equal opportunities (Watson 2015
; Mankiw 2013
; Azerrad and Hederman 2012
). If everyone starts from a position of equality, where individuals end up might be thought to be solely determined by their personal efforts. And if that is the case, individuals can achieve any desired position in the income distribution through variations in their own efforts. Watson
), and Mankiw
) do recognize that complete equality of opportunity does not exist in any known society but often seem to feel that there is enough similarity in the opportunities people are afforded for most inequality to result from the actions of individuals themselves rather than from political or institutional biases or large inheritances that result in unequal starting points.
(2013, pp. 206–7
) agrees that working to insure equality of opportunity is an important strategy for achieving social justice and seconds the concern of many more conservative writers that hard-working individuals who make important contributions to their societies not be penalized for their success. He points out, however, that most countries are a long way from assuring equality of opportunity, noting that countries with the greatest degree of inequality are also the countries in which there are significant disparities in opportunities as reflected by the very close correlation between the incomes of fathers and their children. In a study of a large number of countries, Brunori et al.
(2013, p. 16
) find that “…an important portion of income inequality observed in the world today cannot be attributed to differences in individual efforts or responsibility”. They point to factors such as place of birth, gender, and other personal characteristics over which individuals have little control as the main causes of economic inequality. Ferreira and Pergine
) highlight the difficulties in measuring inequality of opportunity pointing to studies of individual countries that show great variation in the observed degree of equality of opportunity. Estimates of inequality of opportunity are many times higher in Brazil and Guatemala, for example, than in countries such as Norway or Sweden (Ferreira and Pergine 2015
) describes the great advantages with which he started life as a result of being born to a wealthy family, advantages that are not available to those born to families of humbler means. Krueger
) has found that countries with high levels of economic inequality are often characterized by very low social mobility. Socio-economic status at birth in such countries tends to remain at the same level throughout most individuals’ lives. Stiglitz
) characterizes equality of opportunity in the United States, a country with high levels of economic inequality, as a “national myth”. Putnam
(2015, p. 43
) argues that social mobility in the United States has “stalled since the 1970s”.
Note that the suggestion that equalizing opportunities and then letting the chips fall where they may can lead to an impression that the plight of the poor is their own fault. Fleischacker
) suggests that historically, most writers thought that the poor deserved their fate because they are lazy or slow-witted while the rich deserved their good fortune because they are hard-working and creative. Spencer (Spencer  1969
) believed that the poor were unfit for survival and argued against public assistance on the grounds that the government should allow the poor to become extinct through Darwinian natural selection. Azerrad and Hederman
(2012, p. vi
) echo these sentiments, suggesting that one of the factors that threatens the realization of general prosperity in the United States is “...the rise of a slacker culture that disparages hard work and celebrates indolence.” In contrast to this perspective, many analysts believe that poverty and inequality result from socio-economic conditions rather than from deficiencies of the poor themselves. Atkinson
) argues that inequality is unavoidably generated by social structures and economic institutions so that, as a practical matter, equality of opportunity simply means that individuals all have an equal opportunity to participate in a race that will inevitably result in unacceptable inequalities in the final outcomes. Troutt
), and Milanovic
) suggest that where a person is born is often the main explanation for that person’s subsequent level of prosperity. It has already been noted that the very large citizenship premium received by those born in high-income countries is the main factor in global inequality (Milanovic 2016
) and Bischoff
) point to the way in which policies in the United States have segregated individuals into geographically unequal locations. It is also clear that individuals are born with different genetic endowments that influence their life chances. The circumstances of one’s birth play a significant role in how well one fares and the possibilities for evening out these disparities to ensure that everyone has an equal opportunity to succeed appear to be limited.
