March 20, 2014--The Rich Get Richer, The Poor Get . . .

The intellectual firepower in economic theory that claimed that economic growth over time reduces inequality was provided during the 1950s and 60s by Simon Keznets.

Most starkly, he put forth the Kuznets Curve that graphically illustrated what he argued was a natural curve, a natural cycle that begins with widening inequality while an economy grows but then decreases, again naturally, over time until a "certain average income is attained." In other words, after overall economic growth, inequality, if we are patient, is reduced.

His work was derived by his assembling reams of data primarily from tax returns. He argued that between 1913 when the income tax was introduced in the United States until the end of World War II in 1948, the portion of the national income earned by the richest 10 percent of Americans declined from a little under half that total income to "only" about a third.

In other words, Karl Marx and more benign progressives were wrong--the free market was a self-correcting system and governments should get out of the way and allow economic justice over time to express itself.

Now there is a new, massively data-rich study by Thomas Piketty of the Paris School of Economics, Capital in the 21st Century, that looks at even more data. Much more data. He studied income and wealth disparity over hundreds of years in dozens of countries and comes to very different conclusions than Kuznets.

In brief, Piketty found that the rate of return on capital investment (machinery, real estate, land, financial instruments) is much higher that the rate of economic growth.

This means that wages cannot keep up with capital formation, inequality therefore increases rather than decreases over time, and it is not self-correcting. That is, if markets are left to themselves. But when governments intervene through, say, progressive taxation, the gaps between the haves and have-nots can be narrowed.

From his data Piketty cites numerous examples of how the unfettered market increases inequality but how with shifts in public policy it has been and can be reduced.

He shows that inequality today is reaching and exceeding the upper limits of the Gilded Age. According to a essay in the New York Times from data mined by Piketty, investment profits account for the largest share of national income since the 1930s and as a result, the richest 10 percent of Americans control a larger share of the economic pie than at any time since 1913.

In regard to Kuznets, Piketty demonstrates that the data that underlie the Curve were amassed from an idiosyncratic period in one country's history--the years in the United States when the Depression destroyed a large portion of the richest people's wealth while at the other end of the period Kuznets studied, the economy benefitted disproportionately by the spending and government investments required to arm the country to fight the Second World War.

Ironically, the forces that ultimately led to the end of the Depression and an era in which income equality was reduced were more the result of government taxation and spending policies than the Invisible Hand of the free market.

The free market brought about the Depression while government intervention and a world war were essential to ending it.

Piketty argues that unless we amend current fiscal policy--especially taxation--the concentration of wealth will continue and inequality will worsen. There are no examples in history since the Industrial Revolution that the market will in and of itself make a difference. Not even expanded investments in education, which to many is the best way to proceed.