Wealth Inequality means nothing

Growing wealth inequality is often touted as one of the biggest flaws of the capitalist system we have today. The GINI coefficient is an indicator that measures wealth inequality and income disparity, with higher scores suggesting more extreme income gaps between the rich and the poor. As of 2016, this is at 0.35 in the UK – up from 0.32 in 1983; this suggests a widening income gap between the wealthy and the less well-off. However, when adjusted for taxes, the GINI coefficient has decreased in the UK, from 0.36 in 2002 to 0.31 in 2016. This still begs the question as to whether wealth inequality is an issue, with many arguing that it breaks social cohesion, creating class conflict. This, however, is far from the truth, with wealth inequality hardly representative of the average citizen’s living standards.

Social cohesion

Many, especially those on the left, argue that wealth inequality creates class division, undermining the ‘social fabric’ of the country. However, this is simply not the case. A 2012 European study looked at the effects of wealth inequality in 32 OECD nations on societal factors: altruism, civic-ness, tolerance, obedience and work ethic. No correlation was found between inequality and all of these factors, aside from work ethic, with inequality having a positive effect on the latter. This is likely due to the greater incentive to succeed in life, with individuals at the top more wealthy than ever before. A greater work ethic increases productivity and thus more wealth is generated, in effect creating increasing prosperity for all.

Similarly, wealth inequality is said to decrease social mobility. The argument stems from the fact that as wealthier individuals acquire more money, the less well-off are ill-put to provide quality education and glamorous job opportunities through connections. Once again, this is far from the truth. A study by the Federal Reserve in 2001 found that of the top 1% of wealthy individuals, only 9% of their wealth was inherited. Likewise, a study by the Spectrum Group in the US saw that only 2% of millionaires acquired their wealth. This indicates that through working hard and adding value to society, regardless of born wealth, most individuals can succeed and live a prosperous life. With this said, poor social mobility is simply the result of a lack of opportunity for individuals to succeed. The Labour government, not wealth inequality, can be seen to have worsened social mobility in the UK, as the decline of grammar schools first started under the Labour government of the 1960s.

Economic growth

Proponents of taking drastic action against wealth inequality claim economic growth is hindered by excessive disparities in income between the rich and poor. It follows that as wealth concentrates towards the top, with wealthy individuals acquiring more wealth, less money is spent in the economy as they have a lower propensity to consume, decreasing long-term economic growth. Although the aforementioned correlation between work ethic and inequality already disproves this, further studies show a positive correlation between growing wealth inequality and economic growth. Analysis conducted by Kristen Forbes concluded that an increase in the level of income inequality has a positive relationship with subsequent economic growth. Studies by the IMF disagree with this, however, these fail to account for externalities; these omit several factors that may cause lower inequality, crime and poverty rates. One study conveniently left out the nations of South-East Asia, which have seen rising inequality coupled with huge increases in living standards.

It is also forgotten that wealthier individuals tend to invest most of their income. These investments end up in the hands of firms who now have more capital to innovate, offer more competitive pricing or distribute more in dividends to shareholders – all of which boost aggregate demand in an economy, thereby promoting growth and prosperity.

Put simply, the alternative to wealth inequality is perfect equality, with which everyone receives the same regardless of output. This system, as witnessed in the USSR, creates a perverse incentive structure in which there is little incentive to realise your potential – a recipe for stagnation and falling living standards. There are many countries with high and low levels of wealth inequality. Both Greece and Hong Kong have had similar GINI coefficients for much of the 2000s and yet their economic outcomes are vastly contrasting. In the former, as wealth inequality has decreased so have living standards; whilst in the latter, both wealth inequality and real median income have increased. From this, it is clear that the real determinants of how a society fares are real wage and poverty levels. Wealth inequality measures nothing really.