Even if one believes that opportunities are sufficiently equalized in a given society to leave everyone’s fate up to their own efforts, there would still be the problem of luck. Frank
) develops a simple simulation model, which shows that with large numbers of contestants, the winner will often be a person who does not have the highest skill level but is simply luckier than the other contestants. “The upshot is that even when luck counts for only a tiny fraction of total performance, the winner of a large contest will seldom be the most skillful contestant but will usually be one of the luckiest” (Frank 2016, p. 156
). These results undermine the common merit-based argument against efforts to reduce economic inequality. Students of economics generally begin with analysis of a perfectly competitive economy in which the actions of buyers and sellers cannot affect market prices. In such an economy, it can be shown that firms will maximize profits by hiring inputs, including labor, up to the point at which the last input or worker hired generates additional output that has a value just equal to its cost, in the case of labor, its wage. Overall, profit and utility maximization in competitive markets lead to the most efficient use of resources. For some, it is a simple step from this theoretical result to the conclusion that the fair wage to pay a worker is equal to her “marginal product”, that is, the value of the worker’s contribution to the firm’s revenue. This is the sort of logic that is behind arguments that the very high salaries paid to the top one percent are justified because they are in line with the large economic contributions these individuals make (Mankiw 2013
; Becker and Murphy 2007
; Conard 2016
; Watkins and Brook 2016
). An obvious problem with this type of analysis is that most markets are not perfectly competitive and it is not clear that all economic actors are “rational” in the sense that their goal is to maximize profits or utility. In addition, the idea that the Wall Street financiers responsible for the Great Recession of 2008–2009 deserved their multi-million dollar bonuses because of their great contributions to economic prosperity, has not gone unchallenged. Stiglitz
) argues that in modern economies, the connection between an individual’s wages and her economic contribution is weak concluding that the very high incomes at the top have to do mainly with individual behavior and government policies that actually introduce great inefficiencies into the economy through the practice of rent seeking described earlier.
), and Watkins and Brook
) see danger in the concerns about economic inequality, arguing that efforts to reduce inequality will cause great harm to economic systems that have brought great prosperity to many. Conard
) suggests that high salaries for those at the top provide the incentives for talented individuals to obtain useful skills and to take risks that pay off handsomely for the rest of society. Watson
) admits that inequalities arising from fraud or destructive rent-seeking are problems but sees other sources of inequality as necessary for economic progress. Watkins and Brook
) and Azerrad and Hederman
) see much of the discussion of inequality as attacks, often fueled by envy, on the success of those who have been the primary drivers of economic growth and prosperity. According to Mayer
(2015, p. 115
), “[a] world without wealth and income inequality is in fact a world of universal poverty”. From these perspectives, economic inequality is broadly beneficial because it encourages growth and innovation. Thompson and Leight
) tested these propositions using state-level data for the United States finding that increases in the share of total income flowing to the top income-earners actually lead to lower incomes for low- and middle-income households contrary to the assertions of Watson
) and Mayer
). While these latter writers discount the significance of economic inequality, most of them do recognize that poverty is a serious social ill. Watson
), and Frankfurt
) worry that the focus on inequality will distract policy makers from the true problem, which is poverty. For those who feel that economic and social inequalities are unfair, the challenge is to explain how inequality in itself reduces overall well-being independently of the clear negative effects of poverty.
The literature on economic inequality is vast and growing by the day. While this survey is based on a substantial sample of that literature, there are undoubtedly many valuable studies and analyses that have not been included. Moreover, the discussion focuses on just one aspect of the debates, whether inequality in itself represents a social ill that is distinct from the problem of poverty. Important issues such as the causes of rising economic inequality around the world or potential policy responses to this problem have been touched on only lightly or not at all. I have tried to select a representative sample of the works on inequality that speak to the question posed at the outset. I believe that these works do represent the best of current thinking about this topic and that they provide a strong foundation for the conclusion that inequality is, in fact, a social ill that is separate from the equally important problem of poverty. Economic inequality has increased substantially in recent years and is widely considered to be excessive. In addition to violating norms of distributive justice in most societies, it undermines democracy, causes widespread stress and illness, erodes social cohesion and trust, contributes to environmental degradation, and slows economic growth. Reducing current levels of economic inequality would thus have both intrinsic and instrumental value.
