Why Income Inequality Matters: The Naked Economist

and regarded measure of income distribution.

Income isn't distributed, it's earned and created.

Doesn't this deny the notion of inflation?

That's why I used wealth instead of money. Inflation happens with currency, not with wealth.

What's better, person A has a cracker and person B has two crackers, or Person A has 50 crackers and person B has 500 crackers. The distribution is far more unequal in the second scenario, but I think most people would agree that Person A is more wealthy and better off in the second scenario regardless of income distribution.

From the Wikipedia description, it seems to be entirely money based. I think basing inequality on just money is a bad metric, because money when it all comes down to it really just doesn't exist. I think a better metric would be something resource based, because that is at least something more or less inelastic.

There was also a seed floating around a few days ago on how basing a Gini coefficient off of income tax returns, which is the usual method, is very distorted. Thanks to the million and one changes in our income tax system, what counts as income changes quite a lot. Income tax returns for the US also don't count much of welfare, so it makes the poor people look even poorer because social security, earned income tax credit and all that is not being added in.

Lorenz curve calculation suffers from the garbage in garbage out syndrome. Good solid measures of buying power still elude economists much to our chagrin but is sometimes compensated for by good looking theoretical models. So how unequal is income distribution in the United States? What curve looks good today, we can generate data for most values with a little work.

The largest flaw in the model is the choice of comparison points, that is income versus population. By itself it's really a meaningless measure. What we need to know is total wealth generated inside a period, then compare buying power relative to change in total wealth. That would be a far better measure of inequality instead of asymmetry.

Yes, but if you apply the crackers example to a whole society, the price of each cracker would drop so much that it could actually be better to be in the first scenario. It is called inflation, and wealth does have an impact on it. Wealth can be measured in money, in my opinion.

This is why I think some liberals are liberal. They don't have the firmest grip on economics.

Yes, but if you apply the crackers example to a whole society, the price of each cracker would drop so much that it could actually be better to be in the first scenario.

I used crackers not as an example of money but as an example of wealth. The point is not to trade the crackers for something else, crackers unlike money have intrinsic value, you can eat them. Assume that all there is in the world is crackers. In the first scenario, both people go hungry. In the second scenario, they both have enough for at least a snack. It doesn't matter how rich the rich person is as long as the poor person has enough to get by.

The key here is that the economy is not an inelastic pie. When someone takes a piece of the pie it does not have to take a piece away from someone else. The pie can grow. I'm not talking about money either. Of course you can print more money, but then my piece of pie is worth less. I mean actual wealth that is valuable regardless of its relation to others.

Think of it this way. Person A has a widget. Person B has five dollars. Person A values the widget at 4 dollars. Person B values the widget at 6 dollars. Person A trades the widget to person B for five dollars. The economy is now two dollars greater. Person A has five dollars but traded something worth four to him, so he is one dollar richer. Person B had five dollars and traded them for an item he values at six dollars and is thus a dollar richer. The economy grew by two dollars, because we started with items with 9 dollars to their owners and ended with items worth 11 dollars to their owners.

The economy can grow and shrink regardless of inflation and deflation.

But the crackers analogy only holds up if the crackers get smaller as time goes on due to cracker-flation. Over time a cracker that could have fed a family of four will turn into a bite-sized snack. you can sock $100 dollars in a mattress for 50 years, but at the end of that 50 years, your $100 isnt nearly the wealth it was when you started out.

That was my point, crackers don't have inflation. The whole point I am trying to make is about inflation-free wealth. Inflation affects money and currency, not actual wealth.

The distribution of income and wealth certainly does matter to our society. The inequality in the USA approaches that of a developing country. This is unfair and everybody knows it.

And, yes, this is political, as Bush tax breaks and even running huge deficits (funded by rich lenders) reinforces this.

The inequality in the USA approaches that of a developing country.

Where would you rather be poor, the USA or a developing country? That's my point. The inequality doesn't matter so much as the actual wealth of the bottom rung. Who cares if everyone has equal wealth if everyone is also living in huts with no running water. However being poor in a nation where there average poor person owns more than one tv, a car and a house (with a mortgage, but even lower high class people have mortgages) is not that bad at all.

