IT'S a rare economics tome that makes the New York Times bestsellers list, but Thomas Piketty’s “Capital in the Twenty-FirstCentury” has done it, keeping inequality at the forefront of the political discourse. Yet the book raises key questions, such as just which measures of inequality we should be concerned with. Economists generally think of three similar, but distinct, metrics of economic disparity: inequality of income, consumption and wealth. In general wealth is the most unequally distributed of the three, consumption the least. In America, for example, the Gini coefficients (a measure of inequality in which 1 represents maximum inequality and 0 a perfectly egalitarian society) are 0.78 for wealth and 0.63 for income, but only 0.40 for consumption. Common to all measures, however, is the upward trend over the past 30 years.

Income inequality is the most commonly cited measure, primarily because the data on it is the most comprehensive. However, for the purpose of measuring how inequality affects a community it is also probably the least interesting yardstick of the three.

Consumption inequality, though harder to measure, provides a better proxy of social welfare. This is because people’s living standards depend on the amount of goods and services they consume, rather than the number of dollars in their wage packet. Consumption is also thought to have diminishing marginal utility, i.e. a poorer person will value an additional unit of consumption more than his richer cousin. Thus spreading consumption equally will maximise aggregate welfare. Consumption inequality should in theory track income fairly closely, and while the evidence is not clear cut, recent research suggests that the two have risen in tandem over the past 30 years.

Wealth is also an important metric since it can be inherited, unlike income. When wealth inequality increases, the lottery of birth becomes an increasingly important determinant of living standards. Consequently, a society which wants to ensure an equal level of opportunity, in which outcomes are not closely linked to surnames, will endeavour to keep wealth inequality at tolerably low levels.

The relationship between wealth and income inequality however is somewhat murky. While the two measures are positively linked for several countries, such as America (where inequality is high) and South Korea (where it’s low), for other countries the two measures diverge. For example, Switzerland and Denmark have the highest levels of wealth inequality in the OECD, but have relatively low levels of income inequality. In comparison, Japan and Italy have a high disparity amongst incomes, but moderate levels of wealth inequality.

Within countries however, all three measures of inequality have a positive correlation with each other. Wealth inequality begets income inequality, which in turn begets consumption inequality. So why should we care about which yardstick we use? The yardstick matters when deciding how policy should best respond. Consider, for example, the progressive wealth tax that Mr Piketty promotes in his book. Taxing large family fortunes would surely decrease wealth inequality. However, its impact onconsumption inequality is far less clear. While the tax would reduce wealthy households’ income, it would also increase their incentive to consume to avoid the burden of the tax. Thus it is possible the tax may actually increase consumption inequality, at least in the short run. Conversely, a progressive consumption tax, which is designed to reduce the level of consumption inequality, will exacerbate wealth inequality.

These policies will have very different, perhaps even diametrically opposite, effects on the two measures on inequality. Thus the way we measure inequality, and the choice as to which we wish to minimise, will have a critical impact on the optimal policy response. The intricacies of how we best measure inequality might not be quite as sexy as the latest NYT bestseller, but they can be every bit as important to how we confront the trend of rising inequality.