The Causes of Wealth Inequality (32): How Inheritance Not Only Perpetuates But Also Aggravates Inequality

Inherited wealth – the value of all assets (real estate + financial assets – financial liabilities) transmitted at death or through inter-vivos gifts – has become more important over time. Thomas Piketty estimates that

the annual inheritance flow was about 20%-25% of national income around 1900-1910. It then gradually fell to less than 10% in the 1920s-1930s, and to less than 5% in the 1950s. It has been rising regularly since then, with an acceleration of the trend during the past 20 years, and according to the latest data point (2008), it is now close to 15%. (source, source)

The drop between the 1920s and 1950s was caused by the Great Depression and WWII, two events that destroyed a lot of wealth.

Inheritance has always been an important cause of the persistence of wealth inequality. I guess that goes without saying. Capital is unevenly distributed in most populations, and will remain so to the extent that it can stay in the same families. It’s more interesting to look at the mechanisms through which inheritance could, under some circumstances, aggravate inequality. What are those circumstances? Here are some:

  1. Birth rates. People in developed countries have fewer children than they used to, and the children they have survive into adulthood at higher rates. As a result, those children inherit a larger part of their parents wealth. If numerous siblings no longer have to split their inheritance among themselves, the effect of inheritance on wealth inequality becomes stronger. Piketty as well has made this point in a recent talk.
  2. Higher house prices. Housing has become more expensive. This incites people to save more so as to allow their children to buy a house, which has a ripple effect across generations: the biggest savers are those who enjoyed an inheritance because if you’ve inherited a house or the money to buy one it’s easier to save than when you have to rent or pay a mortgage. And if you can save, your children will inherit. And so on.
  3. Inheritance taxes have been reduced in most countries.
  4. Slow economic growth in most developed countries means that the wealth produced in those countries is smaller compared to the wealth inherited.

Not all of these circumstances can be brought under human control. Perhaps an inheritance tax – the dreaded death tax – is a realistic option. I mean, if even Nozick could get behind that, you would need to be an outright fundamentalist about property rights  in order to oppose it.

For increases in the inheritance tax to happen, however, we will need to start thinking differently. When David Cameron, for instance, promised to raise the threshold for inheritance tax to £1m he did so because he believes that people who work hard, save money, and bequeath it to their offspring are somehow doing the noble thing. But while it may be noble to work hard and save, it’s far from noble to live off of an inheritance and its often huge returns. Hard work for one results in an unproductive lifestyle for its beneficiaries. If you want to promote work and productivity, by all means impose a death tax. And if you want the best for your children, it may be tempting to give them cash or other assets, but beware that this will be self-defeating beyond a certain amount.

More posts in this series are here.

Racism (25): What Do We Know About Race?

At least the following 5 things:

  1. There are no human races in the sense of biological or genetic divisions within the human species. About 94% of genetic variation between individuals lies within so-called “racial groups” – or rather “groups which are conventionally labeled as races” on spurious grounds (for example on the basis of vague and ambiguous differences in appearances). This means that two Africans may be as genetically different from one another as an African and a European. Continued interbreeding throughout history and the resulting exchange of genetic material has maintained humanity as a single species. There are no clearly divided species of humanity that are biological distinct. Humans aren’t monkeys. The concept of race has no genetic basis and genetics doesn’t provide support for those dividing humanity into different races.
  2. Even divisions based solely on appearances rather than genetic characteristics are flawed since those appearances show a continuum across individuals rather than a clear division between discrete groups of individuals. There are indeed superficial visual differences between people living in different parts of the world, but those differences are individual gradations on a continuum rather than divisions between groups. If you move towards the equator, skin color darkens because darker skin helps to avoid the cancerogenous effect of the sun entering the atmosphere at a right angle. These superficial differences are not only continuous and gradual rather than discrete; they also have no connection to other, supposed differences such as IQ or morality. Even if IQ and morality are determined by genes – and that’s a big “if” – then there is no reason to believe that the genes that determine these qualities “cooperate” with the genes that determine skin color. Hence no reason to assume a causal link between skin color and intellectual or moral faculties.
  3. So, even if you manage to divide humanity roughly into groups according to broad ranges of skin color – and provide a category called “mixed” for descendants of two individuals belonging to different groups (“Creoles” for example) or for people belonging to borderline groups (Arabs for example) – nothing useful can be concluded from such a division. There is nothing – no gene, no trait, no color, no moral or intellectual characteristic – that distinguishes all the members of one so-called race from all the members of another so-called race.
  4. As a result of this, observed inequalities between groups that are wrongfully labeled as racial groups must be the result not of biological inheritance but of differences in education, rights and treatment. Biological or genetic arguments for intellectual or moral differences between races are groundless because the denominator – race – is a fiction.
  5. The word “race” only has meaning in the sense that it is something some people believe in, talk about and act upon. “Race” is something that exists only in the minds of people. In other words, it’s a social construct. However, a social construct can have real life effects given the fact that people treat other people on the basis of their mistaken ideas about “race”. Likewise, race can be meaningful as a form of self-identification, subjective allegiance and group belonging. But also in this sense, the word race refers to nothing in biology or genetics.

More on race here. More posts in this series here.