Is inequality the cause of capitalist crises?

by Michael Roberts

Is inequality the cause of crises (slumps) under capitalism?  Well, the majority of the left seems to think so.  I have discussed this explanation several times on my blog (

US inequalityIt remains the dominant view not only of left economists of the Keynesian or post-Keynesian variety (too many to mention), but also of Marxists like Richard Wolf or Costas Lapavitsas and even some mainstream Nobel prize winners like Joseph Stiglitz (in his book The price of inequality) or the current head of the Indian central bank, Raghuram Rajan (as in his book, Faultlines).  And there have been a host of books arguing that inequality is the cause of all our problems – The Spirit Level by Kate Pickett and Richard Wilkinson being one that’s very popular.  The varied views on this issue were summed up in a compendium, Income inequality as a cause of the Great Recession (

Rising inequality

But what has really excited the inequality proponents is a new paper by the some IMF economists who purport to show that the sharp rise in inequality of income and wealth in most mature capitalist economies since the 1980s is not only a bad moral thing, it’s bad economics too.  The IMF paper (, authored by Jonathan Ostry, deputy head of the IMF’s research department, and the economists Andrew Berg and Charalambos Tsangarides, found not only that inequality is bad for economic growth but that redistribution of wealth does little to harm it.  Thus it refutes the ‘trickle-down’ theory on growth and inequality propounded by neoclassical apologists for capitalism that a free market would speed up economic growth and thus everybody would gain.  As the rich prospered, their gains would trickle down to the less rich through more jobs, more spending by the rich etc.  The IMF paper concluded: “It would… be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable,”

This is not a new conclusion because the two eminent economists on inequality in capitalist economies (as well as Anthony Atkinson – see my post (,
Emmanuel Saez and Thomas Piketty explained: “countries that [have] made large cuts in top tax rates, such as the United Kingdom or the United States, have not grown significantly faster than countries that did not, such as Germany or Denmark… we have seen decades of increasing income concentration that have brought about mediocre growth since the 1970s.”

Leftist Democrat Robert Reich wrote a book, Aftershock, which also lays the blame for crises at the door of inequality.  He blogs regularly against capitalist excesses and Republican apologia for capitalism adopted the same conclusion as The Spirit Level authors: “The rich do better with a smaller share of a rapidly-growing economy than they do with a large share of an economy that’s barely growing at all…Higher taxes on the wealthy to finance public investments improve future productivity… All of us gain from these investments, including the wealthy. Broadly-shared prosperity isn’t just compatible with a healthy economy that benefits everyone — it’s essential to it.  That isn’t crazy left-wing talk. It’s common sense. And it is shared by the great majority of people.”

The great recession of recent years

And behind this conclusion is a theoretical analysis that the Great Recession was ultimately the result of rising inequality in the US and elsewhere.  The argument goes that the great financial crisis was caused by debt – mostly in the private sector.  As wages were held down in the US, households were forced to borrow more to get mortgages to buy homes or loans to buy cars and maintain their standard of living.  They were encouraged to do so by reckless lending from banks even to ‘sub-prime’ borrowers.  And as we know, eventually the sheer weight of this debt could not be supported by rising home prices or by the chicken legs of average incomes and the whole house of cards eventually came tumbling down.

The credit crunch, the banking collapse and the Great Recession had nothing to do with the classic Marxist explanation of the downward pressure on profitability.  It was down to the rapacious speculative lending of the too-big-to-fail banks – the explanation that Marxist Costas Lapavitsas has expounded in his new book (Profiting without producing) – see my post ( and Tony Norfield’s devastating review of Lapavitsas’ book (

The argument that inequality causes capitalist crises has been developed more theoretically by leading post-Keynesian economist Engelbert Stockhammer from Kingston University, UK in a new paper in the Cambridge Journal of Economics entitled “Rising inequality as a cause of the present crisis” (Stockhammer on inequality).


For those who don’t know, ‘post-Keynesian’ economists are those who reckon that Keynes developed a really radical analysis of capitalism.   They rely on the work of Michel Kalecki, a Marxist economist who developed a Keynesian-style analysis that ignored Marx’s law of value and profitability.  The post-Keynesians look for the cause of crises under capitalism in a lack of demand arising from a squeeze on wages and a lack of investment.

