What If Piketty Is Right? Real Economic Costs of Rising Income Inequality

Abstract

ABSTRACTThomas Piketty's analysis of income and wealth distribution, Capital in the Twenty-First Century, argues that wealth has become increasingly concentrated in the hands of the most affluent, while lower and middle class real incomes have stagnated; he warns that this trend could have “potentially terrifying” results, possibly even violent revolution. This article presents evidence that growing inequality weakens the entire economy by eroding the purchasing power of the vast majority of the population and the education of the labor force, while increasing its vulnerability to future collapses of the financial markets. It agrees with Piketty's concern that the capitalist market system, driven by Adam Smith's classic reliance on the pursuit of individual self-interest, lacks mechanisms to correct these distortions, which must be addressed by new policy initiatives.