This does not mean, however, that all the arguments on the other side of the issue are invalid. Most people would probably not challenge Watson’s
) claim that we should not begrudge individuals who have made great contributions to human well-being or who have won the lottery, the wealth and prestige that ensues. Large rewards for those who have accomplished great things would seem to be generally acceptable although some may question whether they really need to be quite so substantial. At the same time, however, it would clearly be incorrect to conclude that all those at the top of the income distribution have made beneficial social contributions that justify their incomes and wealth. Beyond those who have acquired their riches dishonestly, others may have benefitted from large inheritances without doing anything for the greater good or earned very large incomes in industries that may not actually serve a useful purpose. Watson
) includes a table showing the proportions of people in the top one percent of taxpayers in the United States working in various professions in 2005. Business executives and financial professionals made up about a third of this group with lawyers and medical professionals accounting for another 22%. Surprisingly, less than two percent were cinema, television, or sports stars. While many in the top one percent are undoubtedly worthy, it is not clear that financial experts who cash in on other people’s investment decisions by taking advantage of tiny differences in the time it takes to complete transactions originating at some distance from the main trading computers are making stock markets more efficient or simply enriching themselves without adding anything of value (Bowley 2011
). It would not be easy to determine which individuals in the top one percent have actually contributed to the general good and whether the rewards they have received are actually justified. But a broad argument that all rich people deserve their good fortunes because of their great contributions is difficult to sustain.
Many of those who oppose efforts to reduce economic inequality emphasize equality of opportunity while dismissing concern about the inequality of outcomes. Some political philosophers include equality of opportunity as an important objective but generally do not believe that unequal outcomes would be acceptable even if equality of opportunity were insured. In any case, most would agree that opportunities are not equal so if both sides of the debate can agree that working to insure greater equality of opportunity is a worthy objective, there may be room for useful collaboration. A further argument supporting priority for poverty reduction over working to lower inequality has been based on the differences between high- and low-income countries. Payne
) suggests that poverty may be a more pressing problem than inequality in developing countries, and Brückner and Lederman
) believe that inequality in these countries will actually enhance economic growth because the rich save more than people of more modest means with the result that there are more resources for investment. Some development economists held this position in the 1960s and 1970s but currently, most specialists in economic development reject the idea that there is a trade-off between reducing inequality and economic growth (Kindleberger and Herrick 1977
). Todarao and Smith
) argue that income inequality in developing countries leads to inefficient resource use that slows economic growth, social instability, and affronts to common perceptions of fairness.
In the end, policy initiatives focusing on either poverty reduction or inequality need not be mutually exclusive. Policies designed to raise the incomes of the poor contribute to both poverty and inequality reduction. Such policies include higher minimum wages, public support for early childhood education and enhanced educational opportunities at all levels, infrastructure development, income support for those who are disabled or otherwise disadvantaged, re-training for people who have lost jobs to technological change and globalization, and other social programs aimed at the least well-off. Other policies should be aimed at reducing the economic disparities between the rich and poor through progressive taxation, inheritance taxes, regulations and laws to control the negative effects of rent-seeking, and elimination of loopholes in the tax codes that protect the rich. These policies would also generate the resources needed to attack poverty. Taxation systems in high-income countries are generally less progressive than often thought (Piketty 2015
) and higher taxes on the wealthy would have very little impact on their well-being while potentially giving them a greater stake in the overall prosperity of their societies. It is important to note that virtually no-one believes complete equality in the distribution of income and wealth is a desirable state of affairs. There is no clear agreement that an optimal level of inequality would be achieved at some given value for the Gini coefficient but there does appear to be widespread agreement that a value of zero would be unsuitable as well as impossible to achieve. The evidence from the Twentieth Century, however, shows that there can be great general prosperity with lower economic inequality than at present so that, given the clear distress caused by rising inequality, lowering it appears to be a worthy aspiration.