Income Inequality, Crisis, and the State: Recovering the Lost Political Economy Model in Early Industrial Relations

Many of the world’s economies are experiencing large increases in income and wealth inequality. They also recently went through a financial crisis and near-depression and in the last half-decade have struggled with anemic growth. Is there a connection between rising income inequality and stagnating growth and crisis? And, if the answer is yes, does industrial relations have relevance to diagnosing and resolving the problem?

This paper demonstrates an affirmative answer to both questions and, at the same time, provides a substantially revisionist perspective on the early 20^th century origins of the industrial relations (IR) field. The original goal of the IR founders, it is documented, was to solve capitalism’s growing Labor Problem which they diagnosed as coming foremost from the system’s persistent large scale unemployment, disruptive boom/bust cycles, and inherent trend toward income and wealth inequality. Early IR founders, such as Commons and the Webbs, concluded that a stable/full employment economy is the #1 step for improved employer-employee relations. After World War I, the Webbs turned to socialism but another Anglo-American group, including Hobson, Beveridge, Slichter, Douglas, and Commons, wrote books and articles – now seldom cited and mostly long forgotten – that develop an institutional/IR political economy model that connects the trend toward growing distributional inequality in capitalism to endogenously generated bouts of macro crisis, such as the Great Depression of the 1930s and Financial Crisis of 2007-2010.  

The core of the paper is a prose and diagrammatic reconstruction of this long-lost IR macro crisis model. The core propositions are (1) the socio-economic structure of capitalism endogenously leads to widening distributional inequality, stagnating growth in lower-middle class wages and family incomes with consequent long-run weakening of consumer spending and total aggregate demand, (2) the trend of widening income inequality also promotes greater savings and profits in monopolistic sectors which leads to a boom in capital investment and financial market values and brisk expansion of production capacity and aggregate supply, and (3) the combination of stagnating aggregate demand and expanding aggregate supply eventually leads to over-production/under-consumption which begins an ordinary recession but, with enough cumulated demand/supply imbalance, spirals into crisis through a collapse of demand brought on by wage/price deflation, debt deflation, and collapse of confidence.

Since the spiral into crisis originates in the structural core of capitalism – in particular, unequal bargaining power between labor and capital both in the external socio-political system and internal wage labor system, the only long-run way out is fundamental institutional restructuring, such as Roosevelt attempted in the early New Deal, to restore equality of bargaining power, redistribute income and wealth from top to lower/middle in order to maintain a demand/supply balance, and open up the social and political power structures to greater democratic participation.

The paper emphasizes that inequality, at last beyond some reasonable upper bound, has both deleterious economic and moral consequences for societies.