Overview of Wealth Inequality
and Why It Matters
Those who possess wealth can
more easily move up the Maslow hierarchy of needs (see previous topic on Maslow
in Happiness.) A certain level of wealth can be required to attain
specific stages in Maslow’s hierarchy, particularly the stage of "Self-Actualization."
People with more wealth have a greater potential to control situations. In
other words, those with wealth can dictate the allocation of resources. A
future example will be how Talyor Swift Changed the Music Industry.
Income and Wealth are related
but not the same. Income is a flow concept and wealth is a static (snapshot).
Recall Income (I) minus Expenses (E) = Savings (S). Wealth is the
sum of savings and negative savings can be a drawdown of wealth and become income.
Much of the following is AI generated
by asking the question “What economic theories explain wealth inequality?”
Several economic theories
attempt to explain wealth inequality, focusing on factors like capital
accumulation, labor dynamics, taxation, and institutional structures. Here
are some of the most influential theories:
1. Classical Economic Theories
- Kuznets Curve
– Economist Simon Kuznets proposed that inequality initially
rises as economies develop but declines in later stages due to
redistribution and social policies. However, modern data suggests
inequality has continued to rise in many advanced economies, challenging
this theory.
- Ricardian & Marxist Theories
– Classical economists like David Ricardo and Karl Marx
argued that wealth inequality stems from capital ownership. Marx
believed that capitalists accumulate wealth at the expense of workers,
leading to increasing inequality.
2. Modern Theories of Wealth
Inequality
- Piketty’s r > g Theory
– Economist Thomas Piketty argues that when the rate of return
on capital (r) exceeds economic growth (g), wealth concentrates among
the rich, leading to persistent inequality. (discussed in more
detail in a future post),
- Pareto Distribution
– This statistical model suggests that wealth follows a power-law
distribution, meaning a small percentage of people control a
disproportionate amount of wealth.
- Superstar Economy Theory –
Some economists argue that globalization and technology have created “superstar”
earners, where a few individuals (CEOs, entrepreneurs, athletes)
accumulate vast wealth due to network effects and winner-takes-all
markets.
3. Institutional &
Policy-Based Theories
- Rent-Seeking & Crony Capitalism
– Some studies suggest that wealth inequality is driven by political
connections, where billionaires gain wealth through favorable
policies, monopolies, and tax loopholes rather than innovation or
productivity.
- Taxation & Redistribution
– Progressive taxation and social policies can reduce inequality,
but weak enforcement or tax havens allow the wealthy to preserve their
fortunes.
- Financialization & Asset Inflation
– The rise of financial markets has led to wealth accumulation
through stocks, real estate, and speculative investments,
benefiting those who already own assets.
4. Emerging Theories &
Challenges
- Declining Wage Share
– Studies show that the bottom 90% of workers receive a shrinking
share of national income, while the top 1% accumulates more wealth.
- Intergenerational Wealth Transfer
– Wealth inequality persists because rich families pass down assets,
reinforcing disparities across generations.
- Automation &
AI – Some economists predict that automation will
further concentrate wealth among those who own technology and
capital.
- Income
Distribution refers to how money earned (such
as wages, salaries, dividends, interest, or rental income) is spread
across a population.
- Wealth
Distribution focuses on how assets (such as
property, stocks, savings, and inherited wealth) are distributed among
individuals or groups.
Income is flow-based—it
represents earnings over time (e.g., annual salary). Wealth, on the
other hand, is stock-based—it captures accumulated assets at a given
point in time.
How Are They Related?
- Wealth often grows from income—people
use income to buy assets, which then generate additional wealth (like
investments in stocks or real estate).
- Wealth inequality can influence income
inequality—those who have significant wealth can use
their assets to generate passive income, widening the gap between rich and
poor.
- Political & economic structures affect
both—tax policies, financial markets, and inheritance laws
shape how both income and wealth are distributed.
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