Are the One Percent Capitalists or Superordinate Workers?

Are the One Percent Capitalists or Superordinate Workers?

The Meritocracy Trap argues that “[m]eritocratic inequality principally arises not from the familiar conflict between capital and labor but from a new conflict—within labor—between superordinate and middle-class workers.” [1]  This is not the only possible, or even plausible, account of rising economic inequality.  An alternative account emphasizes the older capital-labor conflict instead.  According to this view the root of rising economic inequality is that capital’s share of output is growing and labor’s share is shrinking, so that, one might say, owners increasingly exploit workers.

This view comes in many varieties.  The most sophisticated version is developed by Thomas Piketty in his Capital in the Twenty-First Century—which argues (very roughly) that the long-run rate of return on capital tends to exceed the rate of economic growth (or, as Piketty writes, r > g), with the consequences wealth becomes concentrated and that income becomes, over time, both more capital intensive and itself more concentrated at the top. Piketty calls the system that arises “patrimonial capitalism.” [2]  The contrast between this name and The Meritocracy Trap’s “superordinate working class” nicely summarizes a fundamental difference between the two books’ accounts of rising economic inequality.

This note takes up the contrast between The Meritocracy Trap’s elite-labor-centered account of rising economic inequality and accounts that emphasize capital, including Piketty’s account.  It makes no effort to elaborate a comprehensive critique of alternative views, in particular Piketty’s, which has in any event been extensively discussed.  Rather, the note aims to clear away tempting but undeniable errors, focus attention on key areas of reasonable disagreement, and provide the broad outlines of the case in favor of the elite-labor-based view that The Meritocracy Trap develops.

To do this, it helps to organize the discussion by time periods, beginning with the past (from the end of the Great Compression through roughly the turn of the millennium); then taking up the present (from the turn of the millennium through the current decade); and finally turning to the future.

The Past

A common view—especially in political rather than scholarly circles—holds that the rise of the one percent has from the start (that is, beginning right at the close of the Great Compression) been due to a shift of income away from capital and towards labor.  A figure like the following is often misunderstood along these lines, and the misunderstanding is natural and tempting enough to be worth clearing up.

The figure—this version was published on a popular progressive political blog under the headline “40 Years Of Workers Left Behind (Chart)”[3]—is often interpreted to show that while labor captured a proportionate share of rising productivity throughout the mid-century years, since the early 1970s, workers have (as the figure’s sub-heading declares) been almost entirely “shut out” from productivity gains.  The implication is that the gains have gone entirely to capital.

The inference, however, is simply invalid, as thoughtful commentators have long recognized.[4]

First, the gaping jaw between the two series is partly an artifact of technical distortions.   The productivity measure behind the graph focuses exclusively on the non-farm business sector (where labor’s productivity grew fastest), rather than the full economy, and this makes the productivity series steeper than it should be.  In addition, the Bureau of Labor Statistics, which provides the data on which the figure is based, uses different measures of inflation in its hourly productivity and hourly compensation series, and this difference has caused productivity, over time, to appear to outstrip compensation.  Finally, the productivity series uses gross rather than net output, but the increased use of computers and other information technology causes greater depreciation over time, so that the gap between gross and net output increases.  Adjusting to correct for these distortions closes a substantial portion of the jaw (although not all of it), especially for the years before 2000.

A second argument is more important still.  The hourly compensation series behind the figure includes the “production and non-supervisory work force,” and therefore excludes managers and professionals.  The average wage reported in the figure therefore simply ignores the explosion of elite labor income that, The Meritocracy Trap argues, dominates rising top incomes.  For this reason, the figure provides just as much evidence for the within-labor account of rising inequality that the book develops as for the competing labor-capital account.  It is only because “hourly compensation” sounds like it is picking up all labor income that the figure invites the mistaken interpretation that it sometimes gets.

In fact, as The Meritocracy Trap argues, the shift of income away from labor and towards capital, although real, “is simply too small—much too small—to account for rising top income shares.”[5]  The point is sufficiently important to make it worth pausing over the data to see why this is so.

Identifying labor’s precise share of national income involves judgment, and thus invites controversy.  To pick but a sample of controversial questions:  What portion of the profits of owner-operated businesses should be imputed to the proprietor’s work (as self-employment, in effect) and thus included in labor’s share?  How should non-wage income—from benefits, for example, including publicly subsidized benefits—be calculated for purposes of including it in labor’s share? How should the housing sector be treated, and in particular, should all of the income imputed to owner-occupied housing be treated as accruing to capital, or should some share be allocated to labor, treating the owner-occupier as a manager/superintendent who administers her own dwelling?  How should the income of the farm sector be apportioned between labor and capital?  And finally, if the aim is to identify labor’s share of income over the entire economy and not just the private sector, how should income be imputed to publicly owned capital as needed to counterbalance the labor income associated with the wages of public sector workers?

The answers to these questions influence (sometimes substantially) conclusions about both labor’s absolute share of national income and the relative trend in labor’s share, even in analyses confined to the non-farm private sector.  The figures below report responsible estimates of the trend, chosen to display the range of reasonable disagreement.

The figures are striking for the variation among the calculations that they report, both in absolute levels and in trends.  The first, produced by the Bureau of Labor Statistics,[6] almost certainly over-estimates the decline in labor’s income share.  Among other things, the BLS estimates the labor income of proprietors of owner-operated businesses by assuming that proprietors “earn the same hourly compensation as the average employee working in their sector.” [7]  But this is certainly too little, and it becomes more too little over the course of the data series, as top labor incomes have exploded more generally, and proprietors’ labor incomes have figured increasingly prominently in top incomes.[8] Of course, the second figure, produced by Robert Gordon and Ian Drew-Becker, may err in the opposite direction.[9]  Rather than resolving the dispute, it is enough for present purposes to observe that the 70-year trend in labor’s share of national income ranges from a roughly 3 percent increase to a 6-8 percent decrease (with almost the entire decrease coming since 2000).

This range makes plain that the changing relation between capital and labor cannot explain rising economic inequality, at least through the turn of the millennium.  To begin with, rising inequality precedes—by three decades—any plausibly significant gains enjoyed by capital over labor.  Furthermore, and equally importantly, capital’s recent gains over labor are simply not large enough to account for rising income inequality.  Capital’s share has grown by at most 8 percent of national income since 1960.  Capital income inures to the benefit of owners of capital, and the wealthiest 1 percent of Americans hold roughly one-third of the nation’s capital (and the top 1 percent of Americans by income can of course own no more than this share).   Capital’s rising share of national income therefore cannot contribute more than 1/3 * 8 ≈ 2.5 percent to the increase in the top 1 percent’s share of income, overall.  But the top 1 percent of the population today captures roughly 10 percent more of national income than it did in 1960.  This leaves ­­an increase of roughly 7.5 percent (or three-quarters of the total) unexplained by a transfer from labor to capital, even on the most extravagant accounting of that transfer.[10]

Although it has garnered much attention, especially in the popular press,[11] the local decline in labor’s share, even if it is real and becomes permanent, remained through the turn of the millennium at the margins rather than the center of the rising economic inequality.

