

(Photo by Mark Davis/Getty Images for Coachella)

There's an old economic saying: a rising tide lifts all boats. Problem is, most people can't afford a boat.

Most people can't afford a lot of stocks, bonds, or real estate, either. But the few who can afford what economists call capital are racing even further ahead of the many who can't. It's what Nobel prize-winning economist Robert Solow calls the "rich-get-richer" principle, and it's how capitalism usually works.

We know this, because French economist Thomas Piketty has assembled hundreds of years worth of data on wealth and income inequality showing it. His monumental, best-selling new book, "Capital in the Twenty-First Century, makes a startlingly simple argument: if the return on capital, r, is greater than the economy's growth rate, g, as it almost always has been, then inequality will tend to increase. That's because wealth grows faster than wages when r>g, and only the rich have much wealth to begin with.

Now, this dynamic won't make inequality increase forever; it will stop once the ratio of capital to income is the same as the ratio of savings to growth. But in the meantime, the top 1 percent will gobble up more and more wealth—and leave it to their kids.

Here's how we got here, and four things we can to do stop it from getting worse.

The decline and fall - and rise - of the rentiers

Periods of low income inequality, Piketty claims, are just a historical blip. Going back to the 1800s, the rate of return has typically been around 4 to 5 percent, and growth has been far less. Capital-income ratios were high then, so this r>g meant that wealth begat dynastic wealth.

But this, like everything else, changed with World War I. The fighting didn't just destroy a generation. It also destroyed capital—buildings, factories, and government bonds paid back in inflated currency—on a mass scale. Rentiers no longer had the income to support their aristocratic lifestyles, so they started spending down their remaining wealth to do so. Not only that, but countries were forced to resort to steep income taxes to finance their war efforts. Now, governments tried to return to economic normalcy in the 1920s, but the Great Depression and then World War II ended that. There was even more capital destruction. Even more confiscatory taxes. And even more regulation.