The Physics and Ethics of Inequality
In theory, theory and practice are the same. In practice, they aren’t.
—Attributed to Yogi Berra
In the late 1990s, standard measures of income inequality in the United States—and especially of the income shares held by the very top echelon1— rose to levels not seen since 1929. It is not strange that this should give rise (and not for the first time) to the suspicion that there might be a link, under capitalism, between radical inequality and financial crisis.
The link, of course, runs through debt. For those with a little money, it is said, the spur of invidious comparison produces a want for more, and what cannot be earned must be borrowed. For those with no money to spare, made numerous by inequality and faced with exigent needs, there is also the ancient remedy of a loan. The urges and the needs, for bad and for good, are abetted by the aggressive desire of those with money to lend to those with less. They produce a pattern of consumption that for a time appears broadly egalitarian; the rich and the poor alike own televisions and drive automobiles, and until recently in America members of both groups even owned their homes. But the terms are rarely favorable; indeed, the whole profit in making loans to the needy lies in getting a return up front. There will come a day, for many of them, when the promise to pay in full cannot be kept.
The stock boom of the 1920s was marked by the advent of the small investor. Then the day came, in late October 1929, when margin calls wiped them out, precipitating a run on the banks, from which followed industrial collapse and the Great Depression. The housing boom of the 2000s was marked by a run of aggressively fraudulent lending against houses, often cash-out refinancings to the