Inequality and Prosperity: An Unlikely Duo

There is an interesting phenomenon occurring in 2016. For the first time in history, the top 1 percent of the population will have more wealth than the bottom 99 percent. This video posted to the Economist Facebook page shows a graph highlighting the change in position of the top 1 percent versus the bottom 99 percent over time. The narrator claims that 2016 will be a more unequal world than ever before. While this may sound alarming, it does not necessarily indicate that times are tough for the bottom 99 percent.

The above graph shows the number of people living in absolute poverty and the number of people not living in absolute poverty. As you can see, the number of people not in absolute poverty is rising, while the number of people living in poverty is shrinking.

So how can both of these things happen? As long as the total wealth of the world increases, it is possible for the amount of people living in poverty to decrease and for the inequality gap to increase.

One way to look at this is to consider the fixed pie fallacy. With a fixed pie, for one person to get more of the pie, someone else has to get less. Traditionally, people view wealth in this same way. They assume that wealth is a fixed amount, and for one person to make more money, someone else has to make less.

However, this is not the case. Instead of taking more slices of the same pie, the pie gets bigger as the total wealth increases. So now, even though the top 1 percent is making more, the bottom 99 percent is also making more. Think of it as having the choice of a small slice of pie from a gigantic pie, or a larger slice from a microscopic pie. In the case of the gigantic pie, everyone receives more.