Finally, it is worth noting that in spite of his emphasis on capital, Piketty himself also takes the view that, through 2000, the bulk of rising economic inequality in the United States stemmed from within-labor shifts of income, and in particular from the rise of elite labor incomes.[12]  Piketty (alongside co-author Emmanuel Saez) thus observes that in 1916, the top one percent received roughly a fifth of its income (excluding capital gains from both the numerator and denominator) from wages, which unambiguously produce labor income; in 1950 the top one percent’s wage share had risen to a little over a third; and by 1999, the top one percent’s wage share reached fully three-fifths.  The wage share of the top 0.1 percent has experienced an even steeper rise, although from a lower starting point:  from roughly a tenth in 1916; to roughly a quarter in 1950; to over half by 1999.[13]  Piketty and Saez thus conclude that the character of top incomes transformed over the course of the 20th century.  “Before World War II, the richest Americans were overwhelmingly rentiers deriving most of their income from wealth holdings (mainly in the form of dividends).”[14]  But by the end of the century, “the share of wage income has increased significantly for all top groups.  Even at the very top, wage income and entrepreneurial income form the fast majority of income.  The share of capital income is small (less than 25 percent) even for the highest incomes.  Therefore, the composition of high incomes at the end of the century is very different from those earlier in the century.”[15] Indeed, the share of the richest 0.1 percent of the wealth distribution that also belongs to the top 0.1 percent of the labor income distribution (even with labor construed narrowly) doubled between 1960 and 2012 (from 15 percent to 30 percent).[16]

It is an irony of Piketty’s book that the inequality that made U.S. readers so receptive to its message had, by his own admission, origins other than the mechanisms that the book describes.[17]

The Present

Although they disagree about 70-year trajectories, both of the labor income share series just reported agree that labor’s income share dropped—and dropped quite steeply—in the first decade of the new millennium (although it has begun to rise again since).  Moreover, wage shares of elite incomes also fell in the first decade of the new millennium (although they also appear to have stabilized or even recovered slightly at the start of the second).[18] The fall did not erase the earlier gains, but it is real enough to open up the possibility that although rising economic inequality up to roughly 2000 had other causes, including prominently the explosion of elite labor incomes, rising inequality since 2000 is caused by capital’s resurgence.  On this view, the past may follow the logics elaborated in The Meritocracy Trap, but the present follows the very different logic of patrimonial capitalism. Very roughly, this is likely Piketty’s view of present circumstances in the United States.

The Meritocracy Trap takes a different view concerning the present—and argues that both top incomes and the increase in the 1 percent’s share of national income continue to be dominated by labor.[19]  The disagreement about the present has two (overlapping) components.  One is purely technical and concerns how to adjust for shortcomings in data regarding income and its sources.  The other is conceptual and concerns how to draw the fundamental distinction between capital income and labor income.

Some Technical Matters

The root of the technical disagreement lies in the categories through which the U.S. government organizes its income reports.  The Department of the Treasury, using data compiled by the Internal Revenue Service, reports categories of income that include:  wages, salaries, and tips; profits from S-corporations; profits from partnerships; profits from sole-proprietorships; profits from farms; dividends; interest income; rental income; and capital gains.  Wages, salaries, and tips undoubtedly constitute labor income; and dividends interest, and rents (at least on assets that owners originally acquired by gift or bequest) undoubtedly constitute capital income.  But not all income takes such unambiguous forms.

One difficult-to-allocate class of income is particularly consequential.  The IRS combines profits from s-corporations, profits from partnerships, and profits from sole-proprietorships into a category that it calls “business income.” Thomas Piketty and Emmanuel Saez similarly combine profits that owner-workers capture into a category that they call “entrepreneurial income.”[20] The owner-operated businesses that produce “business income” or “entrepreneurial income” are all treated by the tax laws as pass-through entities, whose economic gains are taxed as personal income to their owner-operators.  Apportioning this income—earned by people who mix their own capital with their own labor—between capital and labor requires judgment.  Some such businesses ultimately owe their income substantially, or even principally, to the capital that they deploy:  think of a dry-cleaning business organized in any of these legal forms.  But other such businesses owe their income principally to the labor of their owners:  think of professional partnerships, including law firms and consultancies.  These businesses often deploy precisely the types of labor whose wages have been exploding over the past several decades; and it is therefore unsurprising that income from these sources figures increasing in top incomes and today comprises perhaps a third of the income of the top one percent and even top 0.1 percent.

Judgments of the overall share of top incomes attributable to labor are therefore sensitive to how “business income” or “entrepreneurial income” is apportioned between labor and capital.  Failing to take into account that some income attributed to pass-through businesses is structurally labor income can distort perceptions of top incomes.  An example is the Congressional Budget Office’s report on “Trends in the Distribution of Household Incomes Between 1979 and 2007.”  The report shows the labor income share of the top one percent as roughly flat between 1979 and 2007, where labor is narrowly understood to include only wages, salaries, and non-cash compensation paid by employers.[21] But it also shows business income rising and unambiguous capital income falling.  (Indeed, the share of the top one percent’s income unambiguously attributable to capital fell dramatically, from 42% in 1979 to 21% in 2002, although it then rose again to 30% in 2007.)  And the rising business income in substantial portion reflects rising labor income (unrecognized by the CBO).  The underlying data behind the CBO report therefore confirm the rise of elite labor income, even as the top-line conclusion says otherwise.

Piketty and others who work with him typically apportion 70 percent of entrepreneurial income to labor and 30 percent to capital.[22]  This apportionment roughly reflects the shares of total national income attributable to labor and to capital (as in the figure above).  Critically, they apply the 70/30 split uniformly both across income classes and across time.  Under this approach, both the poor and the rich, both 50 years ago and today, have 70 percent of their “business income” or “entrepreneurial income” allocated to labor, and 30 percent to capital.  The view that present-day elite incomes principally reflect a renewed dominance of capital over labor rather than a new dominance of elite over middle-class labor turns out to depend significantly on this allocation.

The Meritocracy Trap allocates entrepreneurial income differently. Top labor incomes have, after all, unquestionably been increasing over time.  And the share of overall top incomes unambiguously attributable to labor—for example, the share attributable to wages—has also unambiguously been rising over time.  The labor/capital ratio of entrepreneurial income has therefore also in fact almost certainly been rising over time.  (It would be astonishing if the explosion of top wages were not accompanied by an explosion of top labor income among the self-employed, especially where elite entrepreneurial income has exploded.  What person would remain an entrepreneur if her labor were paid much more in employment than in self-employment?)

The Meritocracy Trap therefore adjusts the share of top earners’ entrepreneurial income (for both the top 1 percent and the top 0.1 percent) that it attributes to their labor over time, so that it follows, in every year, the ratio of top earners’ core labor income to core capital income—that is, the ratio of their wages plus pensions to their income from dividends plus interest plus rents.[23]  This is a rough-and-ready approach to fixing the labor share of top entrepreneurial incomes, to be sure.  But its account of the labor share is surely more accurate than the assumption of a constant ratio.[24]  And recent more high-tech work reaches broadly consistent conclusions.[25]

A second consequential category of income that requires disambiguation between labor and capital is the income that is taxed, and characterized in government data, as “capital gains.”  Piketty and his co-authors treat capital gains as income from capital rather than labor. The Meritocracy Trap again takes a different view, and allocates some “capital gains” to labor income.

