The Economic Pitfall of Rising Inequality

The Machine is Grinding

Inequality is not a new phenomenon—it’s as old as human civilization itself. But in advanced Western economies today, it’s reaching a pitch that threatens the very machinery of prosperity we’ve spent centuries building. I enjoy studying economic systems, from the debt cycles that topple empires to the productivity curves that lift nations, and one truth stands out: when the gap between the haves and have-nots widens beyond a certain point, the system begins to buckle. This isn’t just about numbers—it’s about people, their motivations, and the stories they tell themselves about fairness and meaning. Rising inequality isn’t merely an economic pitfall; it’s a psychological and moral one, and unless we confront it with both clarity and courage, we risk a reckoning that could unravel the social order.

Let’s explore this dynamic—how it works, why it’s happening now, and what we might do about it. Like any complex problem, it demands we look at the principles governing the system and the individuals within it. Let’s start with the mechanics.

How Inequality Grows

Imagine the economy as a machine—a network of transactions, incentives, and feedback loops. At its core, it runs and advances on productivity: people work, create value, and exchange it. In an ideal world, this machine distributes rewards roughly in proportion to contribution. But the real world isn’t ideal—it’s messy, shaped by, opportunity, power, corruption, luck, and history.

Since the 1980s, advanced Western economies—think the United States, the UK, and much of Europe—have seen a stark divergence in wealth and income. The top 1% now hold a disproportionate share of the pie. In the U.S., for instance, the wealthiest 1% own nearly 40% of total wealth, up from 25% in 1990. Meanwhile, the bottom 50% have seen their share shrink to a sliver—barely 2%. This isn’t random; it’s the result of specific forces.

First, there’s technology. Automation and digitization have turbocharged productivity, but the gains accrue to those who control the capital—software moguls, corporate titans, and investors—not the workers displaced by machines. Second, globalization has amplified this. Capital flows freely across borders, seeking the highest returns, while labor competes in a race to the bottom. Third, policy has tilted the playing field—tax cuts for the wealthy, deregulation of finance, and a weakening of labor protections have concentrated rewards at the top.

This is the machine at work. It’s not a conspiracy; it’s a pattern. Historically, periods of technological disruption—like the Industrial Revolution—always spike inequality before stabilizing. But here’s the kicker: we’re not stabilizing. The gap keeps widening, and the data shows it’s accelerating. Why? Because the machine is now running on a feedback loop: wealth begets power, power shapes policy, and policy entrenches wealth.

The Psychological Fallout: Resentment and Meaning

Now, let’s zoom in from the system to the individual. Humans aren’t just economic actors; we’re creatures of narrative and emotion. When the machine churns out winners and losers at an uneven clip, it doesn’t just shift numbers—it shifts souls.

Jordan Peterson often speaks of the necessity of competence and responsibility. You want to thrive? Get your house in order, stand up straight, and face the chaos of existence head-on. Fair enough—there’s truth there. But what happens when the game feels rigged? When no amount of grit can bridge the gap between a warehouse worker’s wage and a tech billionaire’s windfall? The bottom half doesn’t just fall behind economically—they lose faith. And that’s where resentment festers.

Resentment is a psychological poison. It’s the shadow side of envy, and it grows in the dark corners of a society that promises opportunity but delivers stagnation for most. Look at the data: in the U.S., real wages for the median worker have barely budged since the 1970s, while productivity has soared 70%. The story they’re told—“work hard, and you’ll make it”—starts to ring hollow. And when people stop believing the story, they stop playing the game. They drop out, they rage, or they turn to demagogues who promise to burn it all down.

This isn’t abstract. You see it in the opioid crisis, in the rising rates of “deaths of despair,” in the populist surges shaking Western democracies. The machine isn’t just breaking economically—it’s breaking people. And here’s the paradox: the top 1% aren’t happier either. Studies show that beyond a certain point, more wealth doesn’t buy more meaning. They’re insulated from the chaos below, but they’re not immune to the existential drift that comes with disconnection from the broader human struggle.

Cycles of Boom and Bust

Let’s step back and look at history, because principles repeat. Ray Dalio’s work on economic cycles teaches us that inequality doesn’t rise in a vacuum—it’s part of a larger arc. Go back to the Gilded Age in the late 19th century: industrialization minted fortunes for the Rockefellers and Carnegies while workers toiled in squalor. By the 1920s, the top 1% held nearly 25% of U.S. wealth. What followed? The Great Depression—a reset born of excess.

Or take the Roman Republic. As land concentrated in the hands of patricians, the plebeians were squeezed out. The Gracchi brothers tried reform; they were murdered. Inequality festered, unrest grew, and eventually, the whole system collapsed into empire. The lesson? When the gap gets too wide, societies don’t bend—they break.