Stockhammer argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense, rising inequality should be regarded as a root cause of the present crisis. Rising inequality creates a downwards pressure on aggregate demand since poorer income groups have high marginal propensities to consume. Higher inequality has led to higher household debt as working-class families have tried to keep up with social consumption norms despite stagnating or falling real wages, while rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups.

For Stockhammer, capitalist economies are either ‘wage-led’ or ‘profit-led’.  A wage-led demand regime is one where an increase in the wage share leads to higher aggregate demand, which will occur if the positive consumption effect is larger than the negative investment effect. A profit-led demand regime is one where an increase the wage share has a negative effect on aggregate demand.  The post-Keynesians reckon that capitalist economies are wage-led.  So when there is a decline in the wage share as there has been since the 1980s, it reduces aggregate demand in a capitalist economy and thus eventually causes a slump.  The banking sector increases the risk of this with its speculative activities

Problems with post-Keynesianism

The problem I have with this post-Keynesian hypothesis is manifold.  First, surely, no one is claiming the simultaneous international slump of 1974-5 was due to a lack of wages or rising debt or banking speculation?  Or that the deep global slump of 1980-2 can be laid at the door of low wages or household debt?  Every Marxist economist reckons that the cause of those slumps can be found in the dramatic decline in the profitability of capital from the heights of the mid-1960s; and even mainstream economists look for explanations in rising oil prices or technological slowdown.  Nobody reckons the cause was low wages or rising inequality.

I suppose Stockhammer would say that in the 1970s, capitalist economies were ‘profit-led’ but now they are ‘wage-led’; so each crisis has a different cause.  As the title of his paper says “inequality as the cause of the present crisis”.  But how did a profit-led capitalist economy become a ‘wage-led’ one?  Yes, wages were held down and profits rose.  But why?  Surely the answer lies is the attempts of the strategists of capital to raise the rate of exploitation as a counteracting factor to the fall in profitability – the classic Marxist explanation.  Rising inequality is really the product of the successful attempt to raise profitability during the 1980s and 1990s by raising the rate of surplus value through unemployment, demolishing labour rights, shackling the trade unions, privatising state assets, ‘freeing’ up product markets, deregulating industry, reducing corporate tax etc – in other words, the neo-liberal agenda.  As Maria Ivanova has pointed out, rising inequalitywas really a side effect of financialisation (CONF_2011_Maria_Ivanova on Marx, Minsky and the GR).

Indeed, the empirical evidence for a causal connection between inequality and crises remains questionable. Michael Bordo and Christopher Meissner from the Bank of International Settlements analysed the data and concluded that inequality does not seem to be the reason for a crisis. Credit booms mostly lead to financial crises, but inequality does not necessarily lead to credit booms.  “Our paper looks for empirical evidence for the recent Kumhof/Rancière hypothesis attributing the US subprime mortgage crisis to rising inequality, redistributive government housing policy and a credit boom. Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms. Narrative evidence on the US experience in the 1920s, and that of other countries, casts further doubt on the role of rising inequality.“

Edward Glaesar also points to research on the US economy that home prices in various parts of the US did not always increase where there was the most income inequality. That calls into question the claim that income inequality was inflating the housing bubble.  And Glaesar refers to Atkinson on this:“Professors Atkinson and Morelli’s international data also suggest little regular connection between inequality and crises. Looking at 25 countries over a century, they find ten cases where crises were preceded by rising inequality and seven where crises were preceded by declining inequality”. Inequality was higher in two of the six cases where a crisis is identified, which is exactly the same proportion as among the 15 cases where no crisis is identified.

As I have mentioned above (and in previous post (, French economist Thomas Piketty is one of the leading experts on the rise in inequality of income and wealth in the major economies.  His magisterial new book, Capital in the 21st century, describes the huge rise in the share of income and wealth held by the top 1%.

But actually, Piketty’s explanation for this does not fit in with the post-Keynesian inequality theory.  Piketty shows that the main reason for the huge increase in the incomes and wealth of the top 1% is not higher incomes from wages or work as such, but huge increases in capital income, namely rising dividends from shares, capital gains from buying and selling shares, rents from property and capital gains from buying and selling property and interest from loans and bond holdings etc.  In other words, rising inequality is the result of rising exploitation of labour’s creation of value that has been appropriated by the top bankers, corporate chief executives and the shareholders of capital.  Rising inequality is a product of capitalist exploitation.