“Capital gains” is a term of art from tax law.  It is decidedly not co-extensive with “income from capital,” on any use of that phrase in economics, philosophy, or even ordinary language.  The Meritocracy Trap takes the view that several types of income that are today taxed as capital gains are in fact, unambiguously, labor income.  Perhaps the most important are “carried interest” income captured by hedge fund managers, certain income associated with the stock or stock-option components of compensation paid to top managers, and income attributable to “founders shares” held and eventually sold by entrepreneurs.

A brief account of “carried interest” income illustrates the book’s approach.  (A discussion of stock-based executive compensation and founders’ shares follows in the next section on the conceptual distinction between capital and labor).  Hedge fund managers typically get paid a “carried interest” share of profits on funds whose investment they administer but that they do not themselves own.  This payment (analogous to “contingency-fee” arrangements in which plaintiffs’ lawyers receive a share of any judgements that they secure for their clients) is a direct substitute for management fees that the hedge fund managers would otherwise charge (just as the lawyer’s contingency fee is a direct substitute for the hourly fees that she would otherwise charge).  It is therefore, fundamentally, labor income to the hedge fund managers.  Indeed, it could not be anything else, as the managers bring nothing but their labor (their investment skills and efforts) to their business relationship with the owners whose capital they invest. Critics of the practice of giving carried interest income the beneficial tax rates otherwise accorded capital gains have long made this point, arguing that fairness (both horizontal and vertical tax equity) requires carried interest income to be taxed as wages, at so-called “ordinary income” rates.

The critics are right as to tax policy.  And the same point should carry over to distributional accounting, with material consequences.  Although it is impossible to know directly what share of capital gains income reported to the treasury is attributable to carried interest, it is certain that this share is growing rapidly and is now large.[26]  Hedge funds are generally, and distinctively, organized in layered partnership structures:  the funds are partnerships, and the fund managers are also organized as partnerships. This means that capital gains income reported to the IRS by general partners in one partnership that are themselves organized as a second partnership—collected under the category “partnership general partners”—is overwhelmingly carried interest income that goes eventually to hedge fund managers.  Effectively no income was reported in this way at mid-century—hedge funds in the present-day sense did not exist; and a material share of capital gains is reported in this way today.[27]

A Conceptual Issue

A second difference between The Meritocracy Trap’s accounting of elite labor income shares and the accounts developed by Piketty and his co-authors involves the question how to draw the conceptual distinction between labor income and capital income quite generally.  This is quite likely more a difference than a disagreement, as the apt construction of any conceptual distinction turns on the broader framework in which that distinction will be deployed.  Interpreting a large and complex body of work is always difficult, but Piketty and his co-authors probably deploy the distinction in the service of arguments concerning the economic form of income while The Meritocracy Trap is more concerned with the moral attribution of income.

Both approaches are suitable for their broader contexts:  Piketty is concerned to divine economic laws, or at least empirical regularities, concerning the form that income takes over time; and The Meritocracy Trap is concerned to develop moral and political arguments that sustain ideas (ideologies?) concerning who deserves what shares of income and wealth.  Insofar as this is so, the two characterizations do not so much conflict as pass each other by.  Nevertheless, it remains worth unpacking the difference between economic form and moral attribution, in order to get clear about the relationship between the two views.

At the most abstract and general level, all economic output is produced from two inputs:  contemporaneous human effort, or labor; and the assets, or capital, that labor works upon.  Labor understood in this most basic way includes not just workers, in the sense embraced by workers’ parties or the union movement, but all contemporaneous productive human effort, including that of managers and indeed the very highest-ranking executives.  Capital includes not just money and financing but also land, machines, and even ideas.[28]  Moreover, all economic output (save for the portion that goes to the government, as taxes) must eventually inure to the benefit of either labor or capital.  These are accounting identities, and their conclusions are therefore inescapable.

Applying the concepts capital and labor outside of flat accounting becomes at once complicated, however, and this is where the distinction between economic form and moral attribution comes into play.  Some elite workers are paid in ways that derive from capital (carried interest) or that simply are productive capital, rather than cash (founders’ shares, stock options). And virtually all elite workers, being paid more than they consume, save some of their income, again in the form of productive capital, which earns returns (pensions and, in a more complicated way, imputed rents from owner-occupied housing, funded by mortgages paid off out of future wages).  Subsequent income resulting from these arrangements takes the economic form capital income.  But it remains attributable to labor, at least from the perspective of meritocratic morals and politics, which condemn the rents that leisured aristocrats extract from inherited capital but approve income that may be traced back to the meritocrat’s own industry and accomplishments, even if its immediate source lies in accumulated savings.

Piketty, whose training and interest both emphasize economic form and whose main argument turns on economic accounting, naturally allocates income between capital and labor based on economic form.  Concretely, Piketty and his co-authors treat carried interest, founders’ shares, and stock-based executive compensation as capital income.  They also (depending on specifications) treat all or some pension income as capital income.[29]  The Meritocracy Trap, by contrast, focuses on moral attribution.  In principle, this entails that only returns on windfalls or inherited wealth should count as capital income.  The book’s conclusion that the top 1 and 0.1 percent owe up to three-quarters and two-thirds of their incomes to labor reflects a rough (but far from extravagant) apportionment of income that takes the economic form capital income between moral attributions to capital and to labor.

One final complication is worth noting, not least because it also produces a difference between how The Meritocracy Trap and Piketty and his co-authors apportion income between labor and capital.  Even though all economic output in a society must come from just the two inputs, capital and labor, an individual’s share of output might helpfully be said to turn on a third input, namely strategic advantage.  This reflects the individual’s ability to capture a larger or smaller share of the total output that capital and labor produce.  When an individual captures an unduly large share, one might say (leaving what unduly means open) that she owes her income to neither capital nor labor but rather to rents.[30]

This possibility often leads commentators to refuse to attribute the very highest incomes to labor.  A powerful impulse—based on fairness, or just a sense for what is in some basic way reasonable—resists the suggestion that these enormous incomes might be attributable to labor in the ordinary way in which middle-class incomes are attributable to labor.  When a hedge fund manager takes home over $1 billion,[31] or when the 5 highest paid employees of S&P 1500 firms (so 7500 workers) collectively take home fully 10 percent of the profits of the entire S&P 1500,[32] it becomes difficult to imagine how their labor could possibly be so outlandishly valuable.  Even if they are not attributable to capital, there must be a way to avoid crediting these incomes to work.  Rents give this impulse a natural expression.  Finance workers must be manipulating markets or exploiting their strangleholds over choke-points in the financial system, and CEOs must control the compensation committees that set their pay.  Piketty himself expresses similar skepticism, for example when he observes that “extremely high executive pay” provides “the most convincing proof of the failure of corporate governance.”[33]  This skepticism, of course, depresses the labor income share of the top 1 and especially 0.1 percent.  Income that appears attributable to labor is in fact better attributed to rents.

