Inequality, Economic

Inequality of What and How Large?

The qualification of inequalities as economic lends itself to various interpretations: In a narrow sense, it regards the differences in the levels of personal income or wealth; in a broader sense, it includes all the values that directly or indirectly derive from economic activities, which can be used in obtaining them or can be exchanged with them. In the first case, its interpretation is straightforward, in the second, it requires the integration of different systems of inequality that include, besides income and wealth, elements such as health, knowledge, power, or availability of public services, and so on, whose distribution among individuals does not coincide with that of income. In the case of income and wealth, the size of the inequalities can be determined in terms of monetary units and in ways that are sufficiently precise, although not stable and exposed to a certain margin of error. For other aspects that can be broadly termed economic, this is not possible, and the differences between the positions can be described only in ordinal terms of larger and smaller (possibly with qualifications such as much larger or much smaller); in still other cases, even this is impossible, and one is limited to an incomplete or partial ordering. The measuring of inequalities raises problems even in the case of items that are directly expressed in monetary terms: In international comparisons, the per capita incomes of different countries are usually translated into a single currency through purchasing power exchange rates, whose value is affected by the choice of national baskets of representative consumption goods. Even more serious are the problems arising from the presence of externalities and of goods whose production counts as income when they are sold in the market but not when they are consumed by the producer or within his or her family, an occurrence that is usually more frequent in poorer countries or among lower income groups. To face these problems, a number of alternative and broader notions of economic welfare have been suggested, among them that of net economic welfare, proposed by Joseph Stiglitz, which adjusts gross domestic product (GDP) by subtracting from it negative factors (“bads”) such as pollution and by adding the contribution of beneficial nonmarket activities such as leisure, household production, child care, or looking after sick people.

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