07/22/2014 02:58 pm ET | Updated Sep 21, 2014

What Prof. Piketty Missed

Prof. Thomas Piketty's book, Capital for the Twenty-First Century, certainly has stirred up plenty of debate and political posturing. Progressives have seized on his careful examination of widening income inequalities to advance an agenda of higher taxes and more income redistribution. Conservatives have criticized his data, his analysis, and, where they acknowledge an income gap, have questioned whether his solutions would help.

In all this whirl of words and argument, it is unfortunate that no one has considered the demographic backdrop behind the economic trends, either Piketty in his book or others in the ensuing debate. This is a serious oversight. The fact is that the demographic situation has changed radically form the way it was during period analyzed by the professor. Alone this shift raises questions about his conclusions and his recommendations.

A surge in the world's workforce dominated the entire long period over which Piketty did his analysis. It emerged initially from tremendous population growth. The trend then accelerated during the last 30 years, not so much from general population growth but from the integration into the global economic system of workers in former communist countries and what in the Cold War were called non-aligned nations, India most prominent of the group. By some estimates, these more recent events increased the global workforce by as much as 50 percent in a rather short period of time. It was an overwhelming and perhaps unique development, and it colors all Piketty's analysis.

This surplus of workers probably did more than anything to create the wealth and income gaps the professor so carefully charts. Economics, after all, makes nothing so clear than that the lowest returns accrue to the basic economic resource - land, labor, or capital - in greatest relative abundance and the highest returns accrue to the scarcest. Such a surge in the supply of labor could then not help but hold back wages relatively. Capital garnered higher returns. It grew but not nearly as fast as the supply of labor.

These trends, however, are turning. Decades of low birth rates, especially in the developed world, have slowed the flow of young workers into the labor force just as the retirement of baby boomers will remove a large percentage of the population from active production. By 2030, the Census Bureau estimates, the United States will have barely three people of working age for each retiree. Japan will have barely two. Europe will fall in between. Labor will become the scarce resource. Its relative returns cannot help but rise, especially compared to capital, which over this long past of superior gains has become comparatively abundant. Whether these new trends will return the income and wealth gaps to some golden ideal remains an open question. But the trends definitely are turning.

It might have been reasonable some time during the long period the professor has analyzed to apply his remedies - to tax high incomes and capital directly and redistribute the proceeds to working people. But it would be a terrible mistake to do so now when demographic trends are decisively turning the balance against capital and in labor's favor.