In his book, Piketty promotes a bastardised neoclassical version of Marx’s profitability law by suggesting that this rise in capital income has diminishing returns and will eventually push capitalism into stagnation.  That’s because the owners of capital will consume more and more of a declining rate of profit growth so that investment and technology will stagnate.  So capitalism will have to reduce inequality to survive.  This ought to appeal to the inequality proponents because it suggests that reducing inequality is in the interests of capitalism itself.  Blogger Steve Roth concludes that Keynes had found the answer to the pessimism of Piketty.  Keynes’s great contribution was to ‘save capitalism from the capitalists’ by explaining that with some judicious government policy and more equality of incomes, capitalism would perform better and all would be well.

The reformist critics of Piketty make the point that “a majority, of corporate profit hinges on rules and regulations that could in principle be altered”.  After all “progressive change advanced by getting some segment of capitalists to side with progressives against retrograde sectors. In the current context this likely means getting large segments of the business community to beat up on financial capital”.   Dean Baker, who is a regular speaker at trade union seminars in the UK and the US and is seen as a leading exponent of the alternative to neoliberal policies of austerity by left leaders, reckons that Piketty gets this wrong in the same way as Marx did (points out where Marx got it wrong).  Baker says: “By changing our institutions, laws, and regulations — the rules of the capitalist game — we can head off that seemingly inevitable downward spiral.”

There are so many objections to this line of thinking that it is difficult to know where to start.  But let’s go back to the IMF paper.  It argued that inequality could be damaging the capitalist economy and moreover more equality would not worsen things.  But the paper’s evidence did not show that more equality under capitalism would speed up economic growth or even make the average household better off.  You see, redistributing the income captured by the owners of capital from the sellers of labour power through more taxes and/or higher benefit etc may make little difference to improving investment, getting more jobs or developing new technology.

And would it in any way start to deal with the impending disaster that is global warming as capitalism accumulates rapaciously without any regard for the planet’s resources and viability?  Programmes of redistribution do little for this.  And what if an economy is made more equal?  Would it stop future slumps under capitalism or future Great Recessions.  More equal economies in the past did not avoid these slumps.

Then there is the political issue:  what on earth would make the top 1% and the very rich owners of capital agree to reduce their gains in order to get a more equal and successful economy? Stockhammer says that “a broad consensus exists that financial reform is necessary to avert similar crises in the future (even if little has yet changed in the regulation of financial markets). The analysis here highlights that income distribution will have to be a central consideration in policies dealing with domestic and international macroeconomic stabilisation. The avoidance of crises similar to the recent one and the generation of stable growth regimes will involve simultaneous consideration of income and wealth distribution, financial regulation and aggregate demand” But what political chance is there of that?

Reversing inequality

As arch-Keynesian economist Simon Wren-Lewis recognised on his blog: “reversing inequality directly threatens the interests of most of those who wield political influence, so it is much less clear how you overcome this political hurdle to reverse the growth in inequality”.
(  For example, what chance is there, short of revolution, that Greek capitalists, desperate to raise profitability and reduce the costs of welfare and wages, would see the light and ‘save themselves’ by reducing, rather than increasing inequality?  More inequality is a rational response to capitalist crisis.

But it is not just the political obstacle that makes the inequality theory the wrong way to approach a critique of capitalism.  It is not a coherent explanation.  It appears to apply to just the current crisis and not to previous ones.  It appears to apply to just some capitalist economies, like the US and the UK, and not to continental Europe or Japan, where inequality is less but the global crisis is worse.

And if Piketty (and Marx) is right, then capitalism is stuck with a low and/or falling rate of return on capital over time, so crises under capitalism will reoccur even if inequality is reduced.  So maybe the inequality theorists need to look elsewhere for the cause of capitalist crises – and look at the ownership of production, not the distribution of the value created.

I ask the question to the proponents of inequality: do they think that redistributing income or wealth is sufficient to put capitalism on the road to growth without catastrophic slumps?  Or do they agree that only replacing the capitalist mode of production through the expropriation of the owners of capital and the establishment of a planned economy based on ownership in common can do the trick?

I think I know their answers.


Comments are closed.