Pope Francis warned in November that "ideologies which defend the absolute autonomy of the marketplace" are driving rapid growth in inequality. Is he right?
In one sense, Francis was clearly wrong: in many cases, inequality between countries is decreasing. The average Chinese household, for example, is now catching up with the average American household (though still with a long way to go).
Adair TurnerJason Alden | Bloomberg via Getty Images
But such examples do not negate the importance of rising inequality within countries. Both China and the United States are dramatically unequal societies – and are becoming more so.
In the U.S., the statistics are striking at both ends of the income distribution. The bottom quarter of U.S. households have received almost no increase in real (inflation-adjusted) income for the last 25 years. They are no longer sharing the fruits of their country's growth. The top 1 percent of Americans, however, have seen their real incomes almost triple during this period, with their share of national income reaching 20 percent, a figure not seen since the 1920s.
In many emerging countries, rapid economic growth has raised living standards to at least some degree for almost everyone, but the share of the rich and ultra-rich is increasing dramatically. Once these countries approach the average income levels of developed economies, and their growth slows to typical rich-country rates, their future may look like America today.
(Read more: The real factsabout inequality)
Globalization explains some of the bottom-quarter income stagnation in the U.S. and other developed economies. Competition from lower-paid Chinese workers has driven down U.S. wages. But technological change may be a more fundamental factor – and one with consequences for all countries.
Technological change is the essence of economic growth. We get richer because we figure out how to maintain or increase output with fewer employees, and because innovation creates new products and services. Successful new technologies always cause job losses in some sectors, which are offset by new jobs elsewhere. Tractors destroyed millions of agricultural jobs, for example, but tractor, truck, and car manufacturers created millions of new ones.
