Causes of Income Inequality

There are many “man-made” causes of income inequality, that are the result of men’s actions, some are fair and other unfair.  Unfair inequality can be created by TAKERS including big businesses and politicians who use government power to transfer wealth from the poor and middle class to the rich.  While fair inequality can be produced by MAKERS like entrepreneurs who create new wealth for everyone and get to keep a portion of it for themselves.  How the rich become rich makes all the difference between fair and unfair income inequality.   Wealth transfer is the result of corruption, while wealth production is the result of gifted hard working people who raise the quality of life for all. 

In addition to these man-made causes of income inequality, there are non-man-made causes, including luck.  Both good and bad luck contribute significantly to income inequality.  Some are poor because of crippling accidents or disease, while others may have been extremely successful in business because they were in the right place at the right time.

Natural Inequality

It is obvious to any observer that all people are not born with equal ability.  Natural inequality is the result of genes, family influence, experience, willingness to work, etc., but how people use that ability is greatly influenced by their environment.  If they live in a world of corruption and arbitrary law, where influence can be easily bought, the ruthless will seek power through bribery and extortion, taking what they want by force.  But in a world where individual freedom, property rights, and free markets are really protected, they will have to use their ability to create and innovate if they want to rise.  Both roads lead to income inequality. 

Different Viewpoints

Income inequality can be good or bad, depending upon its source.  Professor Salerno of the von Mises Institute explains two major causes of income inequality in a 16 minute video that's  summarized here.  The good cause is the result of consumers voting in the free market for what they want and need.  The bad cause of inequality is the result of government plunder that transfers wealth by taking tax money and giving it to the well connected, including politicians, big corporations, big banks, etc.  Stopping or slowing the increase in unfair income inequality requires removing the government’s power to steal wealth and transfer it. 

Most of those on the Left, including many world leaders consider all income inequality bad and the result of greed.  They believe it can only be corrected through greater government control.  French economist Thomas Piketty recently wrote a book called “Capital in the Twenty-First Century” that has become a best seller and favorite of the Left because it claims to have found the cause and cure for rising income inequality.  The cause: return (interest) on capital is higher than the economy's rate of growth, “r>g”.  According to Piketty, this will cause inequality to keep increasing unless governments impose high progressive world-wide taxes.  

Specific Causes

Fair income inequality is the result of wealth production that is shared through the free cooperative market.  It improves everyone’s lives, and as a result, is just and fair.  As a result it should be, but frequently is not, praised and encouraged.  Businessmen, professionals, performers, star athletes, etc. who create wealth (the MAKERS), get to keep some of what they create, but only after their customers have benefited, potentially making them richer than those they improve the lives of many people.  The more people they help, the more they make and the greater the income inequality.  They gain by creating and giving, not by destroying and taking. 

See Causes of Fair Income Inequality for more information.

Bad or unfair income inequality is the result of dishonestly acquired wealth taken by force, primarily through manipulation of government power and rent seeking.  It suppresses the poor and rightly creates resentment and rebellion.  It always involves taking and transferring wealth rather than creating it.  It is rightly viewed as a great problem that must be addressed.  In the modern world it almost always involves use of government coercion to take wealth from one group and give it to another.  There are many ways business and special interests work with politicians for their mutual benefit at the expense of tax payers and customers. Legal or illegal discrimination that limits the opportunities of specific groups of people is also an unfair cause of income inequality.  

See Causes of Unfair Income Inequality for a more information. 

Everyone realizes that there are people who win the lottery, and many hope that they will be one of them.  Or they may be familiar with someone who has succeeded wildly in business partly out of hard work but also because they were lucky enough to be in the right place at the right time.  Their “stars seem to have been aligned.”  But luck is not man-made, and there lies outside the realm of the current discussion of causes of income inequality. 

Unfortunately, it is much more common for people to experience bad luck.  Those who have lived a while are all acquainted with people whose bad fortune was no fault of their own.  They may have been born with severe limitations that prevent them from being gainfully employed.  Or they may have been crippled in an accident or contracted an illness that left them disabled. 

Luck plays a significant role in the development of income inequality, but it is not the result of either unethical wealth transfer or wealth creation.  It is a fact of life and life is not fair.  But since it is not the result of good or bad actions by others, it has not been considered in the causes of fair and unfair income inequality.  It is in a class by itself, and the appropriate response to it is the subject of debate between those who see civil society or government as the solution.

Lesson

The key thing to remember when looking at income inequality is that is has many causes, some fair and many not.  Many of the biggest income gains of politicians, union leaders, investment bankers, trial lawyers, etc. are due to unfair advantages and special insider privileges created by special laws and regulations passed just for them, so it's “legal” but still corrupt. 

What income inequality is not, is the result of a simple mathematical relationship like Piketty’s “r>g” or Karl Marx’s class struggle and exploitation theories.  Income equality is based on natural differences in people, amplified by their environment and ability to manipulate the system in which they find themselves. 

An environment where access to government power can be bought is dangerous because it encourages the ruthless to take control of government and transfer wealth to themselves and their supporters, creating greater unfair income inequality.  In an environment where private use of force is prohibited, including manipulation of government power, those with greater ability must create wealth (benefit) for others before they can keep any for themselves.  But when they succeed, it creates greater fair income inequality.

Inequality  a gateway to inequality, what is it, why it exists and why it matters?

The Ideal of Equality  a fork in the road, legal equality or material equality, with two different destinations

The Trinity of Inequality  what if the forces that cause income inequality are a fundamental part of our humanness?

Thomas Piketty and Capital  the new best seller “Capital in the Twenty-first Century”