Mainstream economists have a real problem: how are they supposed to make sense of the obscene levels of inequality that are now obvious in the United States and other advanced capitalist nations?
Their first attempt was simply to deny that inequality was an issue.
But that simply won’t work anymore (at least for some mainstream economists, probably still a minority).* So, they moved on to a second strategy: to admit that inequality exists and then to make sense of its connection to the current crises of capitalism.
And that’s where we are right now. What’s interesting is that mainstream economists really can’t imagine there’s a direct connection between growing inequality and the economics of the financial crash of 2007-08 or the continuation of the Second Great Depression.** Instead, all they can handle—whether out of choice or as a result of the limitations of their models is still an open question—is to pass through politics (much in the way Paul Krugman attempted in 2010).
Joseph Stiglitz, on the Left of mainstream economics, argues (in The Price of Inequality and the video below) that growing inequality in the economic sphere leads to and is reinforced by the growing influence of a rich minority in the political sphere.
Then there’s the Right of mainstream economics, represented by Raghuram Rajan. For them, inequality is only a problem insofar as governments attempt to do something about it, for example, by extending credit to those who don’t deserve it and can’t possibly keep up with the payments.
Greater competition and the adoption of new technologies increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting. More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced. So income inequality emerged, not primarily because of policies favoring the rich, but because the liberalized economy favored those equipped to take advantage of it.
The short-sighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory restraint, banks overdosed on risky loans. Thus, while differing on the root causes of inequality (at least in the US), the progressive and alternative narratives agree about its consequences.
In both cases, on both ends of mainstream economics, the only possible connection between inequality and the crises of capitalism passes through the political sphere—either reinforcing (for the Left) or inadvisedly attempting to mitigate the effects of (for the Right) growing levels of economic inequality.
That’s why mainstream economics—then, in denial of the existence of inequality, or now, in failing to understand the economic causes and consequences of inequality—remains a poor guide to the class contradictions of capitalism.
*Many mainstream economists, like James Pethokoukis, continue to deny the relevance of inequality.
**Although the authors of a couple of papers from the International Monetary Fund do attempt to make the connection between inequality and macroeconomic issues such as financial instability, external imbalance, and slower growth. In a more recent paper, Heather Boushey and Adam S. Hersh also attempt to make sense of the economic effects of inequality, but their effort is hampered by focusing almost exclusively on the need for a strong “middle-class.”