Does wealth inequality create poverty?


The Being Liberal Facebook page recently posted this image with the subtitle that said, “That’s a fact.”

Is it true that wealth inequality creates poverty? It does only if you believe that poverty should be thought of in relative terms and not in the ability of a person to satisfy his basic needs.

If a business owner pays himself a higher rate than he does his employees, then it is true that the result will almost always be an inequality in wealth. All else equal, over time the employees will be less wealthy than the business owner, but this is a misleading way of putting it. It would be better to say that the business owner will become wealthier than the employees. Is this bad?

Again, holding all else equal, if a person’s wages are static, what would the negative consequences be? Since we’re assuming ceteris paribus, prices will remain the same, and so will his purchasing power. The fact that others can afford or have more does not mean that he will afford or have less than he did before. He will have less relative to those who have more wealth, but this does not lower his “quality” of life. In other words, he will only be poor if your measurement of poverty is proportional to the wealth of others.

Furthermore, when a person trades the money he earned through wages for goods and services, he becomes wealthier, so unless he were to make bad trades over and over again, it would be difficult for his wealth to decrease. Even if his wages stay the same, he’s still very likely increasing his wealth.

If you are looking at wealth and poverty in relative instead of absolute terms, if you look at the entire world, the poor people in the United States and other western countries would not be considered poor when compared to the people of poverty-stricken nations in Africa.

Poverty is not merely created by wealth inequality—there is much more at play. Maybe the people at Being Liberal should get a better understanding of economics or at least not try to mislead their readers.