The Importance Of Economic Inequality

1.Introduction

The phenomenon of economic inequality has existed for a long time in history. One would usually expect todays inequality rates to be much lower than in times of European colonialism and exploitation in the 17th until early twentieth century where organisations like the British East Indian Company rose to account for half of worlds trade. However, recent Studies by the Organisation for Economic Co-operation and development can prove that inequality worldwide is about the same as it was in 1820 (The Economist, 2014). How is that possible? The increase in economic inequality in the last century is a big issue and has created great controversies among political representatives and economic experts. Not only in the macroeconomic

Income empirical studies have shown that in two decades since the first economic crisis in the 19th early 20th century the real disposable household income increased by an average of 1.7% a year in OECD countries. However there were differences in the pace of income growth among social classes. Today the average income distribution in OECD countries is at a ratio of 1 to 9 (richest 10% earn 9 times as much as the poorest 10%). The most common metric economists used to measure inequality in income distribution is the Gini coefficient which runs on a scale from zero to one, with zero indicating total equality and one indicating total inequality. The Gini coefficient is based on residents' net income representing a gap between rich and poor. Interesting to see is that new Gini OECD statistics in clearly show that income remains significantly more unequal than it was a 30 years ago and that it keeps increasing. Figure 1 clearly shows this

The book contains more than a decade of research by Mr Piketty and a handful of other economists, detailing historical changes in the concentration of income and wealth. Piketty (2014) who is hailed to be the “modern Marx” defines Economic inequality as followed: “when the rate of return on capital exceeds the rate of growth of output and income (…)”. He also states that “(…) capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based”(p. 1). Piketty (2014) doesn’t take things as far as Marx, who saw capital’s growth eventually strangling the economy and bringing on its own collapse but agrees that the forces of capital accumulation will leave us with a society radically less equal, less mobile, perhaps even less democratic which is contradictory to Milton Friedman s view of income inequality. Milton Friedman believes that one doesn’t have to be concerned about inequality in a free market economy. He emphasis that some degree of inequality is actually desirable in any well-functioning economic system and that in any case, a certain degree of inequality is unavoidable under an economic system based on free-market principles (Cole,