We’re not there yet, but the parallels are eerie. Debt levels are sky-high—global debt hit $305 trillion in 2024—echoing the leverage of the 1920s. Central banks have propped up markets with cheap money, inflating asset prices (stocks, real estate) that benefit the wealthy while leaving wages flat. The bottom 50% don’t own stocks; they rent, they borrow, they scrape by. This isn’t sustainable. History says the pendulum swings back—sometimes through reform, sometimes through revolution.

Moral Responsibility and Reciprocity

So where does responsibility fit in? Peterson’s right: individuals must strive to be competent, to wrestle with their own chaos before pointing fingers. But there’s a flip side—those at the top aren’t islands. Wealth isn’t just a reward; it’s a burden. If you’ve won the game, you don’t get to walk away and say, “I earned it, tough luck.” That’s not how functional societies work.

Reciprocity is a principle etched into human nature. You see it in every tribe, every religion, every stable civilization: those who have more owe something to the collective. Not out of guilt, but out of self-interest rightly understood. When the bottom half feels abandoned, they don’t just sit quietly—they lash out. The French Revolution wasn’t a picnic for the aristocrats.

The wealthy—let’s call them the “successful”—need to ask: what’s my role in keeping this machine humming? It’s not about handouts; it’s about investment. Education, infrastructure, opportunity—these aren’t charity; they’re the grease that keeps the system from seizing up. And the rest of us? We’ve got to reject victimhood. Resentment won’t pay the bills. Competence will. But competence needs a fair shot, and that’s where the system’s failing.

The Pitfall: Where This Leads

If we do nothing, here’s the trajectory. Inequality keeps climbing until the debt bubble pops—maybe a market crash, maybe a currency crisis. The bottom half, already stretched thin, get crushed. The top half bunker down, but the social fabric frays. Trust evaporates. Institutions—governments, banks, corporations—lose legitimacy. You get polarization, populism, maybe worse. Look at January 6th, 2021, in the U.S.—that wasn’t just about an election; it was a symptom of a deeper rot.

Dalio’s models predict this. When income inequality hits a certain threshold—say, a Gini coefficient above 0.45—and debt exceeds 100% of GDP, the odds of instability spike. The U.S. is already there: Gini at 0.48, debt-to-GDP at 130%. Europe’s not far behind. The machine’s warning lights are flashing.

My Principles for Repair

So what do we do? First, understand the principles. This isn’t about ideology—capitalism vs. socialism—it’s about what works.

1. Fix the Incentives
   Tax wealth, not just income. Capital gains and inheritance taxes hit the root of dynastic concentration. Use the revenue to fund universal education and healthcare—not as welfare, but as investments in human capital. We need to focus on equal opportunity not equal outcomes. The data’s clear: countries with higher social mobility (like Denmark) have lower inequality and stronger economies.

2. Unleash Productivity
   The bottom 50% aren’t lazy—they’re underutilized, under supported, lacking infrastructure and often incentive. Break up monopolies that stifle competition and hoard profits. Small businesses, not megacorporations, are the backbone of a resilient economy.

3. Restore the Narrative
   People need a story that makes sense. Leaders—CEOs, politicians, influencers—must articulate a vision of shared prosperity, not winner-take-all. It’s not about equality of outcome; it’s about equality of opportunity. Peterson’s right: meaning comes from struggle, but the struggle has to feel winnable.

4. Personal Responsibility
   For the individual, it’s simple but hard: don’t wait for the system to save you. Learn a skill, build a network, take risks. The machine’s broken, but it’s not dead. There’s still room to climb if you’re willing to fight for it.

5. Collective Duty
   For the successful, it’s time to step up. Mentor, invest, advocate. The system that enriched you won’t survive if it leaves half the population behind. That’s not altruism—that’s survival.

Conclusion: The Choice Ahead

Rising inequality isn’t a glitch; it’s a signal. The machine’s out of balance, and the human spirit’s taking the hit. We’re at a crossroads: recalibrate the system with clear-eyed principles, or let it run until it breaks. History indicates the latter ends badly. There is a mountain of evidence to suggest says it’s tearing us apart already.

As a society and particularly our political leaders need to study the historical patterns and act decisively. Personally we need to all shoulder the burden of rising inequality and in our own way rich or struggling find meaning in the fight.
The inequality pitfall’s are real, but they not inevitable. Society built this economy—and society can fix it. The question is whether we’ve got the guts and the wisdom to do it before the gears grind to a halt.
The Genie is going to be hard to put back in the bottle…