What They Tell You

Some people are naturally more talented, hardworking, or intelligent than others. Market economies reward these natural differences. Inequality reflects this reality. Trying to reduce inequality too much is both inefficient (removing incentives) and unfair (penalizing the talented). We should focus on equality of opportunity, not equality of outcome.

What They Don’t Tell You

Most inequality is not natural but socially constructed. The same person would earn vastly different amounts in different countries. What’s rewarded varies enormously across societies and time periods. Inequality of outcome creates inequality of opportunity for the next generation. High inequality is actually bad for economic efficiency. Many of history’s most successful economies have been relatively equal.

The “Natural Inequality” Argument

The argument goes:

  • People are born with different talents and capacities

  • In a free market, these differences lead to different outcomes

  • This is both efficient (putting the right people in the right jobs) and fair (rewarding contribution)

  • Trying to equalize outcomes punishes the talented and rewards the lazy

The Problem with “Natural”

But what’s “natural” about inequality?

Geographic differences: A software engineer in the US earns 50-100 times what one earns in India. Are American programmers 50 times more talented? Of course not. The difference is institutional: immigration restrictions, infrastructure, network effects, and capital availability.

Historical changes: In 1965, American CEOs earned about 20 times what average workers earned. Today it’s over 300 times. Did CEOs become 15 times more talented in 50 years? Or did norms and institutions change?

Cross-country variation: A bus driver in Sweden earns many times what one in the Philippines earns. Are Swedish bus drivers more talented? No—Swedish institutions (unions, minimum wages, compressed wage structures) create different outcomes.

What Determines Wages?

Neoclassical economics says wages equal “marginal productivity”—what a worker adds to output. But this is circular reasoning: we can’t observe productivity directly, so we infer it from wages, then explain wages by productivity.

In reality, wages are determined by:

Bargaining power: Workers with more power (through unions, tight labor markets, or scarce skills) extract higher wages.

Social norms: What’s considered “fair” pay changes over time and place. Executive pay exploded partly because norms changed.

Institutions: Minimum wages, collective bargaining, pay transparency—all shape wage distributions.

Luck: Being in the right place at the right time matters enormously.

The Inheritance Factor

Even if we accepted that individual differences matter, those differences are largely inherited—not genetically, but socially:

Wealth inheritance: The children of the rich inherit not just money but networks, education, health, and opportunities.

Human capital inheritance: Educated parents invest more in children’s education, creating dynasties of advantage.

Neighborhood effects: Where you grow up shapes your opportunities profoundly.

The Great Gatsby Curve: Countries with high inequality also have low social mobility. Inequality of outcome becomes inequality of opportunity.

Inequality and Efficiency

The standard argument is that inequality provides incentives: work hard, get rewarded. But too much inequality is actually inefficient:

Human capital waste: Poor children who could have been scientists or entrepreneurs don’t get the chance.

Political instability: High inequality leads to conflict and instability, which is bad for investment.

Financial crises: High inequality drives debt accumulation (the poor borrow to maintain consumption), leading to crises.

Rent-seeking: The rich use their power to extract more rather than create more.

The Evidence

Some of history’s most successful economies have been relatively equal:

  • Japan industrialized with remarkably compressed wages

  • South Korea and Taiwan had land reforms that reduced inequality before their growth miracles

  • The Nordic countries combine high equality with high growth and innovation

  • The US was more equal during its mid-20th century golden age than today

What This Means

Inequality is not natural or inevitable. It’s a choice—made by institutions, policies, and power relations. The level of inequality we accept is a political decision, not an economic necessity.

The question isn’t whether to have some inequality (some is inevitable and perhaps useful) but how much and what kind. And there’s nothing natural about the extreme inequality we see today.