Tag Archives: economic inequality

The Real Problem with Inequality

Lots of people who talk about economic inequality will often list reasons why inequality is bad. Inequality causes crime. Inequality causes bad health outcomes. Inequality could lead to a revolution. Bringing up these justifications for the harm of inequality doesn’t make sense to me. It’s like writing an article about why being set on fire is a bad thing and giving reasons like you won’t be able to catch public transport.

I think there is a core feature of inequality that makes it a bad thing and in comparison the above problems seems like minor side effects. I almost never hear this problem being mentioned. And it is a fundamental concept in economics so the pro free market economists should be very familiar with it.

The problem is diminishing marginal utility. In this case the diminishing marginal utility of wealth. Giving $100 to a person with an income of $1000 a year will give that person more utility than giving that $100 to a person with an income of $100,000. And taking $100 from the first person will harm them more than taking $100 from the second individual.
Because of this, most form of unequal distribution of resources (represented by wealth) lead to a lower level of utility overall. So if we could costlessly redistribute wealth to decrease equality that could increase overall utility.

There are several exceptions to this. Firstly some inequalities are justified by different resource requirements to reach the same level of utility. For example, if there are two people who spend the same amount on all goods and services, except one has to spend an additional several thousand dollars a year on medical expenses to keep them alive, that person needs more resources to achieve the same level of utility as the other person.

Secondly, there is the argument that inequality motivates people to work, and if there was one standard income that everyone received it would distort the market and resources would not be allocated most efficiently. This is probably true, and figuring out the best trad off between efficient use of resources and utility maximization (which are not the same thing) is a hard problem.

But I think that this is the kind of conversation that should be going on when we talk about economic inequality instead of pointing out other side issues like the correlation of inequality with other negative societal outcomes. It can be hard paying for a funeral, but that is not why death is bad.