The ancient Greeks had a word for it – pleonexia – which means an overreaching desire for more than one's share. As Melissa Lane explained in last year's Eco-Republic: Ancient Thinking for a Green Age, this vice was often paired with hubris, a form of arrogance directed especially against the gods and therefore doomed to fail. The Greeks saw tyrants as fundamentally pleonetic in their motivation. As Lane writes: "Power served greed and so to tame power, one must tame greed."

In The Price of Inequality, Joseph E Stiglitz passionately describes how unrestrained power and rampant greed are writing an epitaph for the American dream. The promise of the US as the land of opportunity has been shattered by the modern pleonetic tyrants, who make up the 1%, while sections of the 99% across the globe are beginning to vent their rage. That often inchoate anger, seen in Occupy Wall Street and Spain's los indignados, is given shape, fluency, substance and authority by Stiglitz. He does so not in the name of revolution – although he tells the 1% that their bloody time may yet come – but in order that capitalism be snatched back from free market fundamentalism and put to the service of the many, not the few.

In the 1970s and 80s, "the Chicago boys", from the Chicago school of economics, led by Milton Friedman, developed their anti-regulation, small state, pro-privatisation thesis – and were handed whole countries, aided by the International Monetary Fund (IMF), on which to experiment, among them Thatcher's Britain, Reagan's America, Mexico and Chile. David Harvey's A Brief History of Neoliberalism describes how the democratically elected Salvador Allende was overthrown in Chile and the Chicago boys brought in. Under their influence, nationalisation was reversed, public assets privatised, natural resources opened up to unregulated exploitation (anyone like to buy one of our forests?), the unions and social organisations were torn apart and foreign direct investment and "freer" trade were facilitated. Rather than wealth trickling down, it rapidly found its way to the pinnacle of the pyramid. As Stiglitz explains, these policies were – and are – protected by myths, not least that the highest paid "deserve" their excess of riches.

In 2001, Stiglitz, a former chief economist at the World Bank, and arch critic of the IMF, won the Nobel prize for economics for his theory of "asymmetric information". When some individuals have access to privileged knowledge that others don't, free markets yield bad outcomes for wider society. Stiglitz conducted his work in the 1970s and 80s but asymmetric information perfectly describes the Libor scandal, rigging the interest rate at a cost to the ordinary man and woman in the street. Stiglitz details the profound consequences not just of the current financial meltdown but of the previous decades of neoliberal interventions on the incomes, health and prospects of the 99% and the damage done to the values of fairness, trust and civic responsibility.

In the process, Stiglitz methodically and lyrically (almost joyously) exposes the myths that provide justification for "deficit fetishism" and the rule of austerity. If George Osborne is depressed at the ineffectiveness of Plan A, he should turn to Stiglitz's succinct explanation on page 230 to feel truly miserable. Cutting spending, reducing taxes, shrinking government and increasing deregulation destroys both demand and jobs – and doesn't even benefit the 1%.

For roughly 30 years after the second world war, the 1% had a steady share of the US cake. In the five years to 2007, however, the top 1% seized more than 65% of the gain in US national income. In 2010, their share was 93%. This did not create greater prosperity for all (myth number one). On the contrary, much of this gain was "rent seeking", not creating new wealth but taking it from others; a modern wild west. In the last three decades, the bottom 90% in the US (figures that resonate in the UK) have seen their wages grow by 15%. The 1% have seen their wages increase by 150%. Another myth is that bloated salaries are necessary to retain high achievers. Except, as Stiglitz points out, the rewards are more often for failure. The inequality gap is becoming a chasm. Stiglitz demonstrates how, in the US, those born poor will stay poor yet nearly seven in 10 Americans still believe the ladder of opportunity exists.

Stiglitz is one of a growing band of academics and economists, among them Paul Krugman, Michael J Sandel and Raghuram Rajan, who are trying to inject morality back into capitalism. He argues that we are reaching a level of inequality that is "intolerable". Rent-seekers include top-flight lawyers, monopolists (Stiglitz refers to the illusion of competition: the US has hundreds of banks but the big four share half of the whole sector), financiers and many of those supposed to be regulating the system, but who have been seduced and neutered by lobbyists and their own avarice.

In the "battlefield of ideas", while governments turn citizen against citizen by demonising, for instance, benefit scroungers, what Stiglitz calls corporate welfare goes unchecked. In 2008, insurance company AIG was given $150bn by US taxpayers – more, says Stiglitz, than the total spent on welfare to the poor in the 16 years to 2006. Stiglitz is a powerful advocate for a strong public sector. He argues for full employment, greater investment in roads, technology, education; far more stringent regulation and clear accountability. Culpable bankers, he says, should go straight to jail.

Gross domestic product is an unsatisfactory measure of progress, he believes. Stiglitz wants to see metrics that include the cost of inappropriate use of resources. He illustrates the price of immiseration and unfairness. Management of Firestone tyres demanded much longer hours and a 30% wage cut. The demand created conditions that led to the production of many defective tyres. Defective tyres were related to more than 1,000 deaths and injuries and the recall of Firestone tyres in 2000. Unfairness affects lives, productivity and, ultimately, Stiglitz warns, the security of the 1%.

The Price of Inequality is a powerful plea for the implementation of what Alexis de Tocqueville termed "self-interest properly understood". Stiglitz writes: "Paying attention to everyone else's self-interest – in other words to the common welfare – is in fact a precondition for one's own ultimate wellbeing… it isn't just good for the soul; it's good for business." Unfortunately, that's what those with hubris and pleonexia have never understood – and we are all paying the price. .

Yvonne Roberts is an Observer leader writer and a fellow of the Young Foundation