Inequality in the twenty-first century – in need of a new theory?

This chapter provides the existing theories of inequality in order to answer the following questions. Are current theories capable of reproducing the trends in inequality experienced in the twenty-first century? How can the social phenomenon of inequality be adequately modelled in a formal manner? Is economics in need of a new theory of inequality? The chapter describes how the transformation of financial sector operation has been associated with growing inequality in high-income countries since the 1980s by shaping different balance sheet compositions of households across the distribution. It discusses the existing theoretical explanations explicitly linking finance and inequality, focusing on the theory of Piketty as well as the Post Keynesian functional distribution models. The chapter concludes with proposing an updated theory of inequality, postulating endogenous examination of household balance sheet decisions within the macroeconomic boundaries generated by financial sector transformation.