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February 07, 2007

A Question on Inequality

OK, so this is something that is identified as a big problem by lots of people: inequality.

So, what is the correct level? For those who do worry about inequality, what is the target we should be aiming for? One way of measuring inequality is using the Gini coefficient (or index if you prefer) and we can see, around the world, values of (from memory) something like 0.24 for Denmark, 0.35 or so for us, 0.4 something for the US, 0.5 for some developing (or not developing) countries.

What level should we be trying to get to? At what level of inequality do we say, OK, that problem's solved, time to move on to the next? I doubt anyone would argue for either 1.0 or 0.0, so what is the "correct" level?

February 7, 2007 in Economics | Permalink


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Inequality happens - if it didn't then we would all be equal, regardless of effort or ability - what would you prefer?

Posted by: F0ul | Feb 7, 2007 12:51:06 PM

I assume you're asking this seriously, and not rhetorically, so I'll try to answer seriously.

One method you might find more appealing than other alternatives I could name is to advocate equality to the extent that we maximise total welfare. The more wealth that you have, the less you benefit from each additional unit. That means that in some cases (i.e. depending on how this weighs against disincentive effects and so on) you can increase aggregate welfare by redistributing wealth from the best of to the worst off. Bill Gates will miss that £10 less than the homeless person might gain from it.

(This is obviously one method of many, I'd hope that you're aware that the literature on equality is vast)

I doubt anyone claims that it's easy to work out what the optimal level of equaltiy is, all things considered, but this doesn't prevent us from claiming that more equality than we have now would be a good thing.

Tim adds: I am being serious, yes. But unless we know what is the optimal level of inequality, how can we tell whether we are above or below it?

Posted by: Alex Gregory | Feb 7, 2007 1:27:21 PM

A short reply: I don't know what the optimimum amount of exercise for the human body is, but that doesn't stop me from knowing that it's more than I'm doing now.

Posted by: Alex Gregory | Feb 7, 2007 3:19:18 PM

Nice point. It's like liquidity today. No liquidity is very inefficient, but it seems too much liquidity can make you worse off as well, if you'd believe most analysts today.

If it's really a matter of "how much inequality", my take would be that it's not a problem unless personal wealth is a real constraint on someone's ability to develop its potential. It is a problem if you live in a Rio favela and cannot hope to go to a nice school or find a good job even if you are Einstein reborn. (Not to mention Africa...) It is less of a problem if you're a middle class american citizen, a country where final outcomes are still less connected to initial conditions, even if increasingly more so.

If it's just envy, one can always work harder.

(Note that I'm not talking about "global income inequality", as a comparably rich Brazilian I cannot complain at all.)

Posted by: Avinash Goldfishash | Feb 7, 2007 3:41:01 PM

Alex Gregory,

If say enslaving 40% of the population would maximise welfare would you do it?

Posted by: AntiCitizenOne | Feb 7, 2007 4:06:16 PM

Tim - nice question. It could also be posed in relation to the population of this country. We are constantly assured by politicians that immigration is good for the economy, which it almost certainly is. However, there is also an environmental and economic cost as the demand for more housing, roads etc increases. So, would it be practical to suggest that at a population of say, 65 million, the UK is "full"?

Tim adds: You could say that, sure, but I'd want to see your metric. There are other countries, other areas of other countries, with higher population densities. What makes 65 million make us full?

Posted by: Peter Pryor | Feb 7, 2007 5:34:32 PM


One can endorse the claim that welfare maximisation matters without endorsing the claim that it's the only thing that matters.

Posted by: Alex Gregory | Feb 7, 2007 9:10:44 PM