Peter Lyons examines income inequalities and the age of oversupply.
In standard introductory economics courses, the first part of the course teaches how markets, prices and profits are the best way for a country to organise its economy.
Students are then briefly taught about how markets sometimes fail.
One of the topics taught in this section is called ''income inequalities''.
I hate teaching this section.
The reason I hate teaching this section is because a natural outcome of a market economy must be inequality of incomes.
Inequality of incomes are not a failure of markets.
They are a necessary and desirable outcome.
I always say to my students, if I was to guarantee you all get the same final result, how would that affect your effort in this course?
The response is fairly predictable.
I never overestimate my ability to inspire learning for learning's sake.
Inequalities in income and wealth are a necessary outcome of a market economy because incentives matter.
People gain qualifications, start businesses, work long hours, take commercial risks and make investments in order to gain higher returns.
This is the driving force behind modern capitalism.
It has delivered amazing advances in human prosperity to large parts of the world since the advent of the industrial revolution.
Before this unprecedented surge in human prosperity, life was ''nasty, brutish and short'' for the vast majority of humans.
The problem of income inequalities arises when this inequality becomes entrenched and self-perpetuating.
In the United States in the 19th century, there was a popular author called Horatio Alger.
His short morality tales for young readers related stories about poor orphans able to rise to fame and fortune through their sheer grit and determination.
These stories were designed to stress that all people can overcome the disadvantages of their birthright through their own endeavours.
It is not about luck or happenstance, just sheer grit and character.
But statistics suggest overcoming such odds by individual effort alone may be the exception, rather than the rule.
Inequalities are the double-edged sword of capitalism.
In the decades following World War 2, many Western countries sought to reduce excessive inequalities and increase equality of opportunities.
Full employment rather than controlling inflation was the key macro target of governments.
Income tax systems were more progressive.
In many countries tertiary education was largely paid for by the state.
Social welfare systems were developed to provide for the most needy.
Governments often controlled or owned the commanding heights of their economies such as electricity, education and healthcare, public transport and banking .
The post-war decades are now regarded as a golden age of increased prosperity , growth and full employment for most Western economies.
But the exact recipe for this golden era remains highly contentious.
It would be deceptive to look back on this unique period with rose-tinted glasses.
But there are a number of changes since this time that may help explain the current malaise in much of the West.
A key change has been the massive rise in private sector debt levels.
From the 1980s, the deregulation of the financial sector and the aggressive marketing of credit led to a huge build-up in debt levels for households in Western economies.
Much of this debt was used to bid up the prices of existing assets such as shares and housing or to pay for consumer items.
The growth in student debt for tertiary education has also been a factor.
Income inequalities have also spiralled since the 1970s.
This is understandable.
Talents and skills in any society tend to be concentrated.
Wealth tends to create more wealth through payments of interest, rent, dividends as well as capital gains.
The better off usually ensure their offspring have better access to education and other opportunities to succeed.
Inheritances also help.
This is not a morality tale about the evil rich.
This is how societies have worked since the dawn of civilisation.
But there is a major flaw in our economic system.
In recent decades, the need to increase the output or supply of goods and services has dominated economic thinking.
We are now living in an age of oversupply, as evidenced by very low inflation rates.
The issue is not the supply of goods and services but rather demand.
As incomes and wealth concentrate, the broader demand in the economy is skewed.
Those with the funds can spend only so much on goods and services supplied by their fellow citizens.
The rest of their income is often invested in speculative investments, such as shares or property or other non-productive investments.
Income inequalities and high levels of indebtedness have distorted the demand side of economies.
There are few new jobs or incomes created.
Large income inequalities are both a social and economic problem.
Excessive debt levels and income inequalities act as a handbrake on economic growth.
• Peter Lyons teaches economics at St Peters College in Epsom.
