The pre-capitalist, landed elite were mostly earning returns from practically risk-free capital, generally in the form of land. Without the legal and cultural changes of capitalism, there weren't, in fact, many other options. As human capital and at-risk physical capital have expanded, and as land values have declined (as a proportion of income), the demand for risk-free capital has expanded. Homes help to fill this need for most middle-class households. Developed world government debt also fills this need, in both the developed and developing world.
This applies to human capital, too. We are the 100%. The unemployed 40 year old debating on returning to school, and wondering what vocation will still provide a decent income 20 years from now, is faced with the same problem as the private equity investor. We are all capitalists now.
Old world: Capital: How do we earn additional returns? Choose a family can we join through our children so our descendants will have land income.
Labor: What career should I choose? Shovel horse shit like your grandfather did.
Current world: Capital: How do we earn additional returns? Take risk, but diversify, because who knows what the future will hold.
Labor: What career should I choose? Well, you can either learn to program C++ or you could learn how to rehabilitate a broken hip. Either skill could be obsolete in 10 years. Good luck.
Progress is disruption. This is why when the rubber hits the road, it is hard to find support for things like shutting down the Ex-Im bank. People don't actually dislike rentiers. Rentiers represent stability.*
In our own lives, given the opportunity to develop human capital, we take it. It's too superior to the other options. But, that leaves us feeling vulnerable. Being capital isn't so easy, after all. So, just as we pay a premium as laborers or fixed income investors to have more income stability, we are willing to pay a premium (less growth) for income stability through state policy, which usually creates rentiers (through subsidies, protectionism, regulatory apparatus, etc.). This creates a sort of collective action problem, though, because in our personal lives, we bear enough of the cost from not specializing and optimizing that we tend to go ahead and take risks. Those risks create many positive externalities, through our increased amount of innovation and productivity. But, the cost of collective policies that reduce disruption at the expense of growth falls mostly on the future. Thank goodness our ancestors chose risk.
Revolutionary progress means that legacy capital is overtaken by new capital that arises from the superstars of human capital - in the current instance, this is the equity of Bill Gates, Sergey Brin, Larry Page, etc. Their riches didn't come from rents on a pile of savings. The 18th century land barons earned "r", but were simply passed up by the new physical capital. The 20th century corporate barons earned "r", but were simply passed up by the new human capital.
So, there is inequality that could never have appeared without capitalism - the inequality that comes out of human capital. Framing the current environment as a problem of "r > g" or of "the rich getting richer and the poor getting poorer" is confusion.
People like Tyler Cowen talk about a future where there is a larger divide between owners and workers and between high and low income workers. I suspect that if this is correct, the divide won't come from physical capital. It will come from human capital. And the problem will be that human capital can't be diversified. The problem we have is that there is too much economic mobility. Some kid in his dorm can change the world, and the next thing he knows, he's worth $5 billion. This is the farthest thing in the world from the inequality of the 18th century, but I suspect that it bothers us more. The problem isn't that capital is out-earning labor. The problem is that now we are all capital, and being capital ain't so easy.
I also wonder how foreign this idea of human capital would have been to the tycoons of the mechanical world - the Carnegies and the Rockefellers. Would they have been able to conceive of a world where a few young adults could end up running the most powerful corporations on the planet without much need for physical capital? They probably saw themselves as a sort of end of history. They must have assumed that progress until the end of time would come from accumulated physical capital invested in marginal productivity improvements. What will come after exponential human capital? Could we even imagine it? By the time we are able to judge Picketty's forecast of capital and income in 2100, the world will probably be so foreign to us that, as with the 18th century gentlemen confronted with our world, we won't even recognize their complaints as coherent. As moralists, we end up fighting the last battle. In the case of Picketty, we are actually fighting the previous battle that came before the last battle.
I started this series of posts with the title "the absurdity of blaming capitalism for inequality", but in the end, I think what I've found is that it is responsible for inequality. It's an inequality between generations. An inequality where one century's baron is the next century's anachronism. We now live in a world where Kenyans making less than $2 per day send their kids to private schools, and pay the bill with their mobile phones. I can barely imagine the world we have. I hope to get a glimpse of what the next type of "inequality" brings. I hope we choose risk.
* (Take the recent flair up about High Frequency Trading. People who are not familiar with the institutions of trading come down overwhelmingly against HFT. Trading costs have come down immensely, and HFT as a whole almost certainly has net positive externalities. But, it's unpredictable and because HFT'ers aren't living off of limited access rents, they have to exploit tenuous circumstantial trading activities to try to capture profits. People prefer the old market makers, who pocket a big profit day in and day out and promise to keep things calm. We'd rather have a 20 cent spread and a rentier's protective hand than to have an anarchic 3 cent spread.)