What Is the Relationship between Economic Growth and Inequality?

Osmand Vitez

Economic growth and inequality are often hot-button issues when discussed in both economic circles and among individuals. A relationship naturally exists between these two economic items, dating back to the theories of Adam Smith, who is historically deemed the father of classical capitalism. The relationship exists because economic growth allows certain individuals to rise above their current economic levels, while others stay behind. The monetary differences between the two are the result that pushes economic growth and inequality, though this gap may close over time. In a free market society, most individuals can overcome this gap through specialization of labor and work, as Adam Smith discussed in his many writings on the subject.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

It is important to note that a free market society created under the principles of capitalism most likely results in economic growth and inequality. Other economic models — namely socialism and communism — are not proven through history as engines of economic growth that serve the self-interests of individuals. When individuals are able to secure private property and work in their own self-interests, it is often possible that some individuals will advance their economic standings, while others may not. Hence, the relationship between economic growth and inequality begins among the many individuals in a free market society. The real purpose is to understand how to overcome this gap and not deride it as unfair an inequitable.

A major factor that pushes capitalistic free markets ahead of others is the equality of opportunity that exists in this market form. Almost all individuals can move ahead in their income brackets through education, hard work, and the benefit of other individuals working in their own self-interests. A point that needs understanding between economic growth and inequality is that there is no guarantee in terms of equality of outcome. Therefore, an individual may not be equal in terms of economic growth or other monetary gains among different types of work. The ultimate purpose is to close the gap between economic growth and inequality and not remove it as the latter hinders any incentive to work hard.

Arguments for government intervention to make attempts in removing the gap that exists between economic growth and inequality are often more emotional than rational. While no one likes to see another individual suffer, it is hard to feel benevolence when the suffering comes from a lack of work or intent to grow economically. In theory, this idea falls along the line of Darwin’s evolutionary thought, where the weak that cannot adapt and survive do not deserve to remain in society. Though this concept initially seems rough, it does create some correlation with the idea of working in one’s own self-interest in a society. Another thought here is that free markets make it possible for individuals to help others as the bounty received from hard work is more than necessary to share with charitable organizations that help the less privileged.

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