Inequality Is Not the Problem – Poverty and How to Reach Prosperity Is

Instead of focusing on inequality, we should focus what makes us more prosperous – all of us, regardless of which income group.

Although it is not a new phrase, the claim that “the rich are getting richer while the poor are getting poorer” has gained in popularity again in recent years, with politicians like Bernie Sanders to economists like Paul Krugman, Joseph Stiglitz, and Thomas Picketty having made this argument. In its annual, highly influential yet highly flawed inequality study, Oxfam claimed this year that the richest 2,153 people on the planet are worth as much as the poorest 4.6 billion.

When faced with claims such as these, one has to always ask lots of questions, from questioning the validity of these assertions to more detailed ones concerning data collection and interpretation. And as with everything else in life, definitions matter. So when we say that the rich are getting richer, what does that really mean?

It is true, if we take the richest quintile from 1980, it turns out that most of the gains from economic growth were captured by that group, gaining a bigger portion of the economic pie. But we also need to look at the composition of this group.

40 years, the amount of time we usually spend working, is a long time – and enough for those entering the workforce in their early twenties, often first placed in the lowest income quintile, to earn more and, thus, elevate themselves into new heights by becoming richer over time. Income mobility, although not ‘perfect,’ is real. Indeed, today, more than ever before, income mobility is real even for the billionaire class, as nearly 67% are self-made, compared to 45% in 1996.

Measuring income inequality also doesn’t tell us anything about the general well-being of the population. The Gini coefficient, which measures income distribution, places Ecuador and Singapore in 2017 next to each other, with a relatively high coefficient of 45.9, signaling significant income inequality. But living in these countries will be quite different for both the rich and the poor: in Ecuador, you would earn $6,198 on average. In Singapore, that almost nine times more.

Doing economics right will lead to you somewhat surprising results. The way we measure income inequality has not changed – it is still measured through ‘household income.’ Although the measure has not changed, the family structure has. On the one hand, fewer people are getting married. On the other hand, the divorce rate has increased. This leads to more households in general and more households with only one adult earning, thus naturally decreasing ‘household income.’ Through this measurement, we skew the picture of what is actually happening.

A simple static income measure also doesn’t account for potentially the most important change in wealth: technological progress. The cars we drive and the TVs we watch movies on today are far superior versions than those of the past. We now have computers, cell phones, tablets, and endless other technologies. Think of all the new products we – both rich and poor – have at our disposal. An iPhone replaces scanners, cameras, landlines, and alarm clocks to name a few, making its multi-usage a boon to modern life. All the while we work fewer hours to buy the same things (link 1, link 2, link 3, link 4, link 5, link 6, link 7).

Undoubtedly, the fate of the poor is important. But rather than focusing on who has more and who has less – basing our assumptions on fallacious statistics, we should realize that what is considered a ‘poor household’ in the West today has a car, air conditioning, two color televisions, cable or a satellite TV, is not hungry and can obtain medical care when needed. Instead of focusing on inequality, we should focus on what makes us more prosperous – all of us, regardless of which income group.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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