Wealth: earned or inherited

The efforts of the right to discredit Piketty’s Capital have so far ranged from unconvincing to risible (there’s a particularly amusing one from Max Hastings in the Daily Mail, to which I won’t bother linking). One point raised in this four-para summary by the Economist is that ” today’s super-rich mostly come by their wealth through work, rather than via inheritance.” Piketty does a good job of rebutting this, but for those who haven’t acquired the book or got around to reading it, I thought I’d repost my own response, from 2012.

The coming boom in inherited wealth (repost)

As everyone who has been paying attention knows, the news on inequality is nearly all bad. Not only has inequality increased dramatically in the US, but intergenerational economic mobility is declining[1]. And, where the US leads, the rest of the world looks likely to follow. The top 1 per cent lost more than most during the crisis of 2008-09 but, as Stephen Rattner reports here (drawing on work by Piketty and Saez), that was just a blip. A stunning 93 percent of the additional income created in the US in 2010, compared to 2009, went to the top 1 per cent, and there’s no reason to think things were much better in 2011 – average real earnings have fallen yet again, and employment growth, though positive, was still modest. Wealth inequality is also high, though it has not increased as much as income inequality.

The one bright spot mentioned by Rattner is that ” those at the top were more likely to earn than inherit their riches”. Since I’m already noticing that point popping up in the places you might expect to see it (can’t find a link right now), let me point out that Rattner’s explanation, that “the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers” is wrong, and that there is every reason to expect a boom in inherited wealth.

The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed.  More generally, starting from the position of relatively (to earlier periods and to the current one) equal income and wealth that prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption (and US high-income earners have not been notable for restraint as regards consumption). 

So, given highly unequal incomes, and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes. That will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.


fn1. More precisely, since intertemporal comparisons are difficult, the chance that a person with parents at the top (or bottom) of the income distribution will end up in the same or a similar position is now higher in the US than in Europe, whereas, until at least the  late 20th century there was good reason to think that the oppositewas true.

91 thoughts on “Wealth: earned or inherited

  1. @J-D

    I’d would suggest Kalecki’s argument that the elites of the society would simply not tolerate full employment and equality is pretty much on the money on this issue you’ve raised.

    Kalecki, M 1943, ‘Political aspects of full employment’, Political Quarterly, vol. 14, no. 4, pp. 322-31.

  2. @J-D

    Gina Rinehart, and I’m sure much of the right, think that if only the poor were worse off, they would be better off. Like you, I don’t know why they think that.

    But why would you raise the fact that African miners are “happy” to earn $2 per day unless you somehow thought it should be introduced here?

  3. @Fran Barlow (and Tim Macknay) – I’ve read “Politics and the English Language” quite recently and, despite a slightly archaic style, it is a fine piece of writing.

  4. @J-D
    They would say that carrying unproductive members of society will make us all weaker in the long run -we wont grow as fast as possible ,and, we will fall behind our international competitors who lack compassion. In his ‘end of age of entitlement’ speech in London J Hockey also said how our Asian neighbors dont have NDIS etc (he said Asian style social security) so we cant either . But I agree with Tom that they (we know who they are!) dont want full employment anyway.

    I think its good that humanity is made up of lots of different kinds of people .Not all of these will fit into the ‘greed is good’ hyper competitive and ruthless world we are creating .We should not punish people for failing at that .They need to think —> that only ruthless competition is natural for us—> to be able to use survival of the fittest logic on the less fortunate.

  5. @J-D


    Don’t play those games. Here is what you wrote;

    Is that what you mean when you say he had ‘drifted to the right’? If so, then so what? Do you think that accepting subordination in a Soviet bloc would have been a less bad option than accepting subordination in a US-led bloc?

    This was a direct attempt to impute this choice into others.

    Your “Is this what you mean” was precisely that.

    What other cartoons do you have up your sleeve?

  6. The real meaning of Piketty’s Capital and the reason for all the angst from Keynesians and other academc economists (presumably Mankiw, Samuelson, Alchin etc ad nuseum) is that Piketty directly challenges the value of their contribution to civilisation.