The Meritocracy Trap takes a different view.  The book does not deny that elite rent-seeking and even outright fraud and theft are real; but it argues that there is less fraud and even less rent-seeking than progressives generally claim.  At the same time, The Meritocracy Trap also argues that even if the income paid to elite workers reflects their marginal product in the conventional sense, and therefore should be attributed to labor for purposes of meritocratic moral accounting, this does not at the end of the day make the income earned or deserved.  In fact, The Meritoracy Trap argues, a better accounting of marginal products reveals that the income in question is not deserved (and even has the moral quality of a rent, not conventionally but rather properly understood).[34]

An enormous and intense debate rages over what share of top finance-sector and managerial incomes should be attributed to rent-seeking. It is enough, for present purposes, to observe that even if rents are real and large, the explosion of top incomes has been so large that its main grounds lie elsewhere.  As The Meritocracy Trap observes, the most careful study finds that rents contributed little to rising finance-sector incomes from the 1970s through the 1990s and that, since the 1990s, between 20 and 30 percent of the increase to risk-adjusted wages stems from rents, with between 70 and 80 percent stemming from finance workers’ rising skill.[35]

Similarly, although rent-seeking among top executives is real, the bulk of CEO pay reflects the product of the CEO’s managerial labor rather than rents.  CEO compensation exploded, after all, alongside the rise of the market for corporate control, which also gives shareholders an unprecedented capacity to monitor and discipline top managers.  Moreover, “the level of CEO pay in companies owned by private equity firms is statistically indistinguishable from the level of pay in comparison firms” that are publicly held.[36]  Private equity re-concentrates ownership in the hands of sophisticated financiers who have motive, means, and opportunity to monitor managers’ pay and performance and therefore can prevent CEO rent-seeking. Accordingly, “[t]he evidence does not support the view that managerial power causes directors to overpay executives.”[37]  This strongly suggests that the bulk of CEO pay reflects value-added by the CEO rather than rent-seeking.[38]

These remarks merely scratch the surface of a deep empirical debate about elite rent-seeking.  Rather than intervening empirically in the debate about the size and scope finance-sector and CEO rents, The Meritocracy Trap makes two theoretical contributions to the question.

First, the book describes the technological developments that could rationalize the massive increases in superordinate workers’ incomes.  The point is especially important for management. A transformation in the CEO’s role—as firms have drastically flattened their managerial hierarchies, eliminating the vast, multi-tiered army of middle managers that once dominated their administration—has concentrated the management function in an increasingly small, hard-working, skilled, and productive cadre of super-elite managers. Whereas the elaborate hierarchies that dominated midcentury firms constrained top management (so that even the worst CEOs could do little to harm their firms and even the best ones could do little to help them) the new, flatter managerial structure adopted by firms today gives CEOs great power and renders their choices highly consequential.  This transformation—in what might be called the technology of management—explains why elite managers might provide productivity commensurate to their incomes.[39]  The management function, which was once dispersed across of all of a firm’s workers, has been concentrated in a narrow elite.  The economic returns to management have become similarly concentrated.

And second, The Meritocracy Trap explains why, even if superordinate workers’ immense incomes reflect the enormous productivity of their labor rather than rents (conventionally understood), they nevertheless do not deserve their incomes.[40]  As the chapter on “The Myth of Merit” argues, productivity may be measured in two ways.  On the conventional measure, a worker’s productivity equals the difference between output when she works and when she does not, where everyone else works in precisely the same way without her as they would with her.  This is the measure that makes superordinate workers so productive.

The book, by contrast, proposes an alternative measure, namely that the worker’s productivity equals the difference between output when she works and when she does not, but where everyone else reorganizes their work optimally in her absence.  The book’s account of snowball inequality explains that the technologies of production that make superordinate workers so enormously productive and mid-skilled workers so much less productive in the conventional sense would not exist but for economic inequality.  If superordinate workers did not exist, everyone else would now deploy very different technologies at work, and these alternative technologies would increase the productivity of mid-skilled workers.  In management, for example, the concentrated administrative technologies deployed today would be exchanged for the dispersed administrative technologies deployed by mid-century firms, or by improvements on these technologies, still operating in the same basic way.  Finally, the book develops a series of reasons for believing that total output is not higher in our world than it would be in this more equal alternative.

This entails that the superordinate workers whose productivity is so enormous on the conventional measure produce effectively nothing at all on the alternative measure that The Meritocracy Trap prefers.  Elite productivity, the book argues, is an artifact of inequality.  It therefore cannot justify inequality.  Merit, as the book concludes, is a sham.

A Summary of the Present

All these considerations cumulate to suggest that labor figures much more prominently in top incomes than Piketty and his co-authors suppose, not just in the past but also today.  Re-apportioning entrepreneurial income to have a bigger labor component, treating pensions and imputed rents from owner-occupied housing as labor income, and allocating a fifth of capital gains to labor produces the book’s estimates—namely that perhaps three-quarters and two-thirds of the top 1 percent’s and top 0.1 percent’s incomes should, from within the frame of meritocratic political morality, be attributed labor rather than capital.[41]

These shares are of course not precise. The mis-matches between the categories used by the economic data and by moral accounting, and the complexities immanent in meritocratic moral accounting, mean that they could not possibly be precise.  But that does not matter for The Meritocracy Trap’s larger argument.  The point of the exercise, in that argument, is to show that economic inequality has changed its basic nature since mid-century and therefore that equality’s champions cannot rely exclusively on moral ideas developed to address the old conflict between capital and labor.  Rather, they must develop new ideas that can resist economic inequality produced by a new conflict, within labor, between superordinate workers and everyone else.  The book’s central goal is to elaborate the required ideas.

The Future

The most profound difference between The Meritocracy Trap and Piketty’s account of the resurgence of patrimonial capitalism concerns the future.  Even here, the difference need not be a disagreement, and certainly not a conflict.  The capital-based mechanisms that Piketty describes and the labor-based mechanisms that The Meritocracy Trap describes might both operate, together.  And the book’s project is to elaborate the labor-based mechanism rather than to deny that the capital-based mechanism is at play.  Insofar as the two views conflict, it is only on the margin of explanation.  That is, they disagree about which mechanism is more powerful and will dominate economic inequality going forward.  The future, of course, is uncertain—and anything said in favor of either view’s predictive power must therefore necessarily be speculative.  The remarks that follow are offered in this spirit.

Piketty states his view of the dynamics of rising inequality vividly at the end of this book:  “wealth accumulated in the past,” he says, “grows more rapidly than output and wages. . . . The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor.  Once constituted, capital reproduces itself faster than output increases.  The past devours the future.”[42]  Even if the superordinate working class described in The Meritocracy Trap gets economic inequality going, this argument implies, the future of economic inequality belongs to patrimonial capitalism.  Piketty takes the recovery of capital income in the first decade of the new millennium to constitute an initial vindication of this view, writing that although “the working rich . . . replaced rentiers from the 1970s to the late 1990s; this process culminated in 2000 . . . . Since then [capital] has bounced back.  As the 21st century progresses, the working rich of the late twentieth century may increasingly live off their capital income, or be in the process of being replaced by their offspring living off their inheritance.”[43] When superordinate workers get rich enough off their labor, they no longer need to work to sustain elite incomes going forwards.  Their children, who will inherit the accumulated fruits of their parents’ labor, need never work.  (Even as six of the ten richest Americans owed their incomes to their labor in 2013, for example, the remaining four owed their incomes to capital inherited from parents who had initially acquired it by their labors.[44]) And as long as r > g, capital will concentrate dynastically in families, and top incomes will become increasingly capital intensive.

