The Rise and Rise of the One Percent: Considering Legal Causes of Inequality

Thomas Piketty's Capital in the Twenty-first Century, which is surely one of the very few economics treatises ever to be a best-seller, has parachuted into an intensely emotional and deeply divisive American debate: the problem of inequality in the United States. Piketty's core argument is that throughout history, the rate of return on private capital has usually exceeded the rate of economic growth, expressed by Piketty as the relation r > g. If true, this relation means that the wealthy class – who are the predominant owners of capital – will grow their wealth faster than economies grow, which means that relatively speaking, the non-wealthy will fall behind.But even if we accept Piketty's assertion that this has been an "historical fact," why is r > g most of the time? Piketty offers a few economic factors and a few legal rules, but mostly demurs as to why the "forces of [wealth] divergence" generally overwhelm the "forces of [wealth] convergence." This review argues that legal rules and institutions exhibit an inherent bias towards some forms of private capital, and serve to inflate returns to private capital – Piketty's r. Meanwhile, not only is it more difficult to make economic growth – Piketty's g – keep pace, but it is more contentious. The result is that returns to private capital have indeed commonly exceeded the rate of economic growth. This historical truism can be traceable to a capital-friendly bias that inheres in legal rules and institutions. The bias is particularly pronounced in several areas of law in which law and policy have inflated returns to private capital and driven it above the rate of economic growth, exacerbating economic inequality. This review closes by arguing for a greater attention paid to funding education, which is not only an equalizing "force of convergence," but also a predicate to economic growth.