A Severe Flaw of the Capitalist System: The Inevitable Increase in Income Inequality - A Theoretical Investigation

Abstract

For several decades the New Classical School New Classical School (NCS) has mainly dictated the economic policies of the western world and has led to a dramatic increase of the GDP of these countries. However recent studies have shown that beyond a certain level of GDP the happiness of a community (measured by various indices) grows, or even declines. The intent of this paper is to show that this phenomenon is based on a serious drawback the assumptions of the NCS. Namely, the NCS leads inevitably to a very uneven distribution of income. The causes for the unequal distribution is the fact that some of the basic assumptions of the New Classical School (e.g. that human decision making is an entirely rational process, and information makes transparent the uncertainty of future events) do not correspond to reality. However, we claim that (in addition to the above) the main cause of the uneven distribution is the assumption that the needs of consumers are exogenous. This hypothesis makes the uneven distribution a self-generating process. The article attempts to justify this claim.