Harvard's Ken Rogoff has written a great piece that essentially makes a "Lucas Critique" point about Piketty's work. There is broad agreement that Piketty and his co-authors have done excellent historical empirical working documenting long run trends but one cannot extrapolate and predict the future without having a well grounded model of how our world economy operates. In a previous post, I argued that financing constraints of high potential but poor kid's human capital limit the growth of the macro economy and that the introduction of new capital markets to allow the rich to finance the education of the poor would be one strategy that might lead g to become greater than r. Rogoff alludes to this when he writes;
"There are many practical policies that can be adopted to reduce inequality, in addition to a progressive consumption tax. Focusing on the US, Jeffery Frankel of Harvard University has suggested the elimination of payroll taxes for low-income workers, a cut in deductions for high-income workers, and higher inheritance taxes. Universal pre-school education would enhance long-term growth, as would a much greater emphasis on lifetime adult education (my addition), possibly via online courses. Carbon taxes would help mitigate global warming while raising considerable revenues."
Note that Rogoff's solutions to the income inequality challenge all involve government intervention. My incomplete markets story (that able kids can't finance their optimal human capital and that in aggregate this makes our economy grow at a slower rate) implies that the introduction of the new capital markets themselves would affect the future rates of return to capital, the build up of individual human capital , and the aggregate human capital stock.
Piketty would likely agree with Rogoff's point that there are many public policies that would reverse the trend he has documented. Piketty wants his book to change the course of history so that his dire predictions don't come true. He sees economics and politics as tightly intertwined. Intellectuals such as Paul Ehrlich in Population Bomb have followed this same strategy. If Piketty and Krugman working as a team can push a progressive policy agenda, then there are scenarios where the 1%'s share of income would fall.
While this is certainly true, I would like to see economists who solely have an academic focus to turn back to the invisible hand and ask; "in the absence of government intervention but in the presence of incomplete capital markets, are there new capital markets such that when they are introduced that the long run trend in inequality actually reverses?"
The best starting point for studying this would be;
Galor, Oded, and Omer Moav. "Das human-kapital: A theory of the demise of the class structure." The Review of Economic Studies 73, no. 1 (2006): 85-117.
Note that I'm taking Jim Heckman's early intervention theme quite seriously and suggesting that this high returns human capital investment could have significant aggregate implications. The key issue is who finances these investments and how the gains from this trade are split between the borrower and the lender.