Wealth vs. Income: Two Very Different Games

Before we can understand why inequality grows, it helps to see the difference between wealth and income.

Income is what you earn through work, such as wages, salaries, or professional fees.
Wealth is what you own, such as property, stocks, or savings that generate income without additional effort.

Income depends on time and labor, while wealth earns automatically. A paycheck stops when you stop working, but wealth continues to grow. That simple difference between earning and owning is where inequality begins.

Even when wages rise by two or three percent each year, investments often grow by five or seven percent. Over time, that small gap accumulates. The result is a world where owning assets matters more than how hard you work.

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The Big Question

For most of the twentieth century, economists believed that capitalism would eventually reduce inequality. The Kuznets Curve suggested that inequality rises in the early stages of industrialization but falls as societies grow wealthier. It was a comforting idea that promised capitalism would correct itself over time.

Thomas Piketty challenged this view. After studying hundreds of years of data from many countries, he found that the period between 1914 and 1970, when inequality actually declined, was an exception rather than a rule.

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That decline was driven by war, debt, and high taxes on the rich. Once those forces faded, inequality began to rise again.

Piketty’s conclusion was unsettling: inequality is not a temporary flaw in capitalism. It is part of how the system works.

The Central Contradiction of Capitalism

At the heart of Piketty’s argument lies a simple inequality:

r > g

Here,

r is the rate of return on capital, which means profits, dividends, rent, or interest.
g is the rate of economic growth, which measures how much the economy and average incomes increase.

Across history, the return on capital, r, has stayed around 5 percent, while economic growth, g, has been closer to 1 to 2 percent. That small difference changes everything. When wealth grows faster than the economy, it concentrates naturally in the hands of those who already own it.

The Compounding Divide

Imagine two people, A and B. Both earn $100,000 a year. A also inherits $10 million, which A invests at a 5 percent annual return. B has no savings.

After one year, A earns $500,000 from investments, which is five times A's salary, while B earns only his $100,000.
After ten years, A’s fortune grows to more than $16 million, while B’s wealth stays about the same.

Same job. Same effort. Different math. That is how the flaw of capitalism works in practice.

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The Math That Multiplies Inequality

When r is greater than g, wealth accumulates faster than wages. This simple relationship explains why billionaire wealth can skyrocket even in slow economies. It is not about who works harder; it is about how fast money grows once it already exists.

The flaw is not moral but mathematical. Capitalism rewards ownership more than effort because the rate of return on capital consistently beats the rate of growth in the economy.

Can Capitalism Fix Itself?

Piketty believed that without deliberate action, inequality would keep widening. His solution was a global wealth tax to slow the growth of capital and public investment to strengthen wages, education, and innovation.

Critics have other ideas. Economist Robert Solow argues that innovation and technology can raise economic growth, narrowing the gap between r and g. Lawrence Summers adds that returns on capital are not constant, since competition and risk can reduce them. Others believe the solution is broader ownership so that more people benefit from capital returns rather than just wages.

Whatever the path, the message is clear. Inequality is not an accident. It follows a pattern that can be measured and, if we choose, changed.