What determines our income isn’t just our effort or skill, but factors beyond our control—like the country and family we are born into.
1. What is inequality and why does it persist?
Inequality refers to the gap between the "haves" and the "have-nots," shaped not just by individual efforts but by systemic societal factors. It can manifest within a single country or across nations globally. At its core, inequality measures disparities in wealth, income, and living standards.
Scholars like Italian economist Vilfredo Pareto once believed inequality was constant, regardless of a society’s system—capitalist, socialist, or feudal. Pareto’s 80/20 principle famously showed that 20 percent of people hold 80 percent of wealth. However, Simon Kuznets later argued that inequality changes during societal transitions, such as from agricultural to industrial economies.
Kuznets found that while industrialization initially widened the gap between farmers and the new industrial class, longer-term reforms like education and taxation could eventually narrow it. Inequality, then, isn’t an unchangeable force but evolves with economic policies and societal structures.
Examples
- Pareto’s 80/20 principle is visible as a rule in various economies, like retail sales, where 20% of products account for 80% of sales.
- Kuznets observed income inequality widening during industrialization but decreasing with progressive policies in countries like the US.
- Countries like Denmark demonstrate reduced inequality with government redistribution through taxes and public services.
2. Inequality is a double-edged sword.
Inequality can push societies forward, but it can also hold them back. Think of it as cholesterol—too little or too much can harm the body.
On the positive side, inequality spurs individuals to strive for better opportunities, encouraging innovation and economic growth. Entrepreneurs seek wealth and recognition, which benefits the broader economy. However, when only a small elite has access to education and resources, inequality stifles creativity and limits participation, harming growth overall.
Economic justice adds another layer. Inequalities rooted in unfair systems—like racial, gender, or inheritance-based discrimination—undermine social cohesion, even if they don’t directly impede growth. Overcoming these forms of inequality requires questioning and reshaping unjust social foundations.
Examples
- Societies where elite groups alone benefit, like apartheid-era South Africa, show how inequality entrenches social stagnation.
- Innovation flourished across industries in postwar economies like South Korea’s, where broader access was given to skills and resources.
- Protests for racial and economic justice, like the US Civil Rights movement and Black Lives Matter, highlight systemic inequality.
3. The Gini coefficient helps measure inequality.
Measuring inequality is challenging but necessary for understanding and comparing its effects. The Gini coefficient, developed by Italian economist Corrado Gini, is the most widely used tool for this purpose.
The Gini coefficient quantifies inequality from 0 (perfect equality) to 1 (maximum inequality). Though precise, data collection limits its scope. Many household income surveys began only in the mid-1900s, providing uneven historical data. Moreover, while GDP offers a simple sum of total earnings, representing income distribution requires a more nuanced approach.
Different groups of countries show distinct inequality patterns when analyzed with the Gini coefficient. The Nordic countries have Gini scores as low as 0.25, while nations like Brazil and South Africa reach around 0.6, making them among the world’s most unequal societies.
Examples
- The Nordic countries—like Sweden and Norway—are highly egalitarian with lower Gini scores due to redistributive policies.
- Latin American nations like Brazil have among the highest inequality levels, reflecting systemic wealth concentration.
- The US, with a Gini score exceeding 0.4, highlights significant income disparities despite being a developed economy.
4. Comparing inequality over time and space.
To compare inequalities across eras, such as 1850 China vs. modern France, economists use methods like purchasing power parity (PPP). PPP adjusts income based on the price of goods in a given place and year, offering a standard baseline.
Another measure involves labor value. By assessing how many workers’ earnings equate to a wealthy individual’s fortune, we see vast gaps. For example, John D. Rockefeller’s wealth meant he controlled the equivalent financial output of 116,000 people in 1937, a far greater share of dominance than even modern billionaires like Bill Gates.
This temporal comparison reveals the global wealth divide, past and present, and highlights where power has concentrated over time.
Examples
- Rockefeller’s 1937 wealth ($1.4 billion) was unmatched, making him wealthier than the combined output of tens of thousands of workers.
- The use of PPP allows economists to compare historical incomes, such as colonial empires relative to industrial economies.
- Today, half the world’s richest 1% is composed of Americans, showcasing how national prosperity influences global wealth.
