Capitalism and Income Inequality

We can't get rid of income inequality even if we wanted to. But does capitalism create greater or lower income inequality? Are the proponents of greater income equality on the right track when they try to hamper the market economy?

The policies advocated by the welfare school remove the incentive to saving on the part of private citizens. On the one hand, the measures directed toward a curtailment of big incomes and fortunes seriously reduce or destroy entirely the wealthier people's power to save. On the other hand, the sums which people with moderate incomes previously contributed to capital accumulation are manipulated in such a way as to channel them into the lines of consumption.
~Ludwig von Mises

The rich usually save more out of their income. This leads to greater capital accumulation, greater productivity and higher real wages. Obviously wealth transfer programs impede this process. This on the other hand hurts wage earners, as they now have less capital to work with. Setting the morality of welfare programs aside, I'm quite certain that this process hurts precisely those it's supposed to help.

This also creates all the wrong kinds of incentives. Many are stuck in poverty, because unemployment is subsidized and income taxes penalize working. The psychological effect of progressive taxation creates entire generations of people who know that working your way to the top means higher and higher taxes as you work your way up there.

But hey, maybe these problems are worth it? If capitalism creates income inequality, then maybe we don't want more capitalism?

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.
~Ludwig von Mises

Wealth transfer programs may indeed reduce income inequality, if this inequality is measured in money. But here it gets tricky. We don't want money just to have money(or at least most of the time we don't). We want the goods this money can buy, and this is absolutely critical if we want to understand the inequality capitalism creates.

Most of the land, labor and capital in the world is used for satisfying the needs of the masses. This can be easily seen by simply walking into any supermarket. This results in a disproportionately advantageous price/quality ratio of the goods produced for the common man.

If we go back in time we can easily see what this means. The difference between being poor and rich 1000 years ago could've easily meant the difference between starving to death and not doing so. The rich might've had 100 times more income, but so what? I'd say that life has an infinitely greater amount of "utility" than death(not just 100 times greater).

With capitalism this has been reversed. 200 years ago the transportation the rich could afford was on a different planet compared to the poor. What about now? The poor(in capitalistic countries) have an old car, while the rich might drive a new BMW. But they both have a car and can actually travel. The ultimate end is to get from point A to point B. They can both attain this end, when it used to be that the poor could not. Does a €400 bottle of wine offer 20 times more utility than a €20 bottle? What's the real difference between the internet connections of the rich and the poor nowadays? How about 10 years ago?

Even from a completely utilitarian perspective, there's no way you could argue that the additional enjoyment the rich get from the goods they buy is comparable to how much more income they earn.

If the last few hundred years can tell us anything, it's that capitalism reduces economic inequality in real terms.