November 30, 2020 

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KEYNESIAN EQUILIBRIUM: The state of the macroeconomy in which aggregate expenditures are equal to aggregate output. This is illustrated using the income-expenditure model, or Keynesian cross, as the intersection of the aggregate expenditures line and the 45-degree line. The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving-investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).

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The third of seven basic rules of the economy, stating that resources, income, and wealth are not equally distributed. Some people have more resources, income, and wealth and some people have less. Such inequality is due to natural abilities, acquired talents, market control, political power, and sheer luck.
This rule is based on the fundamental observation that variation exists among people, places, and things. The old adage that "no two snowflakes are alike" also applies to workers, material inputs, bank accounts, consumer preferences, personalities, lifestyles, genetic structures, parents, residential locations, and everything else that makes up the economy and human existence. Nothing is the same and everything is different. This might not be fair, but it is reality.

Causes of Inequality

The primary source of an unequal distribution of income and wealth is ownership and control of resources. Those who own and control more productive resources can use them to generate more income and accumulate more wealth.

A look at the age-old distinction between nature and nurture provides a little insight.

  • On the nature side, some people are born with more talents, abilities, and intelligence that others, which means that they have greater ownership and control of income-generating and wealth-producing resources.

    Harold "Hair Doo" Dueterman, for example is a naturally talented athlete, which he has parlayed into a sizeable annual salary playing for the Shady Valley Primadonnas baseball team. In like manner, George Grumpinkston was born with an innate intelligence and easy-going manner that made it easy from him to learn the complexities of economics and instruct knowledge-hungry college students as a modestly paid Professor at the Ambling Institute of Technology. J. D. Goodluck had the good fortune of residing on a tract of land with vast amounts of petroleum reserves that led to the formation of the Goodluck International Oil Company, which then led to oodles of wealth.

  • On the nurture side, some people work hard to develop skills, acquire education, and uncover opportunities that then lead to ownership and control of income-generating and wealth-producing resources.

    For example, Harold "Hair Doo" Dueterman spent hours each day as a youth practicing the skills needed to perfect his baseball talents. George Grumpinkston spent years in college studying book after book to master the fine art of economic thinking. J. D. Goodluck spent long days and even longer nights building his fledgling Goodluck Oil Company into a global conglomerate.

Consequences of Inequality

The unequal distribution of resources, income, and wealth has both pluses and minuses. First, consider the minuses.

  • One minus of inequality is that those with less income and wealth also have fewer opportunities. If left unchecked, inequality can be self-perpetuating. Those with more ownership and control over resources can use this ownership and control to gain even greater ownership and control.

    Consider the alternative plights of Alton Abernathy and Winston Smythe Kennsington III. Alton Abernathy grew up in a low-income family. He dropped out of high school to help support his family and never found the time or means to attend college. He spent the rest of his adult life working in the HyFy Electronics factory attaching needle arms to record players. He remained close to the poverty level much of his life.

    Winston Smythe Kennsington III, in contrast, grew up as part of the wealthiest family in Shady Valley. After graduating from a prestigious private high school, he attended a prestigious university, earned an MBA, trained with the best business minds, and used his family connections to raise the funds to start his own business. He eventually gained controlling interest in HyFy Electronics, becoming President and CEO. He lived his entire life lapping up luxury. Winston had many opportunities. Alton had few.

  • Another minus is that those at the bottom of the income distribution do not like being there. And if they are really intense about not liking it, they are inclined to revolt, to rebel, to change the current social and economic system, and to forcibly change the income distribution. The French Revolution in the late 1700s is one such rebellion that comes to mind. Most countries have experienced some sort of comparable protestation by those at the bottom.

But there are also pluses to be had with inequality.

  • One prime plus is that inequality provides incentives to excel. If no one is assured of anything more or less than the average regardless of performance, then there is no incentive to be above average. This would assure a stagnate economy filled with mediocre drones.

    Consider if you will Waldo's TexMex Taco World. Waldo has two employees who can help illustrate this point--Edgar Millbottom and Alicia Hyfield. Alicia is conscientious and hardworking--clearly Waldo's best employee. Edgar is lazy and worthless--without question Waldo's worst employee. What happens if Waldo pays both employees the same wage and each year gives both the same raise, if any? Assured of no extra reward, Alicia has no reason to put forth extra effort. Likewise Edgar has no incentive to improve his performance. Each gravitates toward mediocrity and Waldo's business suffers.

    But what if Waldo pays employees based on performance? Alicia receives a higher wage than Edgar. With the expectations of greater reward, Alicia has the incentive to work hard and be more productive. If he is not happy being the lowest paid employee, Edgar might decide that he can also work harder. The end result is that each is more productive and Waldo's business improves.

  • A second plus is that inequality goes hand-in-hand with specialization. Differences in skills, abilities, talents, education, training, and intelligence make some folks better at producing some goods, which improves the overall quality of this production. Rather than having three average people performing brain surgery, carpentry, and music, inequality enables production by people trained or talented in each--much to the betterment of everyone.

    Dr. Dowrimple T. Bedside is a good carpenter, but he is an excellent surgeon. Becky Carpenter took a biology course in high school and knows a little about the human anatomy, but she is much better at building outdoor furniture. Most people are likely prefer that Dr. Bedside perform surgery and that Becky Carpenter build a picnic table, and are willing to pay accordingly. The reverse is probably not as satisfying, and the payments are less. The higher doctoring income is bound to attract Dowrimple T. Bedside into surgery, where he is most productive. Moreover, Becky is most likely to earn more income as a great carpenter than as a horrific doctor.


Recommended Citation:

THIRD RULE OF INEQUALITY, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2020. [Accessed: November 30, 2020].

Check Out These Related Terms...

     | seven economic rules | first rule of scarcity | second rule of subjectivity | fourth rule of competition | fifth rule of imperfection | sixth rule of ignorance | seventh rule of complexity |

Or For A Little Background...

     | equity | three questions of allocation | distribution standards |

And For Further Study...

     | economic goals | economic analysis | economic system | incentive | political views | four estates |

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