The Role of Income Inequality in Crisis Theories and in the Subprime Crisis

Abstract

An increasing number of economists argue that income inequality was a root cause behind the subprime crisis of 2007. The aim of this paper is to outline and contrast the theoretical underpinnings of Marxian, Post Keynesian and mainstream crisis theories and to compare their viewpoints regarding the role that inequality plays. The main finding of this paper is that despite important theoretical differences, economists from all three strands provide a similar explanation for the link between inequality and the subprime crisis (even though conventional mainstream crisis theories do not regard inequality as destabilizing factor). This suggests that the rise in income inequality indeed played an important role in the build-up of the crisis. To ensure that a wider audience accepts inequality as a prominent causal factor for the crisis it is however necessary that the negative effects of wealth concentration are also taken into account.

Earnings, productivity and inequality in Indonesia

“…Inequality is also found to correlate positively with current account deficits and household debts (Goda, 2013; Kumhof and Rancière, 2010; United Nations Conference on Trade and Development (UNCTAD), 2012). Both are sources of macroeconomic instability.…”

Global inequality and national inequality: Is there a trade-off?

“…Hence, while globalisation and financialisation allowed restoration of the declining path of the profit rate, their expansion also determined the increase in income inequality (Goda, 2013). To be more precise, restoring the profit rate occurred at the expense of squeezing the wage share (Onaran and Galanis, 2012).…”

How Capitalism Endogenously Creates Rising Income Inequality and Economic Crisis: The Macro Political Economy Model of Early Industrial Relations

“…For clarity of ideas, it is important to note that the IEIR model is a close complement but not member per se of what are traditionally considered underconsumption theories of economic crises (Allgoewer ; Bleaney ; Goda ). This theory strand was, however, also influential in the early New Deal, such as from Hobson and Foster and Catchings (Barber ).…”

“…Given the current‐day importance of the income inequality topic, and plethora of competing and sometimes incommensurate explanations, this paper makes a contribution by going back to the institutional economics/industrial relations (IEIR) literature of the 1920s–1930s, with primary focus on the American team of Commons, Douglas, and Slichter (CDS), and analytically represents their theory of endogenous wage stagnation, rising income inequality, and macroeconomic crisis. Their theory is distinctive because it was the first alternative to Marxist versions, complemented and incorporated business cycle ideas from other early institutionalists like Veblen and Mitchell (Davanzati and Pacella ; Sherman ), and has significant points of overlap but also key differences with modern Post‐Keynesian and Marxist theories (Goda ; Hein ).…”