Understanding Wealth Inequality

So far in this series, we have been learning about microeconomics, which means we have been

looking at the economy through the choices of individuals or small groups. Primarily,

we have been examining how these choices can lead to positive results. In fact, most of what we know

about choices that are based on scarcity points to the idea that they are based on self-interest,

and therefore the more freedom we have to make choices, the better off we will be.

However, as we learned when discussing public goods and externalities in a previous tutorial,

there are unintended consequences of freedom of choice. When it comes to economic decisions,

one of the negative externalities, or the negative cost a third party receives, is extreme wealth

inequality. Wealth inequality simply refers to the uneven distribution of wealth in a society. If

wealth inequality is extreme, most of the wealth is in the hands of a very small group of people.

Typically this may be less than 1% of the population. This graph displays

current wealth inequality across the entire world. As you can see, most of the wealth is concentrated

at the top, with a full 30% of wealth belonging to just a thousandth of one percent of the global

population. And this extreme polarization is only increasing. However, before we look at why rising

wealth inequality is a negative externality, it’s important to recognize that wealth inequality

is prevalent, and in fact it is necessary and expected, in any market economy. A competitive

economy inevitably leads to wealth inequality. However, extreme wealth inequality can be severely

damaging for a society because the overwhelming majority of wealth is concentrated at the top,

and in the hands of relatively few people, leading to a severe imbalance of power.

Extreme wealth inequality can lead to higher rates of crime, obesity, mental illness,

and drug use. It also often leads to lower population-wide satisfaction and happiness, and

less social cohesion. It gives wealthier people too much control over the lives of others. There

is even evidence that it leads to an increase in the prevalence of authoritarian governments.

And finally, extreme wealth inequality makes it exceptionally difficult for those who have

little to no wealth to build up wealth. In other words, in an extremely unequal society,

one who is born with little wealth is much more likely to die with little wealth.

And while it’s probably easy to recognize how extreme wealth inequality hurts those in poverty,

it also hurts those who have lots of wealth. You see, wealthy individuals can only buy so much.

They can only eat so much or only have enough time to consume so much entertainment. Producers

need a large number of consumers to continue to earn a profit. In a society where most of

the wealth is concentrated at the top, fewer consumers are able to buy goods and services,

which therefore leads to less economic growth. So how do we measure wealth inequality? Economists

generally prefer using what’s known as the Gini index. Named after the Italian statistician and

sociologist who developed it, Corrado Gini, the Gini index measures the distribution of income

across a population. The Gini index measures inequality across the whole of society rather

than simply comparing different income groups. A high Gini index indicates greater inequality,

with more wealth in the hands of the few. At the time of the making of this tutorial,

wealth inequality has increased to historic levels across the entire world.

However, it is particularly pronounced in the wealthiest of countries, the United States.