The Meritocracy Trap does not deny that the forces that Piketty identifies are real or that they tend towards patrimonial capitalism.  But the book does insist that the future Piketty describes is not inexorable, nor even as likely as Piketty supposes.  Probably it is not even the most likely economic future.  Powerful forces conspire to dampen and even undermine Piketty’s patrimonial capitalism, and these intensify as capital-driven inequality increases.  Some of these forces are familiar and have been elaborated in other responses to Piketty’s work.  The Meritocracy Trap, for its part, emphasizes others, which are less familiar and even overlooked.

Most familiarly, a rising supply of capital reduces capital’s price, which is to say that it suppresses the rate of return and thus dampens and eventually stalls the mechanisms that drive patrimonial capitalism forward. As former Treasury Secretary Larry Summers has pointed out in response to Piketty’s work, “as capital accumulates, the incremental return on an additional unit of capital declines.”[45] Former Federal Reserve Chair Ben Bernanke’s lament over a global savings glut suggests that this effect is already underway.[46]  More broadly, there is reason to suppose that r will stably exceed g over time only if the elasticity of substitution between capital and labor is significantly greater than most economists think it is.[47]  All these arguments are familiar and have been much discussed.

Moreover, expropriation by labor, and in particular by elite labor, threatens further to dampen returns to capital:  most obviously, as a prominent economist has pointed out, “capital accumulation bids up wages.”[48]  The Meritocracy Trap emphasizes this point and elaborates a powerful mechanism by which capital becomes vulnerable to (certain classes of) labor.  In particular, the book argues that even as the middle-class workers traditionally represented by unions have lost bargaining power in recent decades, elite workers have gained bargaining power.  This produces a war between capital and talent, which talent is at the moment winning—in fact, talent has “started taking more of the profits from capital.”[49]

The immense incomes paid to elite managers (immense both absolutely and as a share of corporate profits) reflect one front in this war:  Once again, in a recent two-year period, the 5 highest-paid employees of the S&P 1500 (so 7500 managerial workers overall) collectively took home 10 percent of the earnings of the entire S&P 1500.[50]  Talent is winning on other fronts also.  A typical contemporary investment bank, for example, disburses fully half of its revenues after interest paid to its professional workers; and it has been a better three decades to be an elite banker than to be an owner of bank stocks.[51]  Hedge fund managers have also massively increased their incomes even as returns to investors have not kept pace.  The aggregate data generalizes these patterns.  If both the growth of the top income share and elite income overall is dominated by labor income, then it stands to reason that the superordinate workers whose wages comprise this income are holding their own in bargaining with their employers.  The accounts of elite education and induced technological innovation developed in The Meritocracy Trap explain the bargaining environment in which superordinate workers are able to assert such power.

The Meritocracy Trap also elaborates a set of moral and political considerations that shed doubt on any suggestion that r > g will obtain over the middle or long term.  The return to capital will exceed the growth rate, as patrimonial capitalism requires, only where legal and social institutions permit this; and the large concentrations of inherited wealth on which patrimonial capitalism depends are much more politically and socially vulnerable than Piketty imagines.[52]  Inherited wealth is especially vulnerable to familiar progressive arguments for redistribution.  Indeed, part of the point of the book is that elite labor income poses a special threat to equality because meritocracy inoculates it against these arguments. Economic inequality based on patrimonial capitalism, being not inoculated, is as susceptible as meritocratic inequality is resistant.  It is no accident that, among rich nations, societies in which capital most dominates labor in economic production—Italy and Japan—also suffer relatively little economic inequality and have among the most progressive welfare states, and that the society whose economic production is least capital intensive—the United States—also has the most inequality and the least redistributive state.[53]

Inherited wealth is also socially vulnerable, especially in a culture whose elite is constituted, along meritocratic lines, by high caste educations and large labor incomes.  In today’s world, parents who amass great fortunes can transmit their caste to their children by providing their children with elite educations and helping them to secure elite jobs, and children’s labor incomes from these jobs will support elite lifestyles going forward.  Any greater capital inheritance contributes little to the children’s overall human flourishing and imposes any number risks and burdens commonly associated with great inherited wealth, including that spoiled heirs will squander their fortunes (as in the old trusts and estates lawyers’ adage—“shirtsleeves to shirtsleeves in three generations”).  The Meritocracy Trap’s account of Mark Zuckerberg’s approach to his daughter’s inheritance shows both considerations in action.

All these considerations cast doubt on the suggestions of inevitablism that sometimes infect Piketty’s account of inexorably rising, capital-based economic inequality.  The “laws” that produce Piketty’s patrimonial capitalism, including in particular that the rate of return on capital exceeds the rate of economic growth, are unlike laws of nature in that they do not apply everywhere and always.  Rather, they applied broadly from the Industrial Revolution through the First World War, ceased to apply more-or-less anywhere from the Great Depression through the early 1970s, and then re-emerged in recent decades in Europe although not yet in the United States, where elite labor rather than concentrated capital drives rising economic inequality.  Piketty’s spare explanatory frame disguises the many background conditions that have variously constructed and dismantled patrimonial capitalism in these periods and places.  (His statement that the relative equality of the Great Compression arose on account of capital destruction in the Depression and the two World Wars is conclusory rather than explanatory.)  Most notably, Piketty cannot explain the role that elite labor plays in resisting patrimonial capitalism while at the same time building up an economic inequality all its own over the past half-century.  And Piketty’s account therefore cannot predict whether, in coming decades, the patrimonial capitalism that has returned to Continental Europe will spread also to the Anglo-Saxon world or whether, contrariwise, the elite labor that has dominated the United States will also colonize Europe.

For all its prominence (richly-deserved just on account of the immense skill and effort required to amass the data behind Capital in the Twenty-First Century and therefore even if every bit of theory in the book fails), Piketty’s argument is not a good basis for making predictions.  Put in its sparest form, the argument amounts to an observation that pre-industrial economic history has little to say about the present and future and that in the 210 years since the industrial revolution, the mechanisms that produce patrimonial capitalism have dominated economic and social life for the first 140 years and been dominated by other mechanisms for past 70 years.

This is not a sound basis for confident predictions, and The Meritocracy Trap elucidates a series of reasons for thinking that the future will not resemble the more distant past.  As Samuel Moyn observes, Piketty’s prediction for the future “is symptomatic of his assumptions:  having sketched the origins of his regularities so lightly, distracted by belief in a natural law of capitalism, Piketty also fails to explain satisfactorily why those regularities suddenly failed to obtain.”[54] The Meritocracy Trap sets out one set of considerations why the forms of inequality that Piketty emphasizes have not obtained over the seven decades since World War II—why capital-based inequality was first dismantled and then replaced with a very different form of inequality.  Those considerations also suggest, although they do not of course demonstrate, that patrimonial capitalism will not enjoy the resurgence that Piketty predicts.

[1] Daniel Markovits, The Meritocracy Trap: How America’s Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite (New York: Penguin Press, 2019), 89.

[2] Thomas Piketty, Capital in the Twenty-First Century (Cambridge, MA:  Harvard University Press, 2014).

