Is Economic Inequality Inevitable?
Introduction
Well, the simple answer is that it’s complicated. In human history, there have been no economic systems that completely eradicate all hints of inequality, pointing to the answer that it’s always inevitable. However, to find the full and complete answer to such a complex question, let’s break down the Gini coefficient and how to quantify inequality, then look at a quick case study and a couple takeaways, before we finally induce our answer to our question.
What is the Gini Coefficient?
The Gini coefficient is an index that measures the scale of income inequality that exists within a society (which can then be compared to other countries over different time periods to illuminate levels of economic disparity). The scale ranges from 0 — perfect equality where everyone earns the same income — to 1 — perfect inequality where one person has all the income and everyone else has zero; hence, having a lower Gini coefficient means that a society is more equal and vice versa. The Lorenz curve is essentially a graphical representation of the Gini coefficient: showing the distribution of income over the cumulative percentage of households.
Pro’s and Con’s of Using the Gini Coefficient/Lorenz Curve
The pro’s:
- It allows us to grasp an idea of relative equality — which countries are more equal than others in respect to income
- It quantifies the concept and makes it a tangible number or graph which obviously conveys the information
The con’s:
- It doesn’t take into account race, gender, sexual orientation, etc. , not letting us see how demographic association relates to income and income inequality
- It only shows income, meaning investments, real estate, passive income, or other tools people can use to gain wealth aren’t counted, so the real inequality in a society is likely understated by simply citing the Gini coefficient
- It’s impossible to fully know how we arrived at the contemporary income inequality situation
Case Study: Communism vs. Capitalism
The common economic questions that any society must answer are what to produce, how to produce, and for whom to produce. Ideologically, capitalism and communism clash on deciding how to produce and for whom to produce. Capitalist societies rely on private entrepreneurs and corporations to produce goods and sell them on the open market where the laws of supply and demand dictate the quantity and price of goods. Conversely, communists have the government and society as a whole produce goods for the good of the people, having an “equal distribution” of resources and finished product among everyone.
Let’s take the example of the U.S. and USSR, capitalist and communist respectively. The Soviet Union implemented significant reforms to address income inequality (its founding was based on the income inequality of Tsarist Russia). For the Soviet Union’s life, people earned relatively the same wages as their comrades no matter their job, age, etc. — meaning the USSR had a lower Gini coefficient than the U.S. The only problem with the system was that the workers earned significantly less than their capitalist counterparts, for the capitalist system inherently discourages innovation and extra work as there’s no personal incentive to work hard, stagnating economic growth at an extremely low rate. On the other hand, the U.S. had relatively higher levels of income inequality but higher rates of economic growth as there were high incentives to work hard and innovate so that you could enjoy the fruits of your labor. When experiencing rapid economic growth, GDP per capita and overall living standards rise, however the top 1% gets disproportionally richer simultaneously in the U.S. Overall, the comparison of societies illuminates the heavy trade-off between income equality and economic growth.
To analyze another reason for inequality, let’s look at the two biggest superpowers of the world: China and the U.S. China currently has a coefficient of 0.467 while the U.S. has a coefficient of 0.47, making the two essentially the same in terms of inequality. While we’d expect communist China to have a lower coefficient, there are multiple factors contributing to their persisting inequality despite their supposed communist ideology: high-up officials earning much more than the average person, “special economic zones” where the country was opened up to capitalism (meaning a few rich businessmen got extremely rich on the manufacturing labor of the whole country), and disparities in access to resources. In the U.S, our economic inequality is due to capitalism and continued social inequality, namely discrepancies in educational access, innovative business owners and entrepreneurs reaping the benefits of their ingenuity, and investors bearing the risks and rewards of their decisions, etc. In respect to income inequality, both countries’ coefficients and reasons for economic discrepancy are strikingly similar. I bring up this example to show how no matter the supposed economic system of the country, it’s close to impossible to eliminate elites from earning a majority of the income and differences in access due to different socioeconomic status.
Solutions to our Quandary
Now how do we even try to fix the problems that income inequality poses?
- Progressive Income Taxes: Implementing a tax that increases as income increases would tax the upper class more and give the government more revenue to redistribute in programs to help the lower classes compete financially
- Invest in Education and Healthcare: To further equalize the playing field, improving the quality of public education for low-income children would increase the income potential of the children and decrease inequality
- Increase the Minimum Wage: By making low-skill labor more lucrative, those without high-quality education would be able to earn more money which can then be used to support a family or reinvest to create more wealth
Why These Solutions are Ineffective in Practice
The simple answer: the already powerful don’t want to change the status quo. Why would the rich want to pay more of their income in taxes to the government? Why would the rich want to invest in people’s education other than their own kids’? Why would the rich want to increase the minimum wage if they already earn a wage well above the minimum? It’s simple human psychology. Why change if the established systems help keep your family rich and powerful at the expense of others? Without an extremely strong impetus for change coming from those put down by the current systems, there’s little to no chance the systems will significantly change to benefit everyone and not the top 1%.
Income Inequality in the U.S.
Income inequality is still a real problem in the U.S, as the U.S has a higher Gini coefficient than almost every other developed country, including Northern and Western European countries. As the U.S continues to pursue economic growth over income equality and fails to prevent the rich from earning a majority of the country’s income, it appears as if there’s no slowing down the current trends of increased inequality. With little to no improvements to the public education systems, rising costs of college, tax evasion by the top 1%, exorbitantly high real estate costs, and almost no significant government reform, the status quo will likely persist for the foreseeable future, until a powerful and meaningful push for economic equality arises.
Conclusion
Income inequality results as a form of human nature. We pursue material wealth to boost our self-esteem, self-perception, and self-worth no matter the economic system we live in. We view economic wealth as a zero-sum game in which we must put others down to push ourselves up. And once someone rises to the top, they’ll do everything in their power to stay there, continuing the previously established systems of economic oppression and inequality in a repeating cycle where the rich get richer and the poor get poorer. But until we achieve a Gini coefficient of 1, we still have the potential to increase our income potential and determine our own financial success — which is the beauty of capitalism and the reason that I still have hope for our future.
I am not a financial analyst; my articles are strictly for educational purposes. This article was inspired largely by a Ted-Ed YouTube video I watched a couple days ago about the subject. Go check it out if you’d like a shorter introduction to the topic! Thank you for reading my article, and if you want to become a writer for my publication, please reach out at kalan.karuppana@gmail.com.
