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A problem called income inequality
Wed, 10 Dec Pre-Open

Scrutinize any list of the top business books of 2014 and it is unlikely you'll not come across a book titled 'Capital in the Twenty-First Century' written by a young economist called Thomas Piketty.

So, what's the central message of the book? Well, it has one of the most extensive studies ever conducted on the subject of wealth and income inequality. And with this issue being one of the biggest challenges we face as a modern society, there's little wonder the book has struck such a deep chord with people.

In fact, a recent study by OECD further drives the point home. As per the organisation, the gap between rich and poor in a range of countries has reached its widest in 30 years. It further highlights that the richest 10% in the OECD countries earn 9.5 times more the poorest 10% while the ratio stood at 7:1 in the 1980s.

To be honest, even by close observation, one can make out that income inequality has certainly gotten worse over the years. However, can this be reduced using the steps that the same OECD report has outlined? The report has called for anti-poverty programmes and has argued for more intervention by the Government as it has found no evidence that this intervention harms economic growth.

Is this the right approach to take? Well, for one, no matter how hard we try, there's always going to be some sort of income inequality. Simply because people have different talents, skills and ability to do work. But can this be brought down through intervention by the Government?

We don't think so. Had things like taxes and subsidies been the solution, we would have lowered inequality long back. In fact, a case can be made that more and more intervention by the Government could actually make the situation worse as wealth is effectively transferred from the more productive sectors of an economy to unproductive ones.

Consequently, the Government would be much better off ensuring that free markets are allowed to function without any major hurdles and try and keep its own expenses to a bare minimum. Trying to lower income inequality by interfering with the market process of allocating resources may not be the right approach to take according to us.

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