They find, in short, that differences in the rate of return on capital and in savings rates are the main factors explaining the distribution of wealth in the United States. The differences in savings rates—documented elsewhere in research by University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman—are motivated by a desire to pass wealth down to children.
If this is true, then an inheritance tax may do quite a bit to reduce wealth inequality. Citing other research on differences in returns on capital, the authors note that the variances in returns are high for housing, business ownership, and private equity investments. The role of housing may be key in explaining the differences in wealth, not only among the entire population but between racial groups as well.
While the rise of income inequality has inspired a great deal of research on its causes, the economic literature on wealth inequality is relatively sparse. The new findings in these papers are an important guide for future research in this area. Understanding why wealth inequality is so high may very well help us understand its effects on our economy. Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!
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North DC Institutions and economic growth: a historical introduction. Routledge, London, pp 47—59 Google Scholar. Picketty T Capital in the 21st century. Piketty T Income inequality in France, — The dislike of economic inequality supposedly runs deep in human psychology. Laboratory studies confirm that inequality aversion is a strong motivator of behaviour. For example, when people are asked to divide money among themselves and fellow subjects in experiments, they have a clear preference for equal distribution.
This desire for equality is so powerful that people often choose to receive smaller but more equal rewards over larger but more unequal ones, and in other cases prefer surplus resources to be thrown away rather than distributed unequally.
There is, however, a paradox. A separate body of research finds something quite different. When people are asked about the ideal distribution of wealth in their country rather than among a small group of individuals in the lab, they are actually quite relaxed about inequality. In one influential study , for instance, researchers asked a representative sample of Americans about their ideal distribution of wealth in the US. On average, people said that the richest 20 per cent should hold 30 per cent of the wealth, and the bottom 20 per cent just 10 per cent.
When forced to choose between high levels of inequality and complete equality, most chose the former. The authors concluded that most Americans desire greater equality, but not to the extent of living in a completely equal society. Similar results have been found in many other countries, and in people from all points on the political spectrum. This body of research casts serious doubt on inequality aversion.
In fact, my colleagues and I argue there is no evidence that people are actually bothered by economic inequality. How can these apparently contradictory findings be reconciled?
Is one wrong and the other right? We think they are both correct. They can be explained by a dislike not of inequality, but of something that is often confounded with it: economic unfairness. Equality and fairness seem like the same thing, but are subtly different. For example, when grading student papers, teachers give better marks to better papers.
Likewise, if you and I co-run a bakery at which you work four days a week and I work the other three, you would expect to receive four-sevenths of the profits. A school that gave all students the same mark regardless of merit, or a bakery at which you work more than me but are paid the same, would be equal, but not fair. The opposite of this, fair inequality, strikes most people as the better option.
When fairness and equality clash, people prefer fair inequality over unfair equality. This preference can explain the apparent paradox of why people opt for equal distribution in the lab, but unequal distribution in the real world. If you are simply asked to allocate some money to yourself and somebody else with no consideration of merit — say, who worked hardest — then an equal outcome is also the fairest outcome. Giving yourself most of the money and your peer less feels wrong not because it is unequal, but because it is unfair.
Some lab studies do take this into account, and find that our aversion to unfairness is stronger than our aversion to inequality. For example, when asked to divvy up five erasers to two boys as a reward for cleaning their rooms, most people — even young children — want to give them two erasers each and discard the surplus. But when told that one boy worked harder, they happily give him the extra eraser. A protest against executive bonuses in Connecticut, US. This intuitive liking of fairness can explain many apparent puzzles that inequality aversion cannot.
For instance, even though current economic conditions in wealthy nations lead to a preference for reducing inequality, in various other societies across the world and across history — the USSR, for example — concerns about fairness have led to anger about too much equality. People are also generally happy with gross inequalities created by national lotteries.
If everyone knows that the outcome is random, one person receiving millions and everyone else nothing seems entirely fair and reasonable. There are many reasons why we might prefer a society with some wealth inequality.
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