By  Frank Cowell

The world seems to have discovered a new problem: economic inequality. But inequality is not something freshly appeared on the world stage. In most developed countries the gap between rich and poor a century ago was similar to what it is today (in the US just before the First World War, the share of the top one percent in total income was 18 percent; their share in 2012 was 19 percent; but in the 1970s it fell below 8 percent)

So, is it a new problem? Or an old problem returning with a new face? Perhaps we have just started to care about it more?

It is nearly always a mistake is to over-simplify the discussion of an economic problem. So, let's look at the "inequality problem" in three dimensions.

Income

The most obvious dimension concerns the disparity of incomes, because most of us experience income inequality at a personal level. We may be intensely aware of the differences between what we earn in our job and the earnings of others in our own place of work, the differences between our pension and the incomes of those in our country whom we see as being rich and powerful. But this kind of close-up view can give a distorted picture.

What has happened is that, in many developed countries, income distribution remained roughly stable for about 35 years after the Second World War – inequality was a non-story; but over the next 35 years this stability was replaced by a steady increase in the dispersion of incomes, with the incomes of the well-paid growing faster than the incomes of the rest; in addition, for rapidly developing countries such as China, the vigorous process of development generated income growth and inequality growth at the same time. However, at the same time as this widening of income differences within each country, the income gap between countries has, in the main, been narrowing: China, India and other once-poorer nations have been "catching up" with those who developed first.

The combination of these two opposing forces – within and between countries -- results in a complicated pattern overall. Whether income inequality has been rising or falling depends on your point of view.

Although the global pattern is complicated, within each country the cause for concern may seem to be clear. Pay gaps that are perceived as excessive, unfair, or unrelated to merit can undermine ordinary people's trust and may even threaten social stability. If inequality has started rising fast where we work, where we live, then maybe we –or our government – should be doing something about it. Those who have lived through the era of stability in income distribution will be aware of the part played by government action in maintaining that stability.

However, there is a danger in this well-meaning desire to "do something". What that "something" ought to be surely depends on the forces that have generated the inequality in the first place. Under normal circumstances – apart from emergencies generated by political upheavals or by war, for example -- changes in income inequality are mainly transmitted through market mechanisms. Of course economic mechanisms can be modified and regulated, just as physical mechanisms can be modified or regulated by a clever engineer. But playing with a mechanism that you don’t understand is usually a mistake.

Wealth

The second important dimension is net worth -- the total value of your resources less any debts that you owe.

Wealth inequality has attracted a lot of attention recently. It has been claimed that just one percent of the world’s population will soon own more of the world’s wealth than the other 99 percent. This worries people. Wealth means power and we worry about power being concentrated in a few hands, perhaps the wrong hands.

The claim about the richest one percent is designed to shock. But what does it really mean? Finding the answer is a little tricky, partly because of the problems of making meaningful international comparisons: when we try to compare wealth-holdings in nations with very dissimilar economic and social systems it can be difficult to ensure that types of asset are essentially the same in both places and that the assets are being valued at an appropriate price. But the answer is also tricky because wealth is a trickier concept than income. For example, within the 99 percent who are the people with zero wealth? Do they all live in desperately poor parts of Africa? Not really: they may be people in rich countries who just happen to be observed at a stage in their lifecycle where debts equal the current value of their assets; catch the same people at a different stage of their life (when the mortgage is paid off) and they will be revealed to be quite wealthy.

The question "how much wealth is held by the top one percent?" is obviously eye-catching; it may even be important. But, perhaps an even more important question is -- what drives wealth inequality? If your immediate reaction is "I know the answer to that one, it's the market again", you are only partly right. People accumulate wealth from their earnings, so the effects of the labour market work their way through into wealth; many people keep a large chunk of their wealth in the form of the house where they live, so the value of their assets is driven by the housing market. But there is more: there are big forces at work that have little to do with the market.

How do wealthy elites perpetuate themselves? In large part it is through their families. There is no mystery here. Think how the inheritance process works. If the rich marry the rich or if families become smaller, then we do not need a complicated theory to see what will happen: rich dad plus rich mum means a doubly rich son or daughter; a society peopled with "little emperors" will divide its wealth much less from generation to generation than a society where parents pass their wealth on to many sons and daughters. Smaller families mean greater wealth inequality.

In the development of wealth inequality over the generations the disequalising forces of market power and blind chance usually play an important role. But they are often reinforced by social convention and social policies.

Mobility

When people discuss the "inequality problem" it is often in language that suggests a fixed total of income or wealth, like a big pie to be shared around. But the fixed-pie approach is misleading: it ignores the third dimension of our problem, mobility. In many countries what concerns policy-makers and citizens is not just that there is a substantial gap between those who turn out to be rich and those who turn out less well-off, but that there may be a little prospect of bridging that gap. If the dynamics of growth mean that the poor stay poor and the rich – the same rich – carry on getting ahead, this polarisation can weaken the ties that bind society together and that ultimately lead to society’s economic prosperity. And in many countries, while income levels and inequality have been growing, mobility has been falling.

Here is the real problem underlying the income and wealth gaps, for large countries and small: not "how much more does he have than I have?" but "what are the economic prospects for me and my family in an unequal world?"

The author is Professor of Economics at the London School of Economics and Political Science.

A Chinese version of this article appears on People's Daily as 《思考经济不平等的三个维度(国际论坛)-访伦敦政治经济学院教授弗兰克·考埃尔》