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Overview

Many countries have huge gaps between the rich and poor. Inequality even exists among different countries, as some receive billions in foreign investment while others struggle to improve roads and basic services for their citizens.

Inequality is a lack of balance, or haves and have-nots. There are various factors that come into play when we talk about inequality. These key points will help you better understand the causes of inequality and how one person, one country or even the world can work to level the economic playing field.

In this passage, you’ll be introduced to the concept of inequality and how it’s defined. You’ll also learn more about the causes of rising inequality in society today.

Big Idea #1: Inequality between individuals can change depending on developments in society.

Would a capitalist society have different levels of inequality than would a socialist one? Your answer is probably yes, but back in the early days of income distribution studies, people weren’t sure. The first person to study this was Italian economist Vilfredo Pareto, who also pioneered the field of inequality.

Pareto’s main belief was that no matter what type of government a country has, the income distribution is almost always the same.

The 80/20 rule says that 20% of the things in a situation will cause 80% of the results. For example, 20% of your customers might buy 80% of your products. This means that those who are at the top have an almost overwhelming amount of power and influence over what happens to everyone else. Pareto believed that nothing could ever change this law, so he thought inequality would always be a part of life. Kuznets disagreed with him by saying that society’s changes can actually improve people’s lives, which causes them to become more equal.

After conducting extensive research, Kuznets found that initially income inequality increases when a society shifts from an agricultural focus to an industrial one. However, as education and progressive state policies increase later on, income inequality decreases.

The policies implemented by the government shifted the balance of income to those at the bottom, which disproved Pareto’s theory.

Big Idea #2: Inequality is intertwined with both economic growth and economic justice.

Inequality is a hot topic because it affects everyone. In fact, inequality can be good for the economy if it encourages growth and bad for the economy if it discourages growth.

In this way, we can compare inequality to cholesterol. It’s good in small amounts but bad when there is too much of it.

For example, when inequality motivates people to work hard and pursue ambitious projects, it is good.

On the other hand, when there is a lack of opportunity for people to grow and be creative, it stifles economic growth.

It’s easy to imagine a society where only the richest and most educated people get the best jobs. Everyone else is forced into low-skilled, low-paying positions that don’t provide much opportunity for growth.

In a society with extreme inequality, most people are not able to contribute much to the economy. That means that growth is low and productivity suffers. Inequality leads to economic inefficiency because it prevents large segments of the population from contributing their fair share to the economy.

Inequality is also linked to economic justice. For example, if inequality is the result of practices that favor or discriminate against certain populations based on race, gender or inheritance, then it’s bad and unjust even if it doesn’t negatively impact economic growth.