The role of income inequality in crisis theories and its contribution to the financial crisis

What is it about?

It is widely accepted that inequality has increased sharply recently in developed countries, but no consensus exists so far about the importance of inequality in the financial crisis of 2007-2009. The aim of this article 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 income inequality played in the crisis. The results of this review suggest that, despite important differences in their theoretical concepts, several economists of these three strands offer a similar explanation on why income inequality was an important contributing factor to the financial crisis.

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Why is it important?

Several authors have suggested that the increase in income inequality was an important contributing factor to the recent financial crisis that began in the market for subprime derivatives. However, this has remained a minority view to date. This comparative review aims outlines the main underpinnings of some important crisis theories, and establishes that economic inequality not only can have adverse social impacts, but also can foster economic instability.