    Piketty outlines his project:

    I did not find the work of US economists entirely convincing… To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in. — Capital in the Twenty-first Century, Thomas Piketty (p31-32).

  7. Piketty’s idea about taking income >500k at 80% and global wealth tax is laughable. It is instinctive human nature to firstly earn from additional work, and secondly to pass onto your heirs something. Additionally, r>g is not always true and there are periods when wealth destruction is awe-inspiring via mispricing risk or unexpected “black swan” events. Hence r>g otherwise you wouldn’t bother taking risk in the first place. Also, has anyone on this board actually read his book (other than myself?) as you all seem to be talking about every other author rather than the subject matter.

    Oh, forgot to mention, r>g is true for pensions and house prices, which benefit those who have saved for retirement and those who purchased a house. Hardly the “global elite”!

  8. Oh, and not to be too negative, the book is an interesting read but the gushing reviews tell us more about the reviewer than it does about the actual book itself.

  9. faust :
    Economists are known for having physics-envy!

    My only wish is that mathematical economists could learn to count correctly.

  10. @faust

    It is instinctive human nature to firstly earn from additional work, and secondly to pass onto your heirs something.

    Is that so?

    I’ve never heard anything like that, and never felt this natural instinct.

    Got anything to back that up?

  11. So, you never felt any instinct to earn more from working harder and to pass something onto your children?

    Also, empirically, estate duties are disliked even though a majority according to polls (both phone-based and via focus groups) do not pay it because it is considered immoral.

    And if you want to see people rebelling against higher tax on higher income earners look at the poll impact from the deficit tax.

    You are unique: you want to work harder but earn less and you do not care what you pass onto your children!

  12. Faust

    There is either no such thing as human nature, or it’s limited to mere banalities. Using the term ‘instinct’ doesn’t alter this.

    There are indeed commonly seen impulses amongst humans, including those you cite, but theses can be explained again in entirely banal terms. Put simply, theses are maladaptive responses to fear, angst over death, want of satisfaction in work and so forth.

  13. @Ivor
    Bizarre and foreign though the idea may be to some people (and I speak from experience), I asked the question not as an indirect way of making a point but in the hope of obtaining information. My experience suggests to me that I have a far-greater-than-average desire for the reduction of my own personal ignorance, and I still don’t know an adequate substitute for questions as a tool for this purpose. I asked ‘Is this what you meant?’ because I wanted to know whether that was Fran Barlow meant. It seems now that it wasn’t, which would be the answer to my question. Good.

  14. @faust
    Perhaps you haven’t heard that the concept of ‘SKIN’–Spending the Kids’ Inheritance Now–has become common enough to have been labelled. Clearly the desire to pass on wealth to one’s children is not as universal as you suppose, as if the increasing number of people who are childless by choice didn’t already make that plain.

  15. @faust

    I never felt that my kids needed me to make money or to climb the ladder for them. I totally discouraged them from competing with neo-liberals. There are neo-liberal small business owners in our extended family, so I know how badly this ideology affects ordinarily nice people and turns them into ugly greedy selfish consumers who love to judge others who are not like that.

    This is a true story Faust. Second son was being expelled from his high school in grade 11 after having ‘run away’ with the daughter of two of the local ‘upper class’ neo-liberals, the day after she turned 17. They came back after a few days having some fun in the big city and spending all their money, some went on staying the last night in a swanky hotel.

    I’m not sure what the basis of the complaint was, but it seems that my son was to be punished and expelled for this adventure. But after the interview with the fella from the Education department, he was offered a sporting scholarship to a private school. But there was no way that I was going to have my son associating with those sort of people, so I turned it down and my son went to another state school in the next town with a high school.

    My oldest son did dabble in the neo-liberal ‘entrepreneurial’ society for a a couple of decades and despite not having gone to a private school did very well, but has now seen the light and a couple of years ago took a 50% cut in his 6 figure salary to move back to a small town and a ‘better’ job with less money and status and we are all of us so much happier.

