Neoclassical interpretation of Inequality

Homo Economicus

the neoclassical assumption that humans are self-interested rational utility maximisers. They always choose the option that maximises their own benefit.

Invisible hand

Individuals pursuing their own self-interest produce socially optimal outcomes as a byproduct, through the price mechanism. No central coordination needed.

Equilibrium price

Price a quantity supplied equals quantity demanded / market clearing price

Consumer surplus

the difference between what a consumer was willing to pay and what they actually paid

MPL

dditional output a firm gets from hiring one more worker. In the neoclassical model, wages equal MPL — workers are paid exactly what they contribute.

Skill Biased Technological Change

the argument that new technologies (computers, automation) increase productivity and demand for high-skilled workers while reducing demand for low-skilled workers.

Used by neoclassical economists to explain rising wage inequality as a natural market outcome.

Wage-Productivity decoupling

ince the 1970s productivity kept rising but wages flatlined. Directly contradicts the Wage = MPL prediction. The gap went to profits, not workers.

Mark-Up

difference between a firm's price and its cost of production

Monopsony

labour market situation where one or few employers dominate local hiring, allowing them to pay workers below their marginal product.

Equality efficiency trde off

neoclassical argument that redistribution reduces incentives to work, invest, and take risks, shrinking the total pie. Greg Mankiw: "When the government redistributes income from the rich to the poor, it reduces the reward for working hard… the pie gets smaller."

Trade off : domestic and international equality

Globalisation causes intra-country inequality to rise but reduces inter-country inequality (e.g. China’s rise

Trickle Down economics

neoclassical claim that policies benefiting the wealthy and corporations will eventually benefit everyone through higher investment, job creation, and productivity growth. "A rising tide lifts all boats."

Great Gatsby Curve

Measure inequality compared to intergenerational mobility

Saving Glut for the rich

henomenon where excess savings by wealthy households flow into financial markets and asset prices rather than productive real investment, because the rich have a low marginal propensity to consume.

MPC

fraction of additional income that a household spends rather than saves. Poor households have high MPC (spend almost everything); rich households have low MPC (save a large share). Rising inequality → income shifts to low-MPC rich → aggregate consumption falls.

Structural Power of Capital

Capital owners' inherent ability to constrain government policy by threatening to withhold investment or move capital abroad, without needing to explicitly lobby. Governments depend on private investment for growth so they must keep investors confident.

TINA

ideological claim that market-oriented policies are the only viable option, since capital can always credibly threaten to leave. Presents politically constructed constraints as natural and inevitable.

Underconsumption

situation where wages are too low or inequality too high for households to purchase all the goods the economy produces.