[3] See Brian Beutler, “40 Years of Workers Left Behind (Chart),” Talkingpointsmemo, May 12, 2012,

[4] Much of the discussion in this and the next paragraphs follows Dean Baker, “The Productivity to Paycheck Gap:  What the Data Show,” Center for Economic and Policy Research, April 2007,

[5] Markovits, The Meritocracy Trap, 93.

[6] See Bureau of Labor Statistics, “Estimating the U.S. Labor Share,” Monthly Labor Review, February 2017,

[7] See Bureau of Labor Statistics, “Estimating the U.S. Labor Share,” Monthly Labor Review, February 2017,

[8] Michael Elsby and his coauthors determined that about one-third of the observed decline in the labor share is due to this the assumption that proprietors make the same hourly wage as employees. See Michael W L Elsby, Bart Hobijn, and Ayşegül Şahin, “The decline of the US labor share” Brookings Papers on Economic Activity, Fall 2013,

On rising proprietor’s incomes among top earners overall, see generally Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, Capitalists in the Twenty-First Century, (working paper no. 25442, National Bureau of Economic Research, 2019),

[9] Robert J. Gordon and Ian Drew-Becker, “Controversies about the Rise of American Inequality:  A Survey,” (working paper no. 13982, National Bureau of Economic Research, 2008),

Others have also questioned the Bureau of Labor Statistics’ conclusion that labor’s income share is declining.  See, e.g., Paul Gomme and Peter Rupert, “Measuring Labor’s Share of Income,” (Policy Discussion Paper No. 7, Federal Reserve Bank of Cleveland, 2007),

[10] This is a very rough accounting.  It quite possibly over-estimates the shift from labor to capital and underestimates the 1 percent’s share of capital income.  But note that these errors—even if real—counteract rather than compound each other.

[11] Economists emphasize labor’s declining share for reasons that have less to do with its relation to economic inequality than with the internal professional dynamics of the field.  In 1957, the famous economist Nicholas Kaldor included that labor’s share of total output is more-or-less constant among six “stylized facts” about economic growth.  See Nicholas Kaldor, “A model of economic growth,” The Economic Journal 67, no. 268 (December 1957).  This became so ingrained in the conventional wisdom of professional economists that, in the words of one, it is “almost sacrilege to use an aggregate production function” that does not give labor a constant share.  Data showing that labor’s share in recent years might not be constant thus unsettles economists’ professional narrative; and the new data naturally capture economists’ attention for this reason, and entirely apart from their importance specifically for explaining economic inequality.

The popular press has likely picked up on the recent trend because it plays into the conventional view that economic justice, at heart, concerns the battle between capital and labor.  Thus, a prominent Washington Post columnist recently lamented that “It was only 20 years ago . . . that wage and salary earners reliably captured about 75 percent of the national income, with the rest going to the providers of capital.  But in recent years, Labor’s share has fallen closer to 67 percent.” See Steven Pearlstein, “Is Capitalism Moral?,” Washington Post, March 15, 2013, And the New York Times, reports that “according to the left-leaning Economic Policy Institute, the G.D.P. shift from labor to capital explains fully one-third of the 1 percent’s run-up in its share of national income.” See Timothy Noah, “The Great Divide, The 1 Percent Are Only Half the Problem,” May 18, 2013, Economist, similarly notes that “All around the world, labour is losing out to capital.”  See “Labour Pains,” Economist, Nov. 2, 2013, from the print edition.

The final formulation, is revealing, although less for what it expresses than for what it admits:  even partisans, making the most extravagant assumptions, acknowledge that the shift from labor to capital leaves fully two-thirds of rising inequality unaccounted for.

[12] See Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics 118, no. 1(Feb. 2003 with Tables and Figures Updated to 2015), 1, 3,

[13]  These numbers come from Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” table A7.  Other elite income slices follow similar trends.  For example, for the top one-half percent, “capital income made about 55 percent of total income in the 1920s, 35 percent in the 1950s-1960s, and 15 percent in the 1990s.”  Id. at 12.

[14] Id. at pp. 10-11.  Moreover, the prevalence of dividend income among the rich survived the war.  Saez reports that dividends “represented more than 60 percent of top incomes in the early 1960s.”  Emmanuel Saez, “Reported Incomes and Marginal Tax Rates, 1916-2000:  Evidence and Policy Implications,” NBER Tax Policy and the Economy 18 (2004), 158.

[15] Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” 10-11.

[16] See Emmanuel Saez and Gabriel Zucman, “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” Quarterly Journal of Economics 131, no. 2 (2016), 559

[17] It is also ironic, and now more darkly so, that Piketty’s work announces a moral critique of inequality that, by focusing on income generated by (inherited) capital, sympathizes with precisely the elite mind-workers who form the overwhelming preponderance of the book’s readership, at once exonerating them of responsibility for rising inequality in general and capturing, exquisitely, the resentment that millionaire workers feel towards billionaire capitalists.  In this respect, the book falls into a long tradition of hostility towards capitalism among the intelligentsia, recognized by Schumpeter’s observation that intellectuals have a “group interest” in hostility towards capital income. (Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York:  Harper and Brothers, 1942), 153.

Humility counsels that mind workers should resolve doubts against Piketty’s view, and therefore also against themselves.  Political prudence gives a similar counsel.  Inequalities based on elite labor income are not nearly so politically vulnerable as inequalities based on capital, so that it will take new ideas to unsettle and unseat the economic inequality centered on the labor incomes of the working rich.  Even just the possibility that the future of economic inequality will sound in elite labor rather than patrimonial capitalism therefore gives equality’s champions a good reason to develop the required arguments.

[18] See Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts:  Methods and Estimates for the United States,” (working paper number 22945, National Bureau of Economic Research, 2016), 26, Fig. 8 p. 49, and Appendix tables B2b and B2c, available at

[19] Others have made similar observations, although not couched in the concepts or language that The Meritocracy Trap develops.  For example, the Nobel Prize winning economist Robert Solow entitled his review of the book “Thomas Piketty is Right:  Everything you need to know about ‘Capital in the Twenty-First Century,’” but added that “much of the increased income (and wealth) inequality in the United States is driven by the rise of [elite] wages,” and noted that “[t]here is not much understanding of this phenomenon, and this book has little to add.”  See Robert Solow, book review, “Thomas Piketty is Right:  Everything you need to know about ‘Capital in the Twenty-First Century,” The New Republic, April 22 2014.

[20] See Thomas Piketty & Emmanuel Saez, “Income Inequality in the United States, 1913-2002,” 80

[21] See Congressional Budget Office, “Trends in the Distribution of Household Incomes Between 1979 and 2007,” 17.

[22] See Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts:  Methods and Estimates for the United States,” 26 and Fig. 8, p. 49.  Note that they apportion 0 percent of S-Corporation income to labor, although S-corporations are also pass-through entities for tax purposes.

[23] The path of these ratios over time may be calculated using data from, Piketty, Saez, & Zucman, “Distributional National Accounts: Methods and Estimates for the United States,” Appendix II, “Detailed distributional series,” Tables D2b, D2c, “Composition of Fiscal Income Shares.” For the top 1 percent, the ratio of core labor to core capital income has grown from roughly 1:1 at the end of the World War II to as high as 4:1 in recent year.  For the top 0.1 percent, this ratio has grown from roughly 1:2 at the end of the War to as high as 3:1 in recent years.

