One thing no reader can complain about, Piketty’s empirical work is superb. The effort he puts into disaggregating the data goes a long way in helping us to explain the contingent causes of income inequality. In Capital, he provides data on the composition of the top decile’s income. Here is the data for France (2005) and the U.S. (2007),

One thing these graphs show is when income from capital becomes more important than income from labor. (Mixed income is analogous to a business, where it’s difficult to distinguish between the marginal products of the owner’s labor and her capital.) You can’t see it here, because I am not uploading the same graphs depicting data for the interwar years, but the intersection of the two curves occurs much later today than it did 80 years ago. Piketty distinguishes between two types of societies with extreme inequality: “hyperpatrimonial” and “hypermeritocratic.” Inequality today is as much due to inequalities in the distribution of wages as it is from inequities in the distribution (and return on) capital.

These graphs also show that income from labor becomes comparatively less important as the person becomes wealthier, on average. Inversely, income from capital grows in importance. On average, the lower half of the upper decile accrue ~5 percent of their income from capital and 90 percent stems from labor. The top .01 percent, on the other hand, earn a little under 35 percent of their income from capital, and less than 40 percent from their labor. This has a lot to do with the fact that top incomes own a very large chunk of capital, but also results from differences in the types of capital owned by various agents. 99 percent of the top decile earn much of their capital income from real estate; the top centile, on the other hand, earns large returns on the large stocks of financial assets they own, such as equity and bonds.

Justified or unjustified, doesn’t monetary policy play a big role in determining inequality, then? For an Austrian, it’s easy to blame central banking for the growth in value of real estate, specifically during the boom. But, this is controversial, so let’s focus exclusively on financial assets — or the top .01 percent. It should be less controversial to argue that monetary policy, directly and indirectly, affects asset and equity prices. Indeed, this is one possible channel of counter-cyclical monetary policy: higher asset prices creates a wealth effect. Neither is it far-fetched to argue that, if central banks issue an excess supply of money (which they possibly did during this past decade, in response to a positive supply-shock), asset prices are likely to be affected disproportionately. While Piketty’s data does not include capital gains, the implication is that monetary policy can actually make those in the top .01–1 percent less dependent on labor than they already are. It’s a subsidy to the rentier class.

Let’s go down the controversial route now, and see what Austrians can tell us about inequality. If money is non-neutral, it means that some or all are affected disproportionately by changes in the supply of and demand for money. Austrian business cycle theory (ABCT) says that excess supplies of money can be spent in two ways: investment and consumption. The assumption is that excess money is invested, on net. Think of productive assets as inputs and outputs. But, inputs have inputs of their own. To distinguish between all of these, Austrians talk about stages of production. The very last stage, consumption, uses the second-to-last stages’ output as input, and this penultimate stage uses the ante-penultimate stage’s output as input. If money is non-neutral, each stages’ prices level will lag behind the one in front of it. This is a disequilibrium, creating opportunities to profit. Booms, caused by excess money, attract heavy investment into sectors with relatively high profitability, and the economy as a whole becomes more capital intensive.

Hayek and Mises argued that wages lag behind capital goods’ prices; it’s the eventual receipt of wages, and their spending of these wages on consumption, that causes the economy to shift back to the equilibrium is was at before the boom. For simplicity, assume that the wage level remains constant for some period of time t, which is also characterized by a rising price level for capital goods. Doesn’t this imply an increasing share of income from capital? Total income is defined as: Y = wL + rK. Suppose Y doubles. W is constant, and we can assume L is constant as well. R, however, increases as the “false” value of capital increases and capital owners accrue an entrepreneurial profit. If Y doubles, rK increases, and wL stays the same, then wL/Y shrinks and rk/Y grows. This helps to explain Piketty’s r>g (and an elasticity of substitution between capital and labor greater than one).

Who else benefit? Stock- and bondholders, who are earning interest, dividends and capital gains. These are exactly the type of people, at least those who hold these assets in significant quantities, who make up the top centile of the income distribution.

According to Piketty, somewhere between 99–99.9 percent of the top decile earn most of their capital income from real estate. As the period between 1995‒2006 shows, real estate prices can be very sensitive to excess money. While it is true that land ownership is now much more common — ~65–67 percent of Americans are homeowners, for example (although, homeowners equity has fallen) —, higher incomes earn greater rents on average. Real estate booms benefit the very wealthy much more than they do the moderately wealthy, and come at the expense of the worst-off, who typically rent. That seems like another strong force for inequality that Austrians can explain very well.

Modern inequality has as much to do with a very unequal distribution of capital ownership as it does with wage inequity. The U.S. and France are “hypermeritocratic,” according to Piketty. What type of job do we think of when we think high income? Manager. Not just any manager. The guy with a summer home in the Hamptons is not running a local 7/11. Rather, big-money management is in industries like finance and real estate. These people manage not only their own and their firm’s wealth, but the wealth of all their firms’ clients — these are people earning a share of r from the capital of all their clients. Even corporate management in very large corporation has a lower income level than finance management. These are the managers who are the best at pursuing profits — or they’re lucky to be in the right place, at the right time —, and who work in industries sensitive to excess money.

If Austrians are right, institutions do matter a lot in determining the distribution of income and wealth. Specifically, monetary institutions matter a lot. An excess supply of money can explain a growing capital share of income and a rate of return greater than the rate of growth. Specific income groups, usually higher on the spectrum, receive benefits from excess money, often at the expense of the other income groups, typically the worst-off. While capital owners benefit from an increased r, renters lose, and those buyers (namely, homeowners) who have negative equity will typically lose in the bust, because their asset will probably depreciate in value. Furthermore, the rules of the game that are fault are exactly the rules of the game Austrians (and some others) would like to change.