As Solow remarked when he received the Nobel Prize in economics in 1987, “One of the achievements of growth theory was to relate equilibrium growth to asset pricing under tranquil conditions.” In other words, private investment and distribution goals could be made objects of indirect planning if capital markets sent meaningful signals about social priorities. But “the hard part of disequilibrium growth is that we do not have — and it may be impossible to have — a really good theory of asset valuation under turbulent conditions.” High securities prices might signal that a corporation or municipality was satisfying public wants through its provision of sales or services — or that it had been thrown on the betting table or the chopping block. Profits and profitability in the capital market, it turned out, no longer told us anything about what kind of products and services the public wanted to consume and how. Maybe they never had.

When economists aggregate all the various types of capital into a single quantity — corporate paper, equipment, patents, real estate, et cetera — they make it impossible to know whether the right tax incentives will channel this abstraction into labor income, productivity, or growth. Most often, liberated capital flows into asset bidding, more debt, corporate stock buybacks, dividends, and idle cash to be hoarded. You might call it wealth, but you’d need the right education to believe it.

Historically, the tendency in American economics has been to conflate investment talk with trading talk, which opens the door to the argument that cutting tax rates for large savers will increase the funds available for starting businesses and creating jobs, rather than for taking bets and protecting status. Since high rates of return should mean available investment opportunities, the confusion leads people to oppose any limits on profits. This makes it difficult to determine what type of social activity our financial institutions are sustaining — increasing the income of ordinary workers or safeguarding hoarded wealth. The devastating effects of this confusion are now self-evident, and they cast a shadow over the Clinton and Obama Administrations.

[...] Yale Law professor David Singh Grewal asks how our theory of history changes when we see capital as a “social relation” rather than “simply a stock of assets, whose equilibrium rental price may be established through conventional supply and demand considerations.” Grewal argues that the ability of the state to “limit — or buttress — the prerogatives of capital” is rooted in the legal distinction between a government constitution and a government administration. In this analysis, it is the law, rather than productivity, that determines the distribution of income. Conflicts that emerge between a new administration and constitutional law — as with the campaigns to abolish slavery, to institute the graduated income tax, or to establish a federal minimum wage or universal health insurance at the state level — “are only to be overcome, if at all, in extraordinary moments of popular constitutional lawmaking.” [...]

[...] As Naidu writes, financial markets and labor relations are both arenas in which state power plays the determining role; both are shaped by the contingencies of government interference or lack thereof. When values collapse and debts go unpaid, or when a strike threatens the health and safety of the community, it falls to the courts and the police to decide which groups will come out ahead. If we follow this line of thinking, property values represent more than expectations about social desires; they represent confidence that ownership will continue to carry influence and power. Property rights are best understood as “the ability to call on the government to secure the promised flow of income.”

As Steinbaum writes with startling frankness, income and wealth “tend to diverge because the ideological commitments of capitalism prohibit policies that would check divergence.” If there is a formula here, it is about power and ideas, not a purely economic understanding of r>g. The state produces inequality by ensuring a constant rate of return to capital, even when growth is slowing.