[24] Indeed, other pieces of analysis by Saez and Zucman call into question the constant 70/30 ratio for entrepreneurial income that they deploy in calculating the top 1 percent’s labor income share.

For one example, when Saez and Zucman seek to derive the distribution of wealth by capitalizing incomes, they attribute a 1-2% return to bank deposits, a 2.7% return to rental property, a 4% return to taxable bonds, and a 14.3% return to partnership shares and ownership interests in pass-through businesses.  See Emmanuel Saez and Gabriel Zucman, “Wealth Inequality in the United States Since 1913:  Evidence from Capitalized Income Tax Data,” 533-4.  The excess return to capital invested in these ways—over four times the rate of return to other forms of capital—reflects that the owners also deploy significant amounts of their own labor in pass-through businesses and indeed that the greater share of income from these businesses is attributable to their owners’ labor.  Saez and Zucman recognize this effect and observe that it does not skew their estimates of business wealth.  It does, however, call into question the 70/30 ratio that Saez and Zucman apply to determine the labor share of entrepreneurial income.

A second example involves Saez’s and Zucman’s observation that the top 1 and top 0.1 percent’s “capital income shares” are roughly one-and-a-half times their wealth shares.  See Emmanuel Saez and Gabriel Zucman, “Wealth Inequality in the United States Since 1913:  Evidence from Capitalized Income Tax Data,” Online Appendix figures B1, B8, B9.  Given that the rich do not receive a commensurately larger return on their invested capital than the rest, see Id. Figure B29, these gaps must reflect a substantial labor component in “capital” income broadly cast.

[25] A new and more sophisticated approach to the labor share of top entrepreneurial incomes, which is broadly consistent with the shares used in The Meritocracy Trap, appears in Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century.” Smith, Yagan, Zidar, and Zwick find that most top earners—over 69% of the top 1 percent and 84% of the top 0.1 percent—capture some pass-through business income, typically from professional firms (of consultants, lawyers, doctors, and so on).  They then measure the labor income share of this income by assessing the effects of non-elderly owner deaths and owner-retirements on firm profits.  When the labor income share of entrepreneurial income is computed in this manner, the overall labor share of top 1 percent incomes increases by 8 percent over the share reported in Piketty, Saez, and Zucman’s “Distributional National Accounts,” to 55 percent for 2014.  See Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century,” 5.  Smith, Yagan, Zidar, and Zwick therefore find that, even in the present, over half of the top 1 percent’s income comes from labor rather than capital.  The Meritocracy Trap attributes still greater shares of elite income to labor, because it counts as labor income certain other classes of income that both Piketty, Saez, and Zucman and Smith, Yagan, Zidar, and Zwick treat as capital income.  The reasons why The Meritocracy Trap allocates income in this way are discussed in the next section, which addresses a conceptual issue in allocating income between capital and labor.

[26] Smith, Yagan, Zidar, and Zwick observe that “published IRS reports indicate that at least 25% and as much as 75% of realized capital gains are not from the sale of C-corporate stock and are instead gains from real estate and other asset sales or carried interest.”  Smith, Yagan, Zidar, and Zwick, “Capitalists in the Twenty-First Century,” 11, 72 ff.  They add that a material portion of these realized gains reflects “recharacterized labor income in the form of carried interest for hedge fund and private equity managers.” Id. at 72.  They deploy these insights to develop alternative measures of top incomes.  But they never fully integrate them into a comprehensive measure of the labor share of top incomes.

[27] See generally, Victor Fleischer, “How a Carried Interest Tax Could Raise $180 Billion,” New York Times, June 5, 2015, ‑a‑carried- interest- tax-could-raise-180-billion.html.; Victor Fleischer, “Alpha: Labor Is the New Capital” (unpublished manuscript on file with author); Internal Revenue Service, “SOI Tax Stats—Partnership Statistics by Sector or Industry,” last modified June 20, 2018,‑by‑sector‑or‑industry;‑CG‑Taxes-Paid-Pos‑CG‑1954-2009‑6‑2012.pdf; “SOI Tax Stats—Individual Statistical Tables by Size of Adjusted Gross Income,” last modified November 5, 2018,‑by‑size‑of‑adjusted-gross-income.

[28] Capital involves another complication also, concerning human capital—the accumulated knowledge and skills that a worker mixes with his contemporaneous labor.  As The Meritocracy Trap observes, “The rich do not possess a secret to effort that the rest lack. Rather, an hour’s superordinate work from an elite doctor, lawyer, banker, or manager produces more value than an hour’s work by an unskilled laborer, holding effort constant, because each unit of the superordinate worker’s effort mixes with capabilities built through massive prior investments in training.”  Daniel Markovits, The Meritocracy Trap, 36.  Superordinate workers are, in this sense, rentiers of their own human capital. Id. at 40.

This way of thinking gives an economic gloss to the libertarian idea of self-ownership.  Taking the thought to its logical extreme has profound implications, perhaps most immediately for the distribution of wealth.  If wealth includes human capital—which is to say the present discounted value of the difference between a person’s actual wages and an unskilled wage—this would dramatically increase the wealth shares of everyone but the very poor (who can capture only the unskilled wage) and the very, very rich (those so rich that conventional capital income dominates their income overall).

Piketty resists treating human capital as wealth, for the stated reason (as slavery has been abolished) it can’t be bought and sold.  Tomas Piketty, Capital in the Twenty-First Century, 46. The Meritocracy Trap does not take a stand on the question, but suggests a more ambivalent view.  On the one hand, the refusal to treat human capital as wealth enables meritocratic elites to cast themselves as ordinary workers and claim the sense of moral and political entitlement (and grievance in the face of redistributive taxes) that this self-understanding underwrites.

On the other hand, even given the prohibition on slavery, human capital lacks the capacity of other capital to free its owners, because it can produce income only by being mixed with the human capitalist’s own contemporaneous labor.

[29] Pensions helpfully illustrate the conceptual issues.  To see how, consider three cases: (1) formal pensions are structured as defined benefit plans, in which workers continue to get paid a specified fraction of their wages even after they retire; (2) formal pensions are structured as defined contribution plans, in which workers and employers allocate a fraction of income each year into a fund, owned by the workers, which becomes available for consumption on retirement; and (3) there are no formal pensions at all, but some workers save and invest a share of their wages to fund their retirements.  Pensions in case (1) obviously yield labor income, from the perspective of moral attribution, as they are just deferred wage payments.  But if this is true for the moral attribution of income in case (1), it is surely equally true in cases (2) and (3), which are morally equivalent and differ only in the economic mechanisms that they deploy to defer wages.  The different mechanisms may, however, change the economic form that the pension income takes.

[30] Rents in this sense include not just exploitative bargaining but also outright fraud and theft.  Of course, these formulations are conclusory with respect to any individual cases.  The main point, for present purposes, is that rents can function, conceptually, as a third possible category of income alongside capital and labor.  They can do so for purposes of moral and political attribution, because attribution is a normative category, and the norms behind it warrant treating fraud differently from both capital and labor.  Rents can function as an independent category for purposes of economic form because bargaining power is sensibly treated as a separate input from both capital and labor, not least because it produces private benefits (shifting output from one person to another) rather than increasing output overall.

