Five ways to get rich:
- pick the right parents (inheritance),
- pick the right spouse (marry well),
- pick the right pocket (theft & conquest),
- pick the right card (luck,serendipity, gambling), or
- pick the right trade (craft, profession, industy).
This list was triggered by an essay by Brad DeLong on how the standards around inheritance have evolved thru time. I’d love to know which of these techniques explains what percentage of a given dollar of wealth.
Assuming wealth floats your boat…
For most of history it appears that the first three were by far your best options. DeLong estimates that there was a long period in England when 91% of accumulated wealth came into one’s hands via inheritance. Picking the right parents is hard. For much of history all the wealth would go to the first-born son, so called primogeniture, which makes it even harder. First you must find the right parents and then you have to get there before your older brother. Talk about first mover advantage!
The second plan, marry well, looks attractive but for most of history it only worked for women. Since capital was typically passed down to sons. In these more egalitarian times it’s an option open to everybody. Setting aside high profile examples, like Ann Nicole Smith, finding a wealthy spouse is a lot easier if you’re already wealthy. Yet another reason to spend all that money on an Ivy League school.
Theft, conquest, embezzlement etc. are risky but if you manage to end up as on top you get the PR advantages of being able to write the history. This technique remains quite popular.
Luck is always good. Win the lottery! The Beverly Hillbillies got rich this way. Spain did all right discovering gold in Mexico – but that’s probably the third technique. All these plans can benefit from a good dose of luck.
The last option, picking the right trade, requires first and foremost that you make enough money to cover expenses. After that, with the help of thrift on the cost side and industry on the revenue side you might manage to start to accumulate some wealth. What really helps is to pick a trade that scales well i.e. has a good business model. Running a good restaurant is one thing. Franchising McDonalds? Now you’re cooking. Running the five and dime generates a lot less wealth than inventing Sears, Wal-Mart, or eBay.
DeLong’s essay tries to puzzle out, from an economist’s point of view, why the standards around how to we treat bequests have evolved over time. For example there was a time when the strategy of primogeniture had one big advantage: you kept the wealth concentrated so it was easier to defend the kingdom from the feudal lord in the next valley. That’s a nice example of the advantage of a big chunk of concentrated wealth. In the absence of a functioning civil society you are going to need your castle and your allies. It makes theft or (de-chief-ment) easier.
Primogeniture keeps wealth concentrated and concentrated wealth has its advantages – in the modern world you might need it to buy a few Senators; or to attract a rich spouse, or just to hire some good lawyers when those intellectual property bandits come over the hill.
So what’s wrong with primogeniture? One disadvantage it tends to cause the siblings to fight a little more than usual. Some of us love all our children. A more utilitarian view is that your gene pool loses the benefit of diversified portfolio. You might prefer to spread your bets across all your offspring. You might do well to take the familial wealth and send it off to various locations much as the Rothschild’s did and run interlocking banks in various European cities.
The central question that DeLong’s essay raises for me is exactly how to make this trade off between the advantages of diversified portfolio vs. the advantages of concentrated wealth.
DeLong provides some information about this issue. The trade off has shifted over time. There were times, like the feudal example above, when the benefit of concentrated wealth was very high. Then as economic growth became a powerful generator of wealth so that industry was a good way to accumulate wealth then some of the balance shifted toward diversity. In some situations the advantages of wealth were quite low; for example in colonial America where land was easily stolen from the natives.
Primogeniture apparently died out quickly in the US. The advantages of wealth were thinner here. There was lots of land “for the taking.” Land was, of course, the primary kind of capital in a pre-industrial society. This land of opportunity rewarded the industrious. DeLong quotes the governor of CT arguing against primogeniture saying that the younger sons wouldn’t labor to ‘tame the land’ if they couldn’t look forward to getting a share in that land. This argument that reminds me of the arguments for widely granted employee stock options.
There is another set of standards here, moral standards. Different eras have different attitudes about what’s a moral road to wealth. The moral high ground, these days, goes to the industrious. This is, of course, a major shift from the days when part and parcel of being a gentleman was to avoid the taint of trade. It’s nice to recognize that estate taxes are, for some, a kind of sin tax.
There is also a social welfare subplot that winds it’s way thru all of this. What is best for society? There was a long period in England, before the industrial revolution, when the top 1% owned 90% of everything. It’s hard to imagine a democracy thriving in such an ecology. That’s not just an abstract historical situation. The distribution of wealth in this country has shifted sharply since the Ronald Reagan took office. Today 1% owns nearly half of everything. Today one of the competitive advantages of concentrated wealth is you can guard against taxes taking it; advocating a repeal of the estate tax, assuring the capital gains tax is lower than the tax on labor’s income.