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Is there a correlation between capitalism and income inequality? Show more Show less
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The political debate around whether capitalism and the tenets of free market socioeconomic modeling are beneficial for society has been raging for hundreds of years. Within a modern context, the topic of income inequality (especially within largely capitalistic countries like the United States and, to an extent, the UK) has emerged alongside the effects of the free market on the world economy. So, a big question within both the economic and political realm asks: Is there a correlation between capitalism and income inequality?

No, capitalism does not cause inequality Show more Show less

Income inequality is a byproduct of every society, no matter what economic system under which that society functions. Capitalism, by nature, does not encourage or catalyze the inequality already in place.
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Capitalism can be proven to shrink inequality

The tenets of the free market allow individual economic growth that acts as a literal opposite to the income inequality attached to capitalism.

The Argument

Though many detractors of capitalism claim that it fuels economic inequality across the board and that the more free market-based a society becomes, the more money is in the hands of the few extremely rich, there are recent signs pointing to a famous hypothesis made by economist Simon Kuznets purporting capitalism's opposite effects. He claimed that, though an economy would initially experience higher rates of income inequality as a result of capitalism, the inequality would actually shrink over time as industrialization and growth bloomed over time. In many Latin American countries (notoriously egregious in terms of income inequality) and China, wages, income, and consumption have become more equally distributed over the past twenty years, which is trending in the right direction. According to several economic studies, "Chinese consumption has been getting less unequal since 2003. And inequality from wage income has been going down since the mid-1990s."[1] There seems to be a remarkable correlation between these countries' later stages of economic growth and the lessening of income inequality. Though there are still many questions for the future, for now, Simon Kuznets seemed to be on the right track.

Counter arguments

Simon Kuznets' hypothesis has been refuted again and again by economists, no matter what side of the political spectrum you fall on. The idea that capitalism actually shrinks income inequality completely contradicts everything we know about how the system itself functions. Within the article referenced, there are several key indicators that the shrinking of inequality in those countries is due to governmental intervention and wealth distribution, not the effects of the free market on society. Without some level of checks and balances, there is no end to the level of inequality that could result from an entirely free market that does whatever it pleases. It has been proven time and time again that the more capitalist a country is, the more income inequality exists within that country.

Proponents

Premises

[P1] Simon Kuznets hypothesized that, though a free market would start out with increased income inequality, over time, industrialization and growth would level the playing field. [P2] Kuznets' hypothesis is slowly being proven in countries like China and many within Latin America experiencing shrinking of inequality during capitalism-based economic growth. [P3] Capitalism can shrink income inequality.

Rejecting the premises

[Rejecting P2] Kuznets has been proven wrong by countless economists who agree that the more capitalistic a society, the more income inequality it will possess. Some of the data in favor of the argument is skewed by governmental intervention and wealth distribution. [Rejecting P3] Capitalism does not shrink income inequality.

References

  1. https://www.bloomberg.com/opinion/articles/2017-03-23/capitalism-will-shrink-inequality-in-fact-it-s-happening

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This page was last edited on Monday, 3 Aug 2020 at 17:26 UTC

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