    And he is healthier you know, without doing anything specific. I think it is really bad for some people’s health to have to associate with competitive greedy and selfish people who are always out to climb the ladder and win something. That isn’t fun.

    I don’t want my kids to work at all, I want them to do what they are good at and what is good for their society and/or community. I don’t care how much they earn as long as they are not selfish and greedy and especially as long as they do not desire to be wealthy and want to be regarded as better than others.

    This society overvalues individual achievement and undervalues cooperation and social intelligence. There was a terrific interview on RN this morning with Geraldine Doogue and her guest, Margaret Heffernan who wrote “A bigger prize: why competition isn’t everything and how we do better”. You should listen.

  16. @J-D

    Dorothy Dixer’s often ask questions to inject a proposition they do not want to take responsibility for themselves, and to tag someone else with adverse imputations.

  17. @Ivor

    Although you may be right, to me (I’m only 1/3 through so far) Piketty seems to want to replace the maths and “theoretical speculation” with a crude empiricism that leads to a number of blind alleys.
    As various reviewers have pointed out his concept of capital conflates actual productive ability with stock market prices, so Piketty’s measures of capital to income ratios make no distinction between capital “destroyed” by a stock market crash and capital destroyed by e.g. carpet bombing in war (leaving aside the Capital Controversy issues).
    He also seems to conflate profit, interest and rent, so his framework is blind to the role of the FIRE industries in generating fictitious capital and destabilising the productive economy – hence all he can suggest is generally higher taxes on everyone, which will never fly, rather than taxes on and regulation of rent seekers.
    And you don’t have to subscribe to Marxism to see that many of his criticisms of Marx are flat wrong – the claim that Marx assumed constant productivity, for example, where Marx has a number of long discussions in Capital and other works about the ways increased productivity and technological improvement could affect and offset the tendency of the rate of profit to fall. This suggests he’s never read Capital or even the Wikipedia page about Capital. According to Jamie Galbraith’s review there are similar basic misunderstandings and misquotings of the post-Keynesians. It’s all very well to criticise theory but it helps to understand what you’re criticising.

  18. @Nevil Kingston-Brown

    Agreed, it is particularly worrisome to see a reputable economist misunderstanding (at best) introductory Marx’s economic theory. However the quote that Ivor quoted from Piketty on the wrong point of focus on American economists does ring true. The top 10 economic journals are filled with mathematically models that hardly have any application on the reality and seems to be publish simply because of the difficulty of the maths involved. It is near impossible to publish economic history or theoretical papers in the top economic journals in the recent years unless you are a “Nobel Prize” winner.

  19. @faust

    “And if you want to see people rebelling against higher tax on higher income earners look at the poll impact from the deficit tax.”

    Where is the evidence, faust?

  20. faust :@Ivor
    Economists are known for having physics-envy!

    Here we have a nice example of speculative theorising, although known as theorising in thin air. .

  21. and here i thought economics – market sentiment, share market bubbles, panic selling, &c. – was a branch of psychology. 😉

  22. @Julie Thomas
    Wow! is that the authoritarian left speaking? You so loved your son that you denied him the right when nearly adult to learn a little by direct association about the kind of relatively rich and poerful or at least influential people that you do not associate with and know by the srereotypes with which you label them with. Bravo! Oh that I was as certain about anything as you seem to be about everything important.

    I haven’t heard of a private school offering a sports scholarship. What schools do that. Come to think of it, it sounds a bit like those great football enthusiasts the Marist and Christian Bros. And that gives me a clue (with Bertrand Russell’s help) to the origin of your severe certainties: you are I guess a lapsed Catholic.

  23. @yuri

    I think it is you speaking all on your own, from your own pain about somethings that hurt you so badly that you like to find things to criticise in others.

    Do you have any insight into what it was in your own ‘self’ that I wrote that triggered this irritable, risible response?

