The story currently making the rounds in the financial blogs is that a 26-year-old MIT graduate, Matt Rognlie, has finally found a fatal flaw in a theory that has shaken the foundations of a profession (economics) that, for the past 30 years, has offered nothing but justification after justification for an economic system that mostly benefits those at the very top. This theory, elaborated in a thick book by the French economist Thomas Piketty, Capital in the 21st Century, states that the sharp increases in inequality since the '80s results from the returns on capital (r) investments being greater than the growth (g) of the economy (r>g). What this means is that those who are lucky/rich enough to own assets such as shares, bonds, and property will claim, as time progresses, a larger and larger portion of a nation's wealth. Much of the evidence for this theory was drawn from income tax returns. Rognlie, however, contends that only one kind of asset class has grown significantly over the years: land, property, houses.

Other asset classes have, according to his reckoning, not performed nearly as well as housing, and also new technologies depreciate (the law of diminishing returns) too quickly to be a meaningful long-term investment for the rich. As a result, Piketty's prediction that capital, the past, will devour more and more income, the future, is most likely wrong. But inequality is still a problem that needs a solution. What is it? Rognlie thinks we need not to tax the rich, as Piketty proposes, but instead to attack (and this is where things get interesting) NIMBYism and build more houses for the people. So, the best answer to inequality is to increase homeownership. This is music to the ears of the right:

Turns out that it might not be the reviled "1 per cent" – the vastly overpaid chief executives, investment bankers and corporate lawyers – who are driving greater social inequality in developed nations. It's more likely to be you.

It's never the rich. It's always us. A perennial hit tune for orthodox economics.

But let's get serious: What is important to understand, and the mistake that is easy to make because Piketty should have been clearer on this point in his book, is that the form (or structure) of inequality in Europe is not the same as that in the US (and, to a certain degree, in the UK). The theory that Rognlie takes a shot at—capital's growing share of national economy—applies almost entirely to continental Europe. For the US, inequality has more to do with the spectacular wages of super-managers.

Now, to say that CEO pay and the like exploded in the '80s is not controversial. What is controversial is to challenge the orthodox explanation for this extraordinary increase, which revolves around marginal productivity. In short: The pay or bonus represents the market value of the skills or expertise these super-managers bring to an enterprise. The evidence and logic supporting this explanation has been very weak. To begin with, as heterodox economists have pointed out, managers in Japan and Europe do not enjoy the kinds of bonuses and paychecks that their American counterparts do, and yet they are as productive (and often more). The American problem is the CEO. And eventually, CEOs will become rentiers. This is Piketty.

As for Rognlie's head-turning housing theory, this seems to be neither here nor there or even contradictory. And besides, have economists already forgotten the sub-prime catastrophe and Bush's ownership society?