Is rising inequality necessarily bad

The word inequality, by its very nature, at least sounds a little bit unfair. Obviously, everyone's not getting the same thing; they're not getting the same income, or they don't have the same wealth. But a question needs to be asked: Is this necessarily a bad thing? And even if it is a bad thing, are there ways of fixing it or trying to address it that could make matters worse in some way, especially for the people that you're trying to help?

Once again, my goal here is not to tell you one way or the other, but to at least give you frameworks for thinking about this. So let's just think about a world where we have kind of a fixed pie economy, and increasing inequality is clearly not doing good for the people who have fewer resources.

Let's imagine a fixed pie economy. So let's say this rectangle right over here represents the total national income in a given period. So year one, this is the total national income. Let's say that in year one, the top 10 percent of earners make a third of the national income. This is the top 10 percent. Now let me be very clear: this area right over here is not 10 percent of the whole rectangle; this is 35 percent, or actually, I said this is a third, so this is going to be 33. This is one-third of the entire rectangle, but it's the income from the top 10.

Now that would mean that the other 90 percent is essentially splitting the remaining two-thirds of national income between them. If you take this reality and if the total pie—so let's do a static pie right over here—so the pie stays the same. When I say pie, I'm talking about the square thing here. I guess it doesn't look too much like a pie, so maybe I won't call it a pie. So national income, static; it's not changing right over here.

Then you have—let me try to draw a rectangle of the same size. If you have increasing inequality in this situation, then you might have the top 10 percent of earners—by let's just say this is year ten. In year ten right over here, maybe instead of having one third of the national income, maybe they have 50 percent of the national income, and I'm just picking round numbers for simplicity.

So this right over here is one half of national income, now from the top 10 percent. So clearly, if this happens, the other 90 percent are now splitting only one half of the national income. So this is the other 90 percent right over here. Here, it's essentially a zero-sum game. If you had a static economy, if it was not growing at all, then of course rising inequality would mean that these people, the other 90 percent, are going to have lower per capita, I guess you could say, income. Lower per capita GDP; they're going to have a lower standard of living. So they're not doing good in this situation.

But let's think of the other way, where you do have economic growth. Economic growth that’s enough—so even if you have some inequality, the growth more than offsets that so that the other 90 percent is still better off. So let's see if we can visualize that.

So economic growth—let's say your pie has grown dramatically over 10 years, and maybe I'm exaggerating a little bit for the sake of discussion. Let me draw it like this. I'll try to draw the same height, but now our whole economy, let's say our whole economy has doubled. Our whole economy has doubled here. In this situation, let's say you still have this wealth inequality growing. The top 10 percent in year one having one third of national income—let's say that it still grows to one half of national income in year ten.

So one half of national income—so I can draw that a little bit neater—half of national income right over there, so one half of national income. This is still a situation where you've had inequality increase, but the half of national income that's going to have to be split between the other 90 percent has still grown fairly dramatically. If we assume that I've drawn it pretty close to proportional, let me just copy and paste this.

So copy and paste. This is how much was being split amongst the other 90 percent in year one, and notice it's much smaller than how much is being split by the other 90, and actually let me put it right over here. Then the other 90 percent in year ten—and if we assume that the population hasn't grown by this amount, it's grown by something smaller than this, or maybe the population has been relatively stable, then your per capita GDP, your per capita income, is actually going to improve.

So this is a situation here where even though inequality has increased, because the pie has gotten bigger, these people are better off. These people are better off. And so that leads to really one of the fundamental questions, especially when you're thinking about economic systems: you have this market system, this capitalist system, this market economy.

The market economy, at least in recent history, has shown us that this leads to growth, wealth creation—the pie, economic growth. But it also leads to inequality; it also leads to inequality. Inequality is an inevitable byproduct.

Now the question you might have to ask is: well, look, is this necessarily bad? If this economic growth is enough, everyone is better off. It doesn't matter if some people are even more better off than other people, but everyone is better off.

And it's important to think about: if you try to just focus on inequality, just focus on inequality, are you also going to stop this from happening? Another way of thinking about it: if you're one of the people in this situation right over here, that you're the other 90 percent, would you rather stay in this world where you're in a static pie and inequality is not increasing, or would you rather go to this world right over here?

Once again, the point of my video isn't to say that this world is necessarily going to happen. There could be a world where your total economic growth was less than this, and the pie got bigger, and these people are not as well off. But the whole point of this is just to highlight that inequality is not necessarily always going to lead to the people who are getting less of the pie being worse off.

If the pie grows fast enough, and the other thing to realize is, well, sometimes you might—in an attempt to lessen inequality, you might also stifle economic growth, and that might keep everyone from being better off in this scenario right over here.

So once again, it really depends on the context; it really depends on the situation and the variables and the numbers you're looking at. But I just really want to emphasize that there's no such thing as, "Hey, if there's rising inequality, it's going to hurt always the other 90." It'll definitely benefit the people who are maybe in the top 10 percent, but also, because that's a byproduct of economic growth, it might make these people better off as well.