Two explanations emerge that explain why income-inequality is omni-present with capitalism:
1. Capitalism is driven by the heirs to family wealth.
Such wealth are mainly assets and accumulated income gained from enterprise dynasties built and ran by many generations of the same family. Each generation spends only a fraction of it and the majority of it is inherited by the next. The extreme problem of inequality today in the U.S. is a net result of a four generation inheritance, accounted for inflation and capital gains. Of course, exceptions occur in the presence of wastrels (an euphemism for “losers”) in the family. Not least this presents an inherent and inevitable initiation of inequality in the economy to begin with.
2. These heirs, very much like their parents and grandparents, find ways to amass more wealth with their inherited capital – this is a psychological mindset evolved into a forceful moral duty that continues to drive capitalism and inequality on a fundamental level.
Because it is not illegal for people to ‘make money out of money’ (in fact, channeling credit into markets in search of returns is endorsed by the market – since high liquidity drives down costs of borrowing and fuels efficiency), policy makers only have a choice of engineering policies (higher tax rates that is bundled with state employment or restrictions on capital) that have a passive effect on the elite. Simply put, we do not have the means (even the justification is an approximation at best) to outrightly accuse what the rich is doing with their capital is wrong. The heirs are concerned with the rate of increase in wealth, which is subject to returns to capital (r) and the rate of economic growth (g).
The g coefficient is the tide that ‘raises all boats” and increases national income – hence income for everyone. However, when r>g, it implies that the owners of capital gain more passive income from their assets. This share of passive income, in real terms, is more than the real increases to income contributed by economic growth.
At this juncture, it is crucial to note that it is the role of finance and its industries to channel the huge amounts of capital into efficient use for the utility of the economy (which yields the returns), and this is for a good cause. It was never the intention of the industry to increase the income gap between the rich elite and the middle class. The rich elite only takes advantage of the ease of using their capital, which is otherwise made possible by finance. The problem of income-inequality becomes associated with finance when the rate of return on capital exceeds the rate of growth of output and income. As worded by Professor Thomas Piketty of the Paris School of Economics in his new work that took the econosphere by storm, “this has happened in the nineteenth century and seems quite likely to do again in the twenty-first…” In that context capitalism will then “automatically generate(s) arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”
Rethinking utopian economics. 