Think of it this way. Person A has a widget. Person B has five dollars. Person A values the widget at 4 dollars. Person B values the widget at 6 dollars. Person A trades the widget to person B for five dollars. The economy is now two dollars greater. Person A has five dollars but traded something worth four to him, so he is one dollar richer. Person B had five dollars and traded them for an item he values at six dollars and is thus a dollar richer. The economy grew by two dollars, because we started with items with 9 dollars to their owners and ended with items worth 11 dollars to their owners.

I think the widget is worth 5 dollars, the agreed value. Economy did not grow at all in this example. They had and have 10 dollars in total. can person B sell it for 6 dollars? If so then person A was just stupid for selling it for 5. If not, his "intrinsic" 6 dollars are meaningless. It doesn't matter what you intrinsically evaluate something if the market is not willing to pay that much.

How exactly can an economy grow without investment (taking from somewhere and putting somewhere else)? I don't quite see how the pie can be elastic. How exactly do you suggest we can increase the amount of wealth in the world? If it is that easy maybe we can solve the world's problems in this forum.

How exactly can an economy grow without investment (taking from somewhere and putting somewhere else)?

Increasing the amount of things (objects or services) that hold value to other people in a period of time. That is accomplished by having more people (usually) and having more productive people. Most people are at least somewhat productive without outside influence to not be (government welfare) and thus create something of value which never existed before thus an increase in all things of value aka growth in the overall pie of the economy. The trick behind eliminating poverty is in distribution and measurement. Poverty means people who need or usually in the US want more than they have as a fraction of what other people have. A moving target in a growing economy for sure.

I think the widget is worth 5 dollars, the agreed value.

This is where you are wrong. There is no objective "worth" to any object. People value everything differently, even money. Some people are willing to do a job for $10 per hour. Others would not be. This is one of the most basic aspects of economics, worth or economic utility is entirely relative.

It doesn't matter what you intrinsically evaluate something if the market is not willing to pay that much.

Here's a hint. There really isn't a market. It's just an entirely intangible idea. We use the term market because most transactions are not one on one negotiations. Most sellers list an item at a price and if they purchaser values it greater than he buys it, if not then he doesn't.

Here's another example. How much do you value a Hornus Wagner rookie card at? If you owned it what would be the minimum price you would sell it for? If someone else values it higher and buys it from you for more than you wanted but less than he wanted are you both not holding something more valuable after the transaction than before?

That is the entire point of trade and economics. People value goods and services differently so they are willing to trade with each other to maximize the value (to them) of what they own.

That is accomplished by having more people (usually) and having more productive people. Most people are at least somewhat productive without outside influence to not be (government welfare) and thus create something of value which never existed before thus an increase in all things of value aka growth in the overall pie of the economy.

Yes, but people are not productive for free, so you need to take money from somewhere else in the pie to get the new something of value. Of course you can explore 3rd world countries people to work basically for free and grow the US economy, but you are still taking from a pie. A Chinese pie is still a pie.

Can you solve hunger in Africa simply by having more people there? Or do you need something else from some other pie?

Yes, but people are not productive for free, so you need to take money from somewhere else in the pie to get the new something of value.

We are talking about different things, monetary theory is highly misunderstood and often maligned on this forum but the short of it is no there isn't a fixed amount of money and modern monetary policy scales the money supply to the value in the market. Since that value has nearly always gone up so does the amount of money. Our tools (economics) are imprecise though so it's generally not a perfect match hence inflation. It's better to get too much than too little though so they target a small amount of inflation rather than the equilibrium.

You can solve hunger in Africa if the people there were more productive growing food than their cost in eating it. Because most of them are a net loss on the equation doesn't mean that what they do isn't worthless it's just worth less than break even. The best policies for reducing poverty and hunger in Africa are those that help them be more productive farmers, not ones that dump food on them. The former you increase overall value, and you make a larger pie so to speak in the future because now African farmers are making more of value while the latter just dumping food is a transfer and at best a break even value (and really a loss due to transport/distribution costs) proposition as nothing is being added just moved.