    I can assure you that it would be a useful exercise for you to ponder on this matter of motivation. I suspect that you don’t have much understanding or experience of how one goes about developing insight into one’s motivations, but it is possible and there is a lot of information on the internet you know, it really will make you so much happier and smarter if you invest sufficient effort and are honest with your self.

    I was brought up to think that all religions were irrational. I went to humanist meetings with my father sometimes though. Does that provide you with another clue you can use? 🙂

  24. Yes a clue that your attempt to signal that you have a sense of humour and even a light touch by emoticon derives from a an earnest indoctrinating background – a kind of Soviet version of family life in Calvin’s Geneva. I didn’t, and my children didn’t need to be taught that religions were not soundly based on reason for us to shed the faint tincture of theism that naturally made itsel apparent in early life.

    My many years of paying school fees, mostly at schools with some Christian connection, when the academic scholarships they all won didn’t cover the year or the amount are undserstandable even I think to you qua parent.

    When one of them won valuable scholarships to one highly regarded school which he wanted to go to, and also to one very highly regarded (especially academically) school we sent him to the former and, out of fairness to siblings, to find the money for fees if necessary. As it turned out the others all won scholarships at various stages too so we were lucky. I had been making preparations to get them into selective high schools – though not as determinedly as my ALP member cousin who bouhht a flat as nominal residence within the catchment area of a selective high school which also took some locals. (That was a good move as her daughter has a D.Phil from Oxford in molecular biology.)

  25. @yuri

    Thanks for that information. Now I understand just a little bit more clearly where your pain and resentment is coming from.

    But people are different you know and that’s the really essential thing that you ‘should’ remember when you choose to think so badly of the other people who done you wrong.

    Take comfort in the idea that it is probability all the way down – not turtles or Atlas shrugging and you don’t need to compare yourself to, or compete with, your relatives. As my grandma used to say “comparisons are odious”.

    You do seem to have an irrational need to identify the ALP as the source of all evil things in your family and the world, even? That seems problematic to me and you might want to understand the source of this dysfunctional thinking and ponder how much happier and more rational you could be if you just got over it. You might even be suffering from some sort of cognitive disability as well as the emotional disability that clearly underpins your miserable, irritable attitude.

    I never voted for the ALP. I blame them for the dole bludger meme they started back in the 80’s when there was high unemployment and no jobs and people who were unlucky and found themselves unable to find work were blamed. This attitude that they were lazy and stupid was the beginning of the crap judgemental society we now have and is the basis of so much of the psychological dysfunction and disability that we now see particularly in men of a certain age who form most of the long term unemployed.

    I don’t think I want to give you any more ‘clues’ though; your attitude is so very boring and typical of people who were fooled into competing for status and stuff over the past couple of decades and didn’t win enough to make them happy. Sigh, there are so many of you out there. But I never did want to be one of those psychologists who ‘helps’.

    I do wish I knew how to put a ‘roll eyes’ emoticon or a “snort” which would be so much more appropriate. But you can have another smile just because it is free. 🙂

  26. @Julie Thomas

    I never voted for the ALP. I blame them for the dole bludger meme they started back in the 80?s

    Actually, 1974, via Clyde Cameron, who also spoke of public servants as “shiny bums” in true populist style.

  27. @Fran Barlow

    It started that early? The bastards!

    I saw, close-up, that nastiness destroy a couple of blokes I knew well. It was cruel and such a waste of human capital.

  28. @Julie Thomas
    You don’t need to provide me with any more clues for my entertainment.

    To start with it is entertaining enough to try and work out whether you have some inkling of the truth that you know almost nothing about me and that your inferences (if that’s what they are rather than just random emissions) are far wide of the mark, in which you are just making clumsy attempts to be provocative – a kind of trolling.

    Alternatively, are you one of those people that one can feel sorry for who is so uncertain and so desperate to live up to the intellectual standards (never perhaps quite understood) that were held out as the summum bonum of aspiration with sad consequences for the relative dullard? (I was alerted to this category by a Jewish friend when we were discussing a couple of Jews who had committed egregious crimes and been caught. He pointed out that in a whole extended family – in this case Ashkenazim – of generally pretty bright people who value and use their intellects the shame at being thought a bit thick even after you have qualified as a lawyer or medical specialist can lead to pretty desperate acts).

