Understanding Wealth Inequality - YouTube

So far in this series, we have been learning  about microeconomics, which means we have been  

looking at the economy through the choices  of individuals or small groups. Primarily,  

we have been examining how these choices can lead  to positive results. In fact, most of what we know  

about choices that are based on scarcity points  to the idea that they are based on self-interest,  

and therefore the more freedom we have to  make choices, the better off we will be. 

However, as we learned when discussing public  goods and externalities in a previous tutorial,  

there are unintended consequences of freedom  of choice. When it comes to economic decisions,  

one of the negative externalities, or the negative  cost a third party receives, is extreme wealth  

inequality. Wealth inequality simply refers to  the uneven distribution of wealth in a society. If  

wealth inequality is extreme, most of the wealth  is in the hands of a very small group of people.  

Typically this may be less than 1% of  the population. This graph displays  

current wealth inequality across the entire world. As you can see, most of the wealth is concentrated  

at the top, with a full 30% of wealth belonging  to just a thousandth of one percent of the global  

population. And this extreme polarization is only  increasing. However, before we look at why rising  

wealth inequality is a negative externality, it’s  important to recognize that wealth inequality  

is prevalent, and in fact it is necessary and  expected, in any market economy. A competitive  

economy inevitably leads to wealth inequality.  However, extreme wealth inequality can be severely  

damaging for a society because the overwhelming  majority of wealth is concentrated at the top,  

and in the hands of relatively few people,  leading to a severe imbalance of power. 

Extreme wealth inequality can lead to higher  rates of crime, obesity, mental illness,  

and drug use. It also often leads to lower  population-wide satisfaction and happiness, and  

less social cohesion. It gives wealthier people  too much control over the lives of others. There  

is even evidence that it leads to an increase  in the prevalence of authoritarian governments.  

And finally, extreme wealth inequality makes  it exceptionally difficult for those who have  

little to no wealth to build up wealth. In  other words, in an extremely unequal society,  

one who is born with little wealth is much  more likely to die with little wealth.  

And while it’s probably easy to recognize how  extreme wealth inequality hurts those in poverty,  

it also hurts those who have lots of wealth. You  see, wealthy individuals can only buy so much.  

They can only eat so much or only have enough  time to consume so much entertainment. Producers  

need a large number of consumers to continue  to earn a profit. In a society where most of  

the wealth is concentrated at the top, fewer  consumers are able to buy goods and services,  

which therefore leads to less economic growth. So how do we measure wealth inequality? Economists  

generally prefer using what’s known as the Gini  index. Named after the Italian statistician and  

sociologist who developed it, Corrado Gini, the  Gini index measures the distribution of income  

across a population. The Gini index measures  inequality across the whole of society rather  

than simply comparing different income groups.  A high Gini index indicates greater inequality,  

with more wealth in the hands of the few. At the time of the making of this tutorial,  

wealth inequality has increased to  historic levels across the entire world.  

However, it is particularly pronounced in the  wealthiest of countries, the United States.  

Adjusted for inflation, wages for the majority of  American workers have barely increased since the  

1970s, while simultaneously rising 362% for the  top tenth of a percent. However, as we have begun  

to understand, the wealthiest tenth of a percent  should be just as concerned as the rest of society  

that wealth inequality has become so pronounced.  This is a complex issue, where we must understand  

that wage and wealth are not synonymous, and also  that any top percentile we attempt to describe  

is not a fixed demographic, but rather a  dynamic cohort which people enter and exit  

all the time. In order to make sense of these  larger concepts, we are going to have to progress  

from microeconomics into macroeconomics.  So let’s move forward and do just that.