[31] See, e.g., Svea Herbst-Bayliss, “Best-Paid U.S. Hedge Fund Managers Take Home $13 Billion,” Reuters, May 10, 2016,

[32] See Lucian Bebchuck and Yaniv Grinstein, “The Growth of Executive Pay,” Oxford Review of Economic Policy 21, no. 2 (2005).

[33] See Tomas Piketty, Capital in the Twenty-First Century, 330-335, 346.

[34] See generally Daniel Markovits, The Meritocracy Trap, Chapter 9 “The Myth of Merit” (2019).

[35] See Thomas Philippon and Ariell Reshef, “Wages and Human Capital,” Quarterly Journal of Economics 127, no.4 (November 2012), 1553, 1603, 1605.  Moreover, this study probably underestimates the true share attributable to skill, as it underestimates the increase in finance workers’ skills.   The study measures skill simply by counting workers’ number of years at school.  This neglects changes in the quality and intensiveness of elite finance workers’ educations, as the top schools—which invest the most in their students—have increasingly come to dominate the sector.

[36] See Robert J. Jackson, Jr., “Private Equity and Executive Compensation,” U.C.L.A. Law Revue 60 (2013), 652; see also David I. Walker, “Executive Pay:  Lessons from Private Equity,” B. U. Law Rev. 91 (2011), 1209.

[37] See Robert J. Jackson, Jr., “Private Equity and Executive Compensation,” 652.

[38] Moreover, and contrary to common perceptions, US CEOs are not outlandishly highly paid by international standards (once adjustments for firm-size, profitability, governance, and industry have been made, US CEOs are paid equivalently to their Italian, British, Australian, Irish, and Canadian counterparts, for example)  See Emmanuel Saez, Neubauer Collegium Lecture, University of Chicago, 30, Fig. B (October 2014); See also Nuno Fernandes, Miguel A. Ferreira, Pedro Matos, and Kevin J. Murphy, “Are U.S. CEOs Paid More? New International Evidence,” The Review of Financial Studies 26 (2013), 323.

[39] Analogous transformations underwrite the immense incomes of other elite workers.  The massive increase of elite labor income in aggregate is the produce of massive increases in income for virtually every particular type of elite worker:  not just CEOs, but also finance workers, consultants, lawyers, accountants, doctors, and even athletes, musicians, artists, and writers.  The particulars that connect increased top incomes to increased productivity necessarily vary from case to case.  But the range of the cases in itself undermines the view that top labor incomes generally reflect wrongdoing rather than productivity.  The mechanisms that set salaries in these very different fields all embed elite workers in market structures, and all involve self-interested and sophisticated counter-parties, but otherwise vary widely.  It is implausible to the point of being incredible that opportunities for elite exploitation and fraud would have risen in tandem across all these otherwise very different settings.

[40] A separate argument proposes that these incomes are anyway not be needed to induce elites to work so productively.  A CEO may be worth her pay to her firm—in the sense of increasing profits by more than her wage—and yet also be willing to do her job, just as industriously, at a much lower wage, leaving more profits to be distributed among other less-elite workers, for example.  (Of course, elite wages would have to be reduced across the board in this scenario, as elite workers facing reductions limited to particular jobs would simply shift to other ones.)  Elite incomes, that is, may be excessive from the point of view of social welfare even though they reflect market forces.

[41] Note that the rise of elite labor incomes helps to resolve an otherwise puzzling aspect of the data that Piketty presents.  Why has income inequality risen so much more rapidly in the US than in Europe, even as European economies are increasingly more capital intensive than the American?  (Europe capital stock has increased from about 3.5 times annual national income in 1950 to about 5.5 times today; over the same period the US capital stock has increased only from about 4 to about 4.5 times national income.  Thomas Piketty, Capital in the Twenty-First Century, 165 Fig. 5.2.  If elite incomes and the increase in the one percent’s income share are both dominated by capital income, then both should have increased more in Europe than in the U.S., which is the reverse of the actual pattern.  An explosion in superordinate workers’ labor incomes in the U.S. but not in Europe explains this pattern.

[42] Thomas Piketty, Capital in the Twenty-First Century, 571.

[43] Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts:  Methods and Estimates for the United States,” 26-27.

[44] See Travis Collins, “Forbes 400: Top 10 Richest Americans (2013),” Forbes

[45] See Lawrence H. Summers, “The Inequality Puzzle,” Democracy 33 (2014),

[46] See Ben S. Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit.” March 10, 2005,

[47] See, e.g., Matthew Rognlie, “A Note on Piketty and Diminishing Returns to Capital,” 2014,

[48] Tyler Cowen, “Why I am not persuaded by Thomas Piketty’s argument,” Marginal Revolution, April 21, 2014,

[49] See Roger L. Martin & Mihnea C. Moldoveanu, “Capital Versus Talent: The Battle That’s Reshaping Business,” Harvard Business Review July 2003,

[50] A 2005 analysis of compensation for top five highest- paid officers in the ExecuComp database (which includes “all the S& P 500, Mid- Cap 400, and Small- Cap 600 companies . . . also known as the S& P 1,500”) found that, between 2001 and 2003, the “ratio of aggregate [top- five] executive compensation to aggregate [S& P 1500] earnings” was 9.8 percent. See Lucian Bebchuk and Yaniv Grinstein, “The Growth of Executive Pay,” Oxford Review of Economic Policy 21, no. 2 (2005), 284, 297,‑of‑Pay.pdf.

[51] See Karen Ho, Liquidated:  An Ethnography of Wall Street (Durham, N.C.: Duke University Press, 2009), 255 (“[t]he standard portion of net revenue (total revenue minus interest expense) earmarked for compensation at Wall Street firms stands at a staggering 50 percent.”) (quoting Duff McDonald, “Please, Sir, I Want Some More. How Goldman Sachs is carving up its $11 billion money pie,” New York Magazine, December 5, 2005.) In 2011, for example, 42 percent of Goldman Sachs’s revenues were paid to its employees (who received, on average $367,057); and in 2010, compensation accounted for 51 percent of revenues at Morgan Stanley, 34 percent at Barclays, and 44 percent at Credit Suisse.  See Chrystia Freeland, Plutocrats:  The Rise of the New Global Super-Rich and the Fall of Everyone Else (New York:  Penguin Press, 2012),122.

[52] For similar points, see Daron Acemoglu and James A Robinson, “The Rise and Decline of General Laws of Capitalism,” Journal of Economic Perspectives 29, no. 1 (winter 2015) and David Singh Grewal, “The Laws of Capitalism,” Harvard Law Review 128 (2014), 652.

[53] See Thomas Piketty and Gabriel Zucman, “Capital is Back. Wealth-Income Ratios in Rich Countries 1700-2010,” Quarterly Journal of Economics 129, no.3 (August 2014), 1281, Table II.

[54] Samuel Moyn, “Thomas Piketty and the Future of Legal Scholarship,” Harvard Law Review Forum, Dec. 10, 2014,

How America’s foundational myth feeds inequality, dismantles the middle class, and devours the elite. 

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