5. Socialism’s paradox: equality without innovation.
Under socialism, countries often achieved greater income equality than their capitalist counterparts but at the cost of economic dynamism.
Socialist policies, such as nationalizing industries, spread wealth more evenly than capitalist privatization systems. After WWII, socialist nations like the Soviet Union and Hungary saw markedly lower Gini scores than Western capitalist countries. However, guaranteed state provisions diminished motivation in socialist economies, stifling technological advances.
East Germany, for instance, manufactured inferior iterations of West German cars. Also, socialist ideals often masked corruption, as elites within these systems diverted public resources for personal gain.
Examples
- Soviet Russia’s nationalized farmland and industries redistributed wealth but led to inefficiency and mass shortages.
- East Germany's Trabant cars reflected socialism’s failure to create competitive global products.
- Corruption within socialist regimes, like in Poland post-WWII, undermined the egalitarian vision.
6. Why nations grow unequal after modern economy shifts.
The Industrial Revolution widened inequalities among nations, dividing industrialized “winners” and lagging agrarian economies.
Before industrialization, most nations operated on subsistence levels, limiting intercountry income differences. The revolution spurred faster growth in the West and left others trailing, increasing the global income gap sharply until the mid-1900s.
Globalization was expected to reduce inequality, but trends like the Lucas Paradox showed wealthier nations kept capital flows within themselves. Countries like the US saw massive investment inflows, while prospective markets like China lagged relatively due to perceived risk factors.
Examples
- Western Europe's industrialization vaulted it ahead of its colonies, establishing imperial economic dominance.
- In 2007, the US drew over $240 billion in foreign investments, while similarly populous China garnered only $138 billion.
- Rich investors buying into stable foreign assets—like luxury European real estate—skews global investment trends.
7. Birthplace determines wealth more than class.
Today, birthplace explains over 60% of a person’s income, overshadowing class within countries. An individual born in a richer country benefits more than one born in a poorer country, even if both share socioeconomic class backgrounds.
The worker in a thriving economy like Chile enjoys more opportunities than the laborer in Cambodia, despite comparable job roles. Wealthy nations provide better infrastructure, education, and resources to their citizens, amplifying income potential. While family wealth still matters, the gap between nations plays the defining role.
Examples
- South Korea’s working class earns more than equivalent workers in poorer nations like Bangladesh.
- 80% of income variation worldwide stems from the double factors of nationality and parental earnings.
- A laborer in the US consistently out-earns peers in developing nations like Angola or Haiti, regardless of job type.
8. Regional inequality reveals contrasting mechanisms.
Even regions like the US and Europe manifest inequality differently. America offers a clear disparity among individuals, whereas the European Union’s inequality reflects gaps between member nations, from wealthy Luxembourg to lower-income Romania.
Contrastingly, the global middle class primarily comes from emerging economies, clustering in Asia and Latin America. Developed wealthy countries barely contribute, remaining in vastly better financial positions compared to the global middle class.
Examples
- Luxembourg’s average GDP of $70,000 per capita far exceeds Romania’s $10,000 PPP levels within the same EU framework.
- Asia accounts for nearly 600 million global middle-class members, overtaking wealthier continents by sheer volume.
- High poverty thresholds in wealthy countries prevent them from classifying as "middle class" on a global scale.
9. Inequality highlights the challenges of globalization.
Economic globalization reshaped inequality, concentrating it globally but collapsing differences domestically for some regions. Wealthy nations saw their top earners leap far ahead globally, while gaps between middle and lower classes narrowed by global standards.
Still, the drawbacks remain. Wealthy countries’ reluctance to invest in poorer regions keeps challenging disparities alive. Questions of fairness emerge as the richest individuals within wealthier countries accumulate unprecedented shares of global assets.
Examples
- The rise of billionaires amplifies income gaps even in stable economies like Germany and the US.
- Global supply chains prevent wealth redistribution where labor is cheapest, relying on concentrated production zones.
- The World Bank’s wealthier countries dominate global decision-making, perpetuating inequality.
Takeaways
- Advocate for reforms: Support tax policies and redistributive measures to level inequality gaps in your country.
- Learn your context: Understand how your nationality and socio-economic background shape your financial potential within a global framework.
- Reflect global priorities: Push for investment in poorer countries to reduce intercountry inequalities through global cooperation and fairer trade.