Inequality and Its Drivers

Inequality: Causes and Implications

Inequality can be characterized as the unequal ownership of output factors by society members, as well as the presence of income differences among them. Various academics have conducted substantial studies on injustice and have concluded that, owing to its negative impact on individuals – such as the formation of two distinct groups, the rich and the poor classes – concrete steps to eliminate it should be placed in motion. Evidence shows that wage and wealth inequalities would appear to be minimal in the long term as a result of sustainable growth in the economies. Consequently, scholars have noted that wealth inequality can be well illustrated by examining the relationship between the rental rate of capital (r) and the growth of the economy (g), which has led to the fundamental laws of inequality. However, other economists have opposed this insight by claiming that it overlooks some integral factors such as the role of political factors and institutions in wealth accumulation and redistribution.

Long-Run Trends in Income and Wealth Inequality As Described by Roine and Waldenstrong

Roine and Waldenstrong are of the opinion that the increase in inequality started during the industrialization era. In some of the industrialized nations on the globe – for instance, the United Kingdom and the United States – it has been noted that there has been a sharp increase in inequality over the years. Nevertheless, the scholars argue that with time, inequality among the community members starts to decrease as a result of the gradual spreading of wealth among them. This argument is in line with Kuznet’s assertion that as a nation becomes more developed, inequality assumes a downward trend (Roine & Waldenstrong, 545). Roine and his colleague are of the opinion that the reduction in inequality within some states might not be justified through Kuznet’s proposition but, instead, it is as a result of some other factors like exogenous shocks and the government’s intervention into the economy. For instance, the reduction of inequality in French was due to the wartime shocks and the income redistributive measures adopted by the government that hindered the income inequality trends from emerging once again (Roine & Waldenstrong, 545). Therefore, Roine and Waldenstrong conclude that economic development leads to the distribution of wealth among all the community members, hence, bringing down the rate of income inequality. However, there are other factors behind the increased income disparities key among them being the continuous increase of the salaries of the people who are paid high wages.

Drivers of Inequality

Piketty argues that concept of inequality can be understood by analyzing the relationship between the growth of the economy (g) and the rental rate of capital (r). At this point, it is critical for one to differentiate between two main types of inequalities; the wealth inequality and the income inequality. According to Piketty, income inequality is determined by the varying incomes that are as a result of labor – it is approximated to the 2/3 or ¾ of the overall income – and it does not have any effect on the relationship between the rental rate of capital and the growth of the economy. On the other hand, he notes that wealth inequality is the uneven possession of factors of production among the community members. According to Piketty, there are a number of reasons that affect the rate of wealth inequality among the people. One such factor is that rate of wealth distribution among members of the same age group is always unequal than the rate of the income distribution. In addition, there exist some demographic factors like the unequal distribution of inheritance among families, which is dependent on the number of children each family has. Besides, the accumulation of wealth in a family is also determined by shocks that exist as a result of the prevailing market rates, hence, the reason why some (families) make better investments while others end up becoming bankrupt. In some other cases, some families earn a higher income than others while some save more than the amount they consume. Piketty argues that in the long-run, the wealth inequality will tend to increase if the gap between the rental rate of capital (r) and the growth of the economy (g) remains significantly high. In other words, the shocks identified above will always make sure that there is significant upward and downward mobility of wealth, which makes wealth inequality to remain bound over time (Piketty, 75). Piketty is of the pinion that a bigger gap between r and g will always lead to a significantly high wealth inequality that is also persistent in the long run. In addition, he asserts that a multiplication of the shocks will lead to the convergence of the inequalities of wealth, which leads to a case of Pareto efficiency among the top wealth holders in the society.

Acemoglu and Robinson’s Critique of Piketty

Nevertheless, Piketty’s opinions were highly criticized by Acemoglu and Robinson. To start with, Piketty argues that some institutions and political factors are some of the forces that may lead to the emergence of wealth inequality in the society. Unfortunately, Robinson and Acemoglu point out that he does not allow such institutions to play any significant role while formulating the inequality gap. According to Robinson and Acemoglu, it is practically impossible to analyze the concept of inequality without paying attention to the input of these institutions within the society. The scholars have also criticized Piketty for his materialistic approach that links capitalism with the ownership of factors of production – as noted out by Marx – which has made him point out that the future economies will be highly dominated by capital incomes, wealth got as a result of inheritances, and accumulation of wealth from rents (Acemoglu & Robinson, 9). Acemoglu and his colleague differ with Piketty’s assertion that these are the only factors that lead to the emergence of wealth inequalities within the economies. These factors are what makes Piketty formulate the fundamental laws of the nature of the capitalism – also known as the ‘fundamental inequality, where he compares the growth rate of the economy to the rental rate, but Acemoglu and Robinson point out that this law is just a definition, but it is not substantial in any way (Acemoglu & Robinson, 9). In addition, the scholars note that Piketty claims that at any point, the change in r should not be so much- for instance, while responding to a decrease in g – since the elasticity of substitution between labor and capital is significantly high, hence, leading to an increase in the overall capital share of the total national income. Acemoglu and Robinson offer a differing opinion by proposing that in the short run, the elasticity of substitution has been noted to be significantly less than one.

Works Cited

Acemoglu, Daron, and James A. Robinson. “The rise and decline of general laws of capitalism.” The Journal of Economic Perspectives 29, no. 1 (2015): 3-28.

Jesper Roine, Daniel Waldenström, “Long-Run Trends in the Distribution of Income and Wealth”, Editor(s): Anthony B. Atkinson, François Bourguignon, In Handbook of Income Distribution, Elsevier, Volume 2, 2015, Pages 469-592,

Piketty, Thomas. ”Putting distribution back at the center of economics: Reflections on capital in the twenty-first century.” The Journal of Economic Perspectives 29, no. 1 (2015): 67-88.