Economic inequality is high today. It was also high 100 years ago. Fifty years ago, it was much lower, meaning that the high levels of a century ago had declined(and have since risen). How did this decline happen (and how could it be replicated today)? This paper(see link) argues that high inequality caused a reduction in aggregate demand that led to capital producing less output per unit that it did in the past, which led to reduced capital profitability and hidden overvaluation on the stock market--a “stealth bubble”, that when it popped, resulted in the Great Depression.
This phenomenon is called a capitalist crisis. Solution of the crisis required that inequality be reduced, which was not something capitalist elites would readily agree too, since it meant accepting high taxes and other economic policies that favored workers over investors/management. When it finally became clear that this was necessary they acquiesced without fomenting an armed rebellion, as elites in their position had done in past had done in previous episodes of inequality-generated crisis. The paper describes how this happened, and implies that the Democratic party, by forming a tacit alliance with Labor and contributing to the solution, gained a near half-century of political dominance.
http://escholarship.org/uc/item/42p5m46m
