Can social inequality be a sign of a healthy economy?

You can't make an omelet without breaking a few eggs." This widely recognized saying encapsulates a long-standing belief in economic history: that making real progress often requires giving up something. In the world of development, that sacrifice is often unfair.

In the past, rapid industrialization and technological advancements have made people richer, but they have also widened the gap between the rich and the poor.

This raises a vital question: Is economic inequality merely a negative effect of growth, or can it genuinely function as a catalyst for economic vitality? 

This paper examines that question using historical, theoretical, and modern instances. Inequality has frequently been a part of times of economic growth, from the factories full of smoke in 19th-century Britain to the skyscrapers in Silicon Valley. However, the story isn't one-sided. Communism's goal to get rid of inequality through state control shows an alternative perspective, wherein equality is achieved at the expense of innovation, individual initiative, and ultimately, economic stagnation. We can learn more about how inequality and economic health are related by comparing capitalist and collectivist models. 

 Those who believe in economic inequality declare that it is a powerful motivator. The belief that one may end up in the world and get rich can make people take risks, come up with new ideas, and put funds into big projects. 

 This sort of incentive structure is very clear in Silicon Valley, where people, including Elon Musk, Steve Jobs, and Mark Zuckerberg, turned massive concepts into billion-dollar businesses. They weren't just doing it out of curiosity or idealism; they did it in a way that made them plenty of money as they succeeded. Thousands of others did the same, leading to new findings in artificial intelligence, biotech, fintech, and other fields. There's some inequality here, yet it's not an accident. It demonstrates how the system rewards talent, risk, and creativity.

Industrialization and the Roots of Inequality

 In China, after the reforms, a similar story played out. In the late 20th century, the Chinese government began implementing changes to its economy that were more market-oriented after decades of centralized planning. This shift led to a surge in new businesses, especially in the tech sector. Companies like Alibaba and Temu began small; nevertheless, they grew due to policies that pushed competition and profit. People like Jack Ma became symbols of the "Chinese Dream," which inspired millions to work hard to get ahead. The economy's potential, innovation, and global importance grew even as the gap between rich and poor grew. In this instance, inequality identified China's evolution from a stagnant command economy to a lively market-driven powerhouse. 

Jack Ma

South Korea’s post-war rise offers another compelling example. From the 1960s onward, the country moved from rural poverty to industrial strength through export-led growth and aggressive investments in infrastructure and education. As corporate elites amassed wealth, inequality deepened. Yet over time, the South Korean government enacted redistributive policies, like universal education and healthcare, that gradually balanced the scales. 

South Korea's transformation: From poverty to Prosperity

Inequality, while sharp at the outset, became manageable with the maturing of institutions. The experience of the country proves that inequality can accompany transformation, but does not define it in the long term. 

These developments follow the shape of the Kuznets Curve, a theory proposed by economist Simon Kuznets in the 1950s. Inequality rises, he argued, as countries embark on industrialization. In these early stages, wealth accumulates in the hands of those who already possess capital or learn quickly, and others fall behind. But as institutions develop, like schools, welfare states, and more progressive taxation, inequality later declines. 

Here, inequality is not a flaw but part of a curve toward a more mature and balanced economy. Britain's Industrial Revolution, the economic miracle of South Korea, and China's tech boom all follow this curve to some extent. Inequality soared during early growth, but later reforms shared the benefits more widely. Though not universal because some rich countries still grapple with entrenched inequality, the Kuznets Curve provides a handy framework for explaining economic transitions. But inequality by itself does not guarantee prosperity. Neither does equality preclude it.

The Soviet Union's experience provides a compelling counterexample. Compelled by the ideology of Marx and Lenin, the USSR attempted to eradicate economic inequality through collective ownership, central planning, and redistribution. This promised equality and protection to all in theory. In reality, it suffocated innovation, stifled entrepreneurship, and brought about inefficiencies at every level. Denied the prospect of individual wealth, no one was much encouraged to innovate or think out of the box. There was a gradual technological advancement relative to the West, and supply shortages of everyday commodities became the rule. Although there were sporadic successes in the fields of science and the military, the Soviet economy stalled and eventually collapsed under its own weight. What the Soviet system had going for it in terms of equality, it lost in terms of dynamism and flexibility. This is a good example of the danger of eradicating all inequality.  It drains the energy that propels economies forward. None of this is to suggest that inequality should never be managed. Excessive inequalities in wealth can damage social trust, prevent access to opportunity, and retard long-term growth. 

USSR bread queues

In America today, with all its technology and wealth, most Americans feel shut out of the system. Rising costs, stagnant wages, and lower public services threaten to destroy the very mobility that inequality was promised to create. Without policy interventions, such as progressive taxation, strong labor rights, and subsidized schooling, inequality can become fixed in permanent privilege rather than a temporary result of growth. This is why the nature of institutions is so important. 

South Korea, for example, didn't just grow; it built a safety net. The United Kingdom eventually did the same in terms of labor reforms and expansion of public services. Those countries that ignore inequality do so at the risk of social unrest or long-term stagnation. Those countries that succeed in redistributing opportunity, not just wealth, can generate more sustainable and inclusive growth. Economic inequality, while generally a pest, also sometimes indicates economic vibrancy. Especially during periods of transition. History shows that inequality rises during the early stages of growth, but need not necessarily do so permanently. With good policies and robust institutions, inequality can be managed and its upside, innovation, investment, and ambition, harnessed for broader prosperity. 

UK healthcare at work

And the Soviet experience informs us that equality enforced at the cost of creativity and advancement is not likely to be durable. Our challenge, then, is not to eliminate inequality entirely but to put it to work for the economy rather than destabilizing it. Like the broken eggs in that old proverb, inequality may be part of the ingredients, but it is up to each society to decide how much is too much and what kind of omelette it wants to make.