Why is there inequality?

Inequality refers to unequal access to welfare as manifested in consumption, health, life expectancy and schooling. It is usually allied to inequality of income. However, income is not an end but a means of acquiring a good life, which has a number of attributes apart from consumption. Needless to say, income is an imperfect guide to welfare distribution because some aspects of welfare are only vaguely linked to income. For example, income inequality on a world scale went on increasing until recent decades while inequality in terms of literacy has fallen. The dramatic fall in child mortality during the last two centuries is also only remotely linked to income, and inequality in terms of life expectancy across nations has fallen. In the advanced welfare states of Europe, a growing number of services such as health, childcare, schooling and access to cultural sites such as theatres are provided at subsidized rates that again weaken the link between income and actual consumption. Despite these reservations, income inequality is an important, although insufficient, guide to welfare distribution.

The major sources of income are work, acquired or inherited wealth and, from the twentieth century onward, transfers such as pensions. Excluding property income, the income inequality we observe is closely related to skills acquired through formal education and on-the-job training. However, throughout history we have seen that discrimination can distort the relationship between skill and reward.