Political Economy of Inequality

Inequality is one of the central topics of political economy, connecting economic analysis with issues of power, justice, and social structure. How inequality is measured, which factors determine it, how it influences politics and economic growth—these questions are at the center of contemporary debates.

Measuring Inequality

Inequality is multidimensional and measured by various indicators:

Gini coefficient is the most widespread indicator. It ranges from 0 (absolute equality) to 1 (absolute inequality). For incomes before taxes and transfers: Scandinavian countries—about 0.25, USA—about 0.39, South Africa and Brazil—above 0.50.
Shares of top groups—what portion of income or wealth is received by the top 1%, 10%, 0.1%. This indicator was popularized by Thomas Piketty and his colleagues. In the USA, the share of the top 1% increased from about 10% in the 1970s to more than 20% in the 2010s.
Difference between income inequality and wealth inequality. Wealth (assets minus liabilities) is distributed much more unevenly than incomes. In most countries, the top 1% owns 25–40% of wealth, the bottom 50%—less than 5%.
Inequality of market incomes vs disposable incomes. Taxes and transfers redistribute incomes. In Scandinavian countries, redistribution reduces Gini by 15–20 points; in the USA—by 10–12 points.

Inequality Trends

The historical dynamics of inequality are described by several patterns:

Kuznets Curve. Simon Kuznets in 1955 put forward the hypothesis that inequality initially grows during industrialization (migration of labor from low-productivity agriculture to cities), and then decreases as education and democratization spread. The hypothesis was confirmed by data from the mid-20th century, but subsequent trends have refuted it.
“The Great Compression”—the period from 1914 to 1945 when inequality in developed countries sharply decreased. Wars destroyed capital, progressive taxes funded military expenditures, inflation depreciated assets. The post-war welfare state consolidated a more even distribution.
Growth of inequality since the 1980s. In Anglo-Saxon countries, inequality began to rise starting from the Reagan and Thatcher era. The reasons are debated: technological changes, globalization, weakening of labor unions, reduced progressivity of taxation, financialization.
Piketty’s thesis. In the book "Capital in the Twenty-First Century," Thomas Piketty demonstrated that when capital returns ($r$) exceed the rate of economic growth ($g$), wealth inequality inevitably increases. Inherited wealth accumulates faster than new wealth is created.

Political Determinants of Inequality

Inequality is not the result of “natural” economic forces but a product of political decisions:

Tax Policy. The progressivity of taxes, taxation of capital and inheritance, offshore schemes—all this determines how much remains with the top groups. Lowering top rates from the 1980s is a factor in rising inequality.
Labor market institutions. Minimum wage, the strength of unions, hiring and firing rules influence the distribution between labor and capital. Weakening unions and labor market deregulation correlate with rising inequality.
Social policy. The size and design of the welfare state—benefits, pensions, healthcare, education—redistribute resources and opportunities.
Regulation of the financial sector. Financialization—the growth of the financial sector's share in the economy—is linked to rising incomes at the top of the distribution. Banker bonuses and profits of financial firms concentrate among top groups.

Feedback: How Inequality Influences Politics

Inequality is not only a consequence of policy but also its cause:

Political influence of the rich. Economic inequality is converted into political inequality. The wealthy have more resources for lobbying, campaign financing, and shaping public opinion. Studies show that policy decisions in the USA more strongly reflect the preferences of the rich than the average voter.
Meltzer-Richard paradox. In a democracy, the median voter is poorer than the average; therefore, they should vote for redistribution. Why then does inequality grow? Possible explanations: ideological factors, hopes for social mobility, ethnic polarization, influence of money on politics.
Social mobility. High inequality lowers intergenerational mobility—“Great Gatsby curve.” In unequal societies, rich children remain rich, poor children remain poor. This undermines the meritocratic legitimacy of inequality.

Consequences of Inequality

Inequality has diverse consequences:

Economic growth. The relationship is ambiguous. Neoclassical theory allowed that inequality stimulates accumulation and investment. However, modern studies (IMF, OECD) show that high inequality slows growth and makes it less sustainable. Mechanisms: limiting investments in human capital of the poor, political instability, insufficient demand.
Health and social problems. Richard Wilkinson and Kate Pickett in the book "The Spirit Level" showed a correlation of inequality with worse health indicators, crime, teenage pregnancy, obesity—even accounting for average income levels.
Democracy. Extreme inequality threatens democracy. When the rich control politics, democratic institutions turn into a façade. Oligarchy is not an exaggeration, but a description of reality in a number of countries.

Policies to Reduce Inequality

Tools for reducing inequality include:

Progressive taxation—increasing rates on high incomes, inheritance taxation, wealth taxes. Piketty proposes a global tax on capital to prevent capital flight.
Strengthening market institutions—increasing minimum wage, support for unions, antitrust policy.
Investment in human capital—quality education from early childhood, accessible healthcare.
Universal basic income—the idea of a guaranteed income for all citizens is gaining popularity as a response to automation and labor precarity.

The choice of policy depends on values: how ready are we to sacrifice efficiency (if the sacrifice is real) for the sake of equality? How “deserved” is inequality? Political economy does not provide unambiguous answers, but offers analytical tools for understanding the crossroads.