The inheritance of wealth and social mobility


Many of the papers are covering the new Greg Clark paper showing that social mobility isn't quite as fast as some think. But it has to be said that the paper isn't quite showing what people think it does. It is true that the intergenerational elasticity of wealth inheritance is 0.7-0.75 as the paper defines it. But this isn't quite the same as saying that that wealth is inherited. To understand the point imagine that it is purely wealth itself that is inherited. People now are rich because their forefathers were rich and that's the only reason. OK. But that's not what this paper has proven in the slightest.

What this paper has shown is that the children (and male children only, as they're tracking surnames) of people who die rich are highly likely to die rich. That means that there is a correlation between being the child of a rich man and being a rich man. It does not show that that richness comes from having inherited the wealth.

Consider this example that is used:

Joseph Bazalgette was responsible for building the world's first sewer system in London in the 19th century, the Pepys family tree contains noted diarist Samuel Pepys, and John Bigge was a judge and royal commissioner.

They found that, compared to their relatives in 1850, those living with that surname today are almost certain to have amassed fortunes well beyond the reach of the average Briton.

For example Sir Peter Bazalgette, the great-great-grandson of Sir Joseph, is the founder of Endemol television production company which created Big Brother and Deal or No Deal.

The company was floated on the Dutch stock exchange in 2005. It trebled in value and was sold for £2.5billion in 2007.

There's a number of different options available to us to explain this. That Sir Peter inherited wealth and was thus able to invest in something that was a further success. Someone who had not inherited could not have done this perhaps. Sir Peter inherited a social position that meant he was able to have such an entrepreneurial success. Or Sir Peter had a privileged education that enabled him to do so and so on. But it's also possible that there's an entirely different explanation, that Sir Peter inherited something else that enabled his success.

It is, after all, indubitably true that intelligence is inheritable. The very concept wouldn't have arisen through evolution if that were not true.

We can even tie this in with earlier work by the very same Greg Clark. In a Farewell to Alms he makes the point that what really enabled the Industrial Revolution etc was that those who were wealthier, had those bourgeois values that created higher incomes, had more surviving children than those that didn't. And thus over the centuries those values spread further down the income bands as the descendants overwhelmed (and there's an argument there about whether it was genes or cultural education) the genes of those who did not start out with these views. Essentially his eariler argument is that it was inheritance of being bourgeois that mattered.

We're going to have an awful lot of shouting in the next week or two about this new paper. And we're prefectly willing to agree with the concept (no, this does not mean we think it necessarily true, just that we're willing to take it as a working assumption and see where it goes) that something or other is being inherited leading to the same sorts of people getting to the top in each subsequent generation. But everyone's going to have to be extremely careful in trying to tease out exactly what it is that is being inherited.

From the information we've got here it's not immediately obvious that it is wealth itself that is being inherited. After all, as the paper itself notes, there's been many different taxation regimes upon both wealth and income over the hundreds of years they study. If it were purely cash that made the difference then the results would not be so consistent over this time. And if it's something else that is being inherited then even 100% death duties aren't going to make much, if any, difference.