The Costs of Inequality

Noah Smith points us to this interview with Peter Thiel. I just wanted to point out Noah’s point #1:

1. Peter Thiel believes that inequality can reduce economic efficiency by causing sudden, devastating collapses in institutions:

PT: We’re now at an extreme comparable to 1913 or 1928; on a worldwide basis we’ve probably surpassed the 1913 highs and are closer to 1789 levels [of inequality].

In the history of the modern world, inequality has only been ended through communist revolution, war or deflationary economic collapse. /PT

If you endogenize the possibility of social collapse, equality of income and wealth becomes a public good (up to a point).

This is a somewhat traditional view of the ills of inequality. That is, if inequality increases too much, you end up with a revolt, either through much higher marginal taxes or with the 1% up against the wall. I think another interesting question is whether or not increased inequality actually leads to lower growth and stagnation because of a lack of purchasing power in the middle class.

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