WEALTH, NOT WAGES:

'Capital in the 21st Century," by French economist Thomas Piketty --its title inviting comparison with Karl Marx's "Das Kapital"--has electrified the intellectual left in the U.S. since its English publication in March. The book is bold, brilliant and perfectly aligned to the current obsession with economic inequality.

Mr. Piketty argues that, in modern market economies, private returns on capital investment are systematically higher than the rate of growth of income and output, and that the difference explains the increase in inequality. A fortunate few derive their income from capital: Some are celebrity capitalists like Warren Buffett or Bill Gates but most are mere business executives who extract enormous salaries from corporate earnings. Capital returns enable them to accumulate wealth at far higher rates than the mass of men whose wages grow no faster than the economy or their own productivity. [...]

That story begins with the 1976 essay of Peter Drucker in the Public Interest (later expanded to a book) on "pension fund socialism." Drucker observed that the growth of invested pension funds--corporate, union, public employee, professional and individual--had made wage earners the owners of one-third, soon to be one-half, of the equity capital of American industry.

"The U.S., without consciously trying, has 'socialized' the economy without 'nationalizing' it," Drucker wrote. Capital investment was better for workers than owning just their own firms because it offered higher returns through trading and diversification--advantages that, Drucker suggested, could be improved with earlier vesting and portability. The corporate income tax, he added, had become exceedingly regressive, because its rate was much higher than that on low-income pensioners--eliminating it, at least for pension holdings, would be a great stroke for income equality.

The left was contemptuous. Writing in the New York Review of Books, Jason Epstein pronounced Drucker's book "the sort of torpid whimsy that high-price business consultants concoct to amuse their clients." Hadn't Drucker noticed that the stock market was flat while the consumer-price index was soaring (this was 1970s stagflation)? Corporations, Mr. Epstein opined, were ripping off poor pensioners just as effectively as the then-notorious New York City politicians who had diverted city pension funds.

In the ensuing decades, academic and think-tank economists, most of them right of center, put forth a succession of proposals for transforming Social Security from a wage-transfer program (from workers to retirees) to one of real capital investment and heritable personal ownership. The aims were to anticipate the retirement of baby boomers, improve on Social Security's already poor returns on payroll taxes, increase national savings, and promote widespread ownership of productive capital.

President George W. Bush campaigned for personally owned and invested Social Security accounts in 2005. He was crushed by an avalanche of objections from progressive intellectuals, AARP lobbyists and Democratic politicians. The objections ran the gamut from high brokerage fees to consumer confusion to corporate self-dealing. But the central, ultimately decisive argument was that exposing average folks to the vicissitudes of stocks and bonds would be tantamount to shredding the social contract.

"Capital" is a comprehensive refutation of that argument. If returns on capital are as superior to the growth of GDP and wages as Mr. Piketty has found, then short- and medium-term fluctuations are a detail. They can be managed through classic diversification, as practiced by many progressive professors in their own TIAA-CREF accounts. Social Security can be divided into a minimum tax-financed guarantee augmented with personally owned, professionally managed investments like TIAA-CREF's. Nations such as Chile with capitalized pension systems have employed these and other approaches with little fuss and much success.

Follow @brothersjudd