We live today at a historically unprecedented moment in the story of inequality. In many countries—China, India, the United States, Japan and Korea, among others—the gap between the rich and the poor has widened to levels unseen since systematic data collection began. If we take a simple measure, such as the ratio of incomes earned by the top 10 per cent compared with the bottom 50 per cent, we find inequality is at its highest point in more than a century.
This does not mean inequality was never worse in some earlier epoch; the feudal order of medieval Europe was hardly egalitarian. Since modern data began to be collected around 1900, the present moment is particularly extraordinary. In countries such as the UK and Italy, which historically sustained rigid class hierarchies, inequality fell after the Second World War, yet today’s levels exceed anything seen in the post-war period.
So what explains this dramatic surge? Is inequality the natural state of capitalism? Is it necessary for economic growth? And crucially, what does it mean for our collective future?
To answer these questions, one must look at the trajectory of inequality over the last century. From the early 20th century through to the late 1970s, inequality generally declined across much of the industrialised world. Then, around 1980, the trend reversed.
The timing is no accident. In 1979 and 1980, Margaret Thatcher in the UK and Ronald Reagan in the US ushered in a new political and economic order. Central to this revolution was the slashing of top marginal tax rates: in the United States, the rate on the wealthiest fell from about 70 per cent to under 40 per cent almost overnight.
Alongside tax cuts came a powerful ideological shift. Economists, policy-makers and business leaders began to argue that inequality was not a problem but a precondition for growth. The Reagan-Thatcher era championed the notion that rewarding the rich would unleash entrepreneurial energy, expand investment and ultimately “trickle down” prosperity to all.
This ideological shift was not confined to tax policy. Within corporations, executive compensation exploded. The pay ratio between CEOs and their lowest-paid employees in large American firms rose from around 60:1 in the 1970s to as much as 6,000:1 today. This was not simply the product of free markets, but a deliberate legitimisation of inequality. CEOs were portrayed as “wealth creators” deserving outsized rewards, while ordinary workers were increasingly treated as expendable.
But did inequality deliver the promised prosperity? The evidence suggests otherwise.
Far from boosting growth, the decades after 1980 saw stagnation. Between 1945 and the early 1970s, advanced economies had enjoyed a golden age of expansion. Productivity soared, wages grew, and social mobility flourished. But from the 1980s onward, precisely when inequality began to rise, growth slowed and mobility faltered.
There is little evidence that more unequal societies grow faster. In fact, highly unequal countries often grow more slowly. The supposed link between inequality and growth was always more political than scientific, serving as a convenient justification for policies that favoured the wealthy.
Yes, incentives matter. But the ultra-rich are not driven by marginal tax rates. Billionaires such as Elon Musk are compulsive workers; their drive stems from obsession, not from the tax code. Higher taxes might push them to shift money to tax havens, but not to work fewer hours. Meanwhile, cuts in taxation reduce governments’ capacity to redistribute wealth, undermining social investments—such as education, health and infrastructure—that genuinely fuel long-term growth.
Indeed, the US once stood out as a land of mobility. In the 1950s and 1960s, it was far easier for the poor to climb into the middle class than in most of Europe. Today, the situation has reversed: America is now less socially mobile than much of continental Europe. Inequality has hardened into immobility.
A deeper dynamic lies beneath these trends: the concentration of wealth at the very top.
Between 1995 and 2021, the incomes of the richest 1,000 people on the planet grew two-and-a-half to three times faster than those of the top 1 per cent as a whole. The richest of the rich are pulling away even from the merely rich.
This concentration is fuelled less by wages than by wealth itself. The returns to capital now far outpace the returns to labour. The fortunes of today’s billionaires grow so vast that they cannot possibly consume them. A Ferrari a month would barely dent Elon Musk’s net worth. That is why they spend on flashy projects such as private space travel, luxury islands or plans to go to Mars.
At the same time, corporate profits have decoupled from productive investment. Global giants with near-monopolistic control—whether in technology, pharmaceuticals or consumer brands—no longer need to reinvest profits in innovation. Market dominance ensures their returns. Productivity growth, once the hallmark of capitalism, has slowed. Monopoly power sustains inequality but undermines dynamism.
Rising inequality carries profound political consequences. Donald Trump’s electoral base was strongest in American regions where real wage growth had stagnated or declined. Disillusioned workers, excluded from the gains of globalisation, turned to populist leaders who promised to upend the system.
Yet populism rarely offers real solutions. Instead, it channels anger into divisive politics, weakening democracy itself. Inequality thus corrodes not only economies but also the political fabric of societies.
If the past 40 years have been defined by policy choices that favoured inequality, the next decades may be shaped by technology, especially artificial intelligence.
Unlike earlier waves of automation, which displaced low-skilled labour, AI threatens middle-skilled workers: accountants, clerks, technicians and even journalists. These are among the best-paid segments of the workforce in many countries, particularly in developing economies such as India. AI could erode the livelihoods of the very middle class that has historically stabilised democracy.
At the same time, elite education is becoming a new bottleneck. As middle-class jobs are threatened, families scramble to secure places in top universities. The cost of such education is soaring, far outpacing global GDP growth. Access to elite schooling is increasingly reserved for the wealthy. A recent study in the United States found that children of the top 1 per cent are 2.7 times more likely to be admitted to elite institutions than those of equal academic ability from average families. For the bottom 20 per cent, the odds are even worse.
Inequality, AI and elite education are converging into a cycle of exclusion. The scale of the problem can feel overwhelming, but there are clear steps that can be taken.
First, taxation must change. Investment subsidies currently encourage firms to replace workers with machines, even when this is socially destructive. The hidden subsidy is even greater when laid-off workers must be supported by the state. AI adoption is, in effect, tax-subsidised at the expense of labour. That distortion must end.
Second, wealth accumulation must be directly addressed. Wealth and inheritance taxes are necessary to slow the concentration of riches in the hands of a few dynasties. For this to be effective, global action against tax havens is essential. Without such coordination, the richest will simply move their assets offshore.
Third, governments must anticipate disruption. It is possible to predict which sectors are most at risk from AI or trade shocks. Active labour market policies—retraining, relocation subsidies and targeted social support—can ease transitions. Yet too often these programmes exist only on paper. In the US, for instance, “trade adjustment allowances” are rarely accessed.
Finally, redistribution must be designed to uphold dignity. If job loss stems from forces such as globalisation or AI, unemployment cannot be stigmatised as personal failure. Otherwise, despair takes root. Already in the United States, life expectancy for sections of the white population is falling, driven by alcoholism, drug overdoses and suicide. Inequality kills, quite literally.
The story of inequality since 1980 reveals one clear truth: rising inequality is not inevitable. It is the result of policy choices, ideological shifts and economic structures that can be changed. The claim that inequality fuels growth has been proven hollow. Instead, inequality undermines growth, corrodes democracy and erodes social cohesion.
The future will bring new challenges, especially from artificial intelligence, but also new opportunities. By rethinking taxation, tackling wealth concentration and investing in human dignity, societies can chart a different course.
The question is not whether inequality will shape our future. It already is. The question is whether we have the political will to confront it.
(Abhijit Banerjee is a Nobel laureate and world-renowned economist. He has pioneered work in development economics and poverty alleviation. He co-founded the Abdul Latif Jameel Poverty Action Lab (J-PAL) to apply evidence-based research in tackling global poverty)
