“The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.” – Frederic Bastiat, “The State”


26-year-old Matt Rognlie has made waves by questioning the main premise of Thomas Piketty’s Capital in the 21st Century. Piketty’s central argument is that the return on industrial capital is greater than the growth rate of the economy in the 21st century, and thus wealth inequality will increase over time. But Piketty lumped all capital, housing and industrial, into a single number for his analysis. Matt Rognlie separated these two statistics and found that the return on industrial capital is not greater than the growth rate in the economy, though the return on housing is.

Increasing wealth inequality is therefore not due to industrial investment, but due to the housing sector. This view certainly calls into question the Federal Reserve’s “wealth effect” policy of keeping home prices from falling: Boosting home prices doesn’t help the poor any more than boosting laptop or cell phone prices. In addition, zoning regulation is now being questioned in a way it never has before. Wealth inequalities seem to have, at their heart, local democratic zoning boards that represent single-family homeowners, not the soulless robber barons who Marx predicted would merge all business into a single firm.

It’s worth going over the basic economics of cartels. In a non-cartelized market, supply and demand for a product match at some price. The higher the price is, the more of it people are incentivized to supply. The lower the price, the more of it people are incentivized to buy/demand. Similarly, the more profitable an industry is, the more money people are willing to invest into it. If one industry’s investments are earning a huge profit, more and more people will invest in that industry until it becomes overfilled with capital and profit margins shrink.

Here is where cartels come in: The essence of a successful cartel is a barrier to entry. In a profitable industry, profit margins can be kept high by preventing competition. Without a barrier to entry, businesses don’t have control over how much profit they make: High profit margins will be whittled away over time as newcomers flood the market with capital. But if businesses lobby for a barrier to entry, such as a set number of taxi medallions, this process doesn’t happen, and profits are fixed high.

What are the economic incentives that single-family homeowners face? They obviously face the incentive to keep their home prices up. If apartment buildings are tolerated by the zoning board, then every homeowner lives in fear of an apartment building going up next door, lowering the property value of the nice, suburban home that they’ve sunk their life savings into. There is also a migration barrier involved: Part of keeping out apartments is keeping out the type of people who live in apartments. This, needless to say, often has a racial component.

A democratic zoning board in a town of homeowners faces a strong incentive to outlaw apartment buildings. A corrupt zoning board might grant a variance and let a few apartment buildings sprout. It’s very easy to sympathize with single-family homeowners: They’ve worked hard all their lives to buy a place they can call their own. Of course, the same thing can be said about taxi medallion owners: They’ve been guaranteed a promise by the state, and it seems unfair for the taxi medallion they’ve saved up years to buy to be devalued by Uber or Lyft.

Democratic zoning boards are typically homeowner cartels: Just as the price of a taxi medallion is fixed high by restricting the supply of medallions, the price of a home is fixed high by restricting the supply of housing. There is no guaranteed profit in a non-cartelized industry, so any industry where asset prices constantly rise is very likely a cartelized industry. Taxi medallions for decades were a better investment than almost anything else.




It should be no surprise that it is the highly cartelized housing market is the real source of permanently profitable investments leading to a large degree of inequality. In most industries, you are allowed to start a new firm. But the municipal zoning board has outlawed or greatly restricted new apartment buildings, in almost all municipalities. And so it should be no surprise that the homeowner class’ wealth is outpacing the apartment-renter class, who must use a huge percentage of their paycheck for artificially scarce housing.

The proposed solutions to the zoning problem seem to be imperialistic “up-zoning”: Where government is taken from the local level and made more “independent” or centralized at the state or county level. One solution that should certainly be discussed is the abolition of zoning laws. Houston gets by without them. In fact, Houston has undergone a population growth rate that dwarfs most cities’ growth rates, and it seems to be suffering no housing shortage. Lo and behold, when prices and products are not fixed by the state, supply and demand meet.