Inequality, instability, and the dynamics of Kuznets waves in core capitalist societies

This paper develops a historical hypothesis on the dynamics of income inequality in core capitalist societies, expanding Branko Milanovic’s Kuznets Waves framework. While Milanovic argued that inequality follows long-term cyclical patterns driven by technological revolutions and their political consequences, this study extends his theory by emphasizing the link between inequality and systemic instability at both extremes—when inequality is either too high or too low. It contends that capitalism becomes unstable not only when excessive inequality erodes political legitimacy and financial balance, but also when very low inequality undermines profitability and capital accumulation. In both cases, the resulting instability precipitates crises that compel institutional transformation. Reforms reinforcing the status quo tend to fail, as inequality cannot rise or fall indefinitely; only structural change can restore stability and initiate a new cycle. Through a historical examination of major turning points—from the Industrial Revolution and the Great Depression to postwar reconstruction and the neoliberal turn—the paper illustrates how inequality trajectories emerge from critical junctures of crisis and reform. It concludes that the current phase of high inequality may be nearing its upper limit, potentially heralding another institutional realignment—though not necessarily one of greater equality or stability.