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PKSG Working Paper Series

Working Paper PKWP1305

The role of income inequality in crisis theories and in the subprime crisis

May 2013

Thomas Goda

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.

Keywords: Income inequality, crisis theories, subprime crisis

JEL classification: B00: History of Economic Thought, Methodology, and Heterodox Approaches D30: Distribution: General E25: Aggregate Factor Income Distribution G01: Financial Crises

Download: Working Paper PKWP1305