    And you do of course know nothing about me and your cod-psychology is pathetic.

    Pain? Resentment? Where do you find it? I am luckier even than I indicated above. Life is kind and any past hurdles surmounted and consigned to the happy memories of success if not, immodestly, triumph and to reminiscence. A favourite godson (as atheist I am in fact) said recently that I was probably the only person he knew to have no negative emotions. Fearing that he was going to ask me what weed I would recommend that he smoke, and anyway thinking it made me sound a trifle simple minded I replied that he was basically correct but that I did find myself struggling sometimes to fend off the unpleasant emotion of contempt.

    The problem issues sometimes in a mildly sadistic approach to pretentious not very bright people who take themselves seriously. Especially if they throw down the gauntlet and are so deluded that they think they can win, so need teaching a lesson. Sorry about that.

    Of course I couldn’t be referring to you could I? You said something about probability which could suggest the kind of intelligent approach that is only to be found reliably in 1 or 2 per cent of even a First World population.

  29. @Peter Chapman
    Is there any evidence of an impulse toward civilisation, learning, invention and other accoutrements of modernity among the primitive people that we all had as ancestors without ingatherer ban being pursued by some who wanted to take advantage of or merely display some superior ability or attribute? That is surely one essential precondition. Others might include conditions under which the hunter gatherer band, typically no larger than about 150, and usually much smaller, could grow into a community of thousands. It is commonly pointed out that the larger, typically farming, community is a prerequisite for some of the smart people to be able to specialise. But it would also be true that one smart strong guy in a hunter gatherer tribe of 100 or so wouldn’t be much interested in progress if he could have the pick of the meat and the girls without having to found an academy or a health service. How would Aboriginal outstations develop from where they are even alcohol free and with TV to show them the path on which their farmer cousins in the Fertile Crescent set us.

    It would appear to be an empirical question as to just which urges to achieve or assert superiority lead to/are essential to beneficial outcomes to the plodding majority.

  30. @Julie Thomas

    I was going to respond to your post but while we may be writing in English we virtually come from different planets. If that is your guiding philosophy as a mother in life then there is so much that is different from us (and what I consider frightening) that I will not respond in depth to your post.

    Suffice to say, no one here has explained to me why r>g in the long-run, no one has explained to me why r is always value accretive, and no one has explained to me why it is a good think that Piketty has ignored household wealth and pensions that make up a lot of what accrues to “capital” nowadays in the western developed world.

  31. @faust

    Good decision Yuri, I did think that you would have trouble keeping up with my creative intelligence – 🙂 – but that doesn’t matter, most types of humans, even bitter and twisted neo-libruls, can be reconstructed.

    Brains can change. Did you know that? Check out Norman Doidge for more info, if you can bring yourself to challenge your prejudices. That doesn’t seem to be one of your intellectual strengths.

    I am pleased that you are frightened though. You should be; there are many many people who think like I do, increasingly so, I am finding as I talk to the country people who, in ignorance sucked up the neo-librul kool-aid and are now gagging on the taste and feeling quite sick.

    I do understand and appreciate your decision not to engage further with a person you don’t like or understand; that is typical of the very ordinary neo-liberal mind and intelligence. You don’t like difference do you? It is scary.

    But I doubt you have the self-control to follow up on your decision. You can’t help being nasty and revealing all your petty little bourgeois personality traits, can you? Let us see if you can resist responding to me this time.

    But LOL you should be afraid, Yuri, be very afraid of the honest decent people who are increasingly waking up to the way we have been manipulated to live in ways that the selfish greedy grasping people prefer.

  32. faust:- “I will not respond in depth to your post.”
    Julie Thomas:- love your stuff. and good on you for educating your children away from materialism. that you’re criticised for that shows how corrupted the modern era has become. -a.v.

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