Does Entrepreneurship Lead to Income Inequality as well as Higher Economic Growth?

Theoretical Perspectives on Entrepreneurship, Income Inequality and Economic Growth

It is a known fact that Entrepreneurs garner the Lion’s share of the profits that their firms and ventures as well as start-ups earn. Indeed, this is something that both Marxists and Capitalists acknowledge.

While Marx lamented that Capitalism leads to more income equality since the owners of the means of production and the capitalists who put in the capital take away the maximum share of the profits, the Capitalists celebrate this by pointing out that since the Entrepreneurs take risks as well as provide the seed capital, they are entitled and have a right to take the majority of the profits.

Moreover, while Marx took this as a factor on which workers should agitate and capture the means of production leading to collective ownership that is just and egalitarian, the capitalists rejoice that this is the sign of a healthy economy since entrepreneurs contribute to higher economic growth by spurring innovation and catalysing job creation in the process ensuring that the economy grows.

Therefore, despite the disagreement over who should get what, classical economic theorists (no matter their ideological orientation) seem to accept that Entrepreneurship is necessary.

The Resurgence of Marxist Ideas and What Capitalists say in Defence

The reason why we are debating this concept and issue is that in recent years, there has been a renewed debate over income inequality and more important, the wage differential in free market economies.

To explain, income inequality over the years has increased leading to widespread social strife threatening the very existence of the political economy and also raising fears over whether the social fabric would be ruptured and the social contract broken.

In addition, the difference in wages between the lower most employees and the senior executives has widened so much that it is causing dissatisfaction and outright rage among both workers and professionals worldwide.

These issues have prompted many Entrepreneurs to weigh in and the Indian IT (Information Technology) icon and a celebrated Entrepreneur, NR Narayana Murthy, to call for a wage differential no more than 10-15 times so that the wage gap is shortened.

However, it must also be noted that NRN had previously justified the system where Entrepreneurs garner a higher share of the profits by pointing that they take risks, put in the capital, and use their brilliance and hard work to contribute to society and therefore, are entitled.

Moreover, Entrepreneurs lose big when their firms fail and hence, it is only natural that they must gain big when their firms succeed.

Economic Growth, Income Inequality and the Paradox of Global Prosperity

In recent months, this debate has received more attention due to the publication of many works which point to how Income Inequality is a sign of a healthy and growing economy as only when there is growth, there is the wage and income differential.

However, there are others who point to the Paradox of Global Prosperity wherein the Rich are Getting Richer and the Poor are Getting Poorer mainly because of the skewed distribution of the gains from economic growth.

Indeed, notable among those who are calling for Income and Wealth Redistribution are Neo Marxists such as the French Economist and Author, Thomas Piketty, who have done considerable research in this field.

Moreover, as is evident from the phenomenon of Booming Equity Markets and Falling Incomes of the middle and bottom layers, it is clear that the proponents of the idea that Entrepreneurs are entitled to higher profits are suddenly at a loss for words.

Of course, they are not retreating and instead, reel out statistics about how Global Poverty has been reduced mainly due to higher economic growth that ultimately trickles down to the bottom.

Does the Rising Tide Lift All Boats and Whether the Wealth Trickles Down?

The cliché that The Rising Tide Lifts All Boats is the apt metaphor that many use to justify how higher economic growth leads to gains for all.

On the other hand, there are those who question this premise and the logic and the theory of Trickle Down Economics and point to how the founders of start-ups and existing Tech Billionaires have seen exponential increases in their fortunes whereas the ones at the middle are being squeezed and the ones further down are being excluded from the Party and the Spoils of Economic Growth.

However, it is also a fact that the economic boom of the last several decades has helped many and more so, the poor in Developing and Third World countries, with China and India being good examples.

Indeed, this portal on which you are reading this article is a perfect example of how Entrepreneurs with Brilliant Ideas and Dedicated Hard work can move up the Income and Value Chain and be beneficiaries of globalisation and higher economic growth.

Of course, for every one success there are countless failures and therefore, our argument is that there must be efforts towards aligning the skewed Risk Reward Ratios and to work towards a more just Minimum Wages for those at the Bottom.

The Case for Compassionate Capitalism and Giving Back

Last, Entrepreneurs need to be celebrated for their achievements and at the same time, they must not kick the Ladder that enabled them to reach the top.

In other words, we believe that the successful among those must give back and have a sense of responsibility towards those aspiring to become like them.

To conclude, we must work towards higher economic growth and at the same time, do it in a compassionate and conscientious manner so that all have reasonable chances and fair shots at success.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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