John Cochrane recently gave a speech where one of the main threads involved talking down the importance of income and wealth inequality. Poverty, and generally not having as much as we would like are bad, he says, but is there anything bad about inequality per se? That is: is there at least one respect in which things would be better if some people who are very well off were made worse off? He argues that there isn’t, or if there is, it is of only trivial importance, and outweighed by all of the costs of actually ‘doing something’ about inequality.
In a response on Bloomberg View, Noah Smith argued that economists should respect people’s actual preferences, and since people show strong preferences against wealth and income inequality, we should respect them. He uses the example of how people prefer to take nothing over free money when they are made offers they perceive as ‘unfair’ in the Ultimatum Game. On top of that, he says, inequality leads to socio-political unrest, which we can all agree is very bad and costly, citing a 1993 paper.
Finally, Tony Yates adds some extra arguments on his blog. He says luck has a big role to play in success, but success can also buy some of the non-luck factors in success (e.g. education), meaning that it can ‘set off path dependence’—according to Yates this can lead to inefficient outcomes by distorting the allocation of talent. He says inequality reduces public good provision (e.g. education). And he says that inequality might make ‘crony capitalism’ more likely.
I’ve written twice about equality before: once saying that Rawlsian-style justice demands inequality of wealth/income in certain very relevant circumstances; another time arguing that Hayekian-style information economics militates towards equality of wealth. There are lots more things to say in this debate, but here I intend to take issue only with one of Yates’ claims: the idea that luck + path-dependence means inequality is passed down through the generations (I can’t see why exactly he thinks this distorts the allocation of talent, but here I’m only questioning the mechanism).
Luck is certainly a huge factor in success. And people do pay big money for better education to try and make sure their kids are more likely to succeed. But does this work? Let’s look at some studies. Random selection into a better school in Beijing has no effect, random selection into a better school in Chicago has close to no effect, random selection into a better Kenyan school has no effect, nor does it in Missouri, nor in New York City. Once you control for student characteristics, Australian private schools didn’t outperform state schools on the 2009 PISA. Conscription into extra education didn’t much affect life outcomes in late 1970s France. The literature is huge and there are many many more examples.
And other literatures point to the same conclusion. For example, we now know that the heritability of intelligence increases through life (to hit around 50-90% in adulthood), while ‘shared environment’—upbringinging, parental inputs and schooling—falls to around zero. This is supported by traditional twin studies, twins reared apart studies, adoption studies, and now whole-genome analysis.
So it should not be surprising that it’s actually really really really really hard to make sure your descendants stay rich with the proceeds of luck. In fact, we know that that’s not why the descendants of the rich often are rich because we have a couple of pretty good experiments showing it! For example:
We track descendants of those eligible to win in Georgia’s Cherokee Land Lottery of 1832, which had nearly universal participation among adult white males. Winners received close to the median level of wealth – a large financial windfall orthogonal to parents’ underlying characteristics that might have also affected their children’s human capital. Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines.
The same is true for modern lottery winners—the truest example of pure luck in success. And it took only two generations for the descendants of slaves to catch up with the much more advantaged & wealthy free blacks. Basically luck mixed with path dependance explains almost nothing.