Question

In a capitalist economy, is income inequality necessary for economic growth?

Answer 1

In a capitalistic economy, market is controlled by demand and supply forces. It makes workers to get income earning opportunity and business owners to create wealth while pursuing production activities. It creates income inequality where workers and owners both are growing. It creates income inequality.

So, income equality is not necessary for economic growth under the capitalistic system, because it is the capitalistic system that provides opportunities to everyone for growth. When people take risk and bring capital to produce something, they create more wealth. At the same time, when people are risk averse and like to do the job, then they earn income. Hence, income equality is the outcome of the capitalist system, rather income inequality being a necessity for the economic growth in this capitalist system.

Here, government should not enforce to bring equality, by applying excess taxation, forceful redestribution of income and acquisition of assets. These acts will lead to discouragement to the private players and economic growth will be halted. It will create more chaos and inequality in the economy.