- Inequality is the social and financial differences that occur between people. There are multiple ways to measure this, including by income and wealth. Economists often use the Gini coefficient as a metric to measure inequality in modern countries.
- The degree to which inequality is avoidable, or normatively just, is a subject of substantial debate. However, the growing inequality in the modern world necessitates democratic governments to address such questions as to avoid social conflict and political upheaval arising from popular dissatisfaction over the distribution of wealth and resources.
What Is Inequality?
Inequality is the variation in purchasing power of different people, and can also encompass social and political disparities. These different forms of inequality often reinforce and exacerbate one another. Social inequality can yield financial inequality when societies impose permanent statuses on individuals and hinder their ability to access higher-paying roles. Likewise, individuals with substantial wealth, especially in corrupt systems, can leverage their money to pursue political positions and use their influence to maintain existing inequalities for personal benefit. In this way, inequality is a system of relationships emerging from how people interact with each other in a society.
Inequality and Capitalism
The most common metric that economists use to measure inequality is the Gini coefficient, which accounts for distribution of both income and wealth inequality in an area and expresses it as a number between 0 and 100 whereby 0 is complete equality and 100 complete inequality. For example, the very unequal South Africa has a Gini coefficient of about 63, while the very equal Czech Republic has a Gini coefficient of about 25. Determining the inequality generated by capitalism in a country solely through the Gini coefficient is challenging because both developed and developing nations, which exhibit “capitalistic” features, can have significantly different Gini coefficients. For example, nations with reputations for limited restraints on economic competition like the United States have Gini coefficients roughly equivalent to economies with extensive regulatory state control like Iran. The relationship between capitalist development and inequality, at least in terms of international comparison, remains obscure.
Scholars have explored the relationship between capitalism and inequality. In developed economies like North America and Western Europe, there has been a growing trend toward inequality in recent decades, often attributed to the increasing returns of capital ownership exceeding that of real wages. This can lead to social conflict when people perceive a lack of upward mobility or when wealthy elites monopolize political power. On the other hand, some argue that capitalism, despite its inequalities fosters overall prosperity through competition and capital accumulation.
As of 2016, the top 10% of income earners received about 50% of all income in the United States. This was an 8% increase from 1989, and since 2016 the rate at which the top earners’ percentage of total national income has only increased further. Furthermore, wealthy Americans are diverging rapidly from their less wealthy peers, as poor and middle-class Americans generally spend their income rather than investing it in capital. Given high returns to capital relative to real wages, this means that wealth inequality is far more drastic than income inequality, and this gap is expected to widen further in the near future. High inequality can cause social crises and threats to political unity; policymakers will have to develop an understanding of the causes and ramifications of inequality and redistribution to effectively address such tensions.