My decade-old thoughts on Piketty issues...
Bequests: An Historical Perspective: Hoisted from the Archives from Eleven Years Ago: So I've finally put to bed a sketch of how the relative economic importance of bequests has changed over the past five centuries. The more I think about it, the more I think that the central points--the stunning decline in the relative importance of inherited wealth with the coming of modern economic growth, and the way in which America initially defined itself as hostile to inheritance for equality of opportunity's sake--are very important. Thus I find myself frustrated: I think I have important things to say, but I don't think I've said them as well as they deserve.
Practically every major aspect of our system of inheritance today is less than two hundred and fifty years old. Two hundred and fifty years ago, inheritance proceeded through primogeniture--as if those leaving bequests cared not for the well-being of their descendants but only for the wealth and power of the lineage head. Before the industrial revolution, inheritance played an overwhelming and crucial role in wealth accumulation and wealth distribution that it does not play today.
Migration to the New World was accompanied by a rapid shift in the perception of the purpose of inheritance as the old patterns failed to flourish in a land-rich, rapidly-growing frontier-settler economy. By the start of the twentieth century inherited wealth was regarded with suspicion in America, with even some of the richest calling for estate taxes to keep the rich from diverting the public trust of their fortunes into the pockets of their descendants. Thus the coming of social democracy to America brought with it high statutory rates of tax on large estates, which nevertheless did not raise a great deal of revenue.
Now we may be seeing another turn of the wheel, for if history teaches anything it is that even those elements of inheritance that we think of as most deeply embedded in fundamental human desires and economic laws are remarkably mutable over the centuries.
In chapter 3 of Pride and Prejudice, Jane Austen introduces her hero, Mr. Fitzwilliam Darcy: The last, by far the most lengthy, and by far the most important part of her initial description of him is
...the report, which was in general circulation within five minutes after his entrance [into the ballroom], of his having ten thousand a year...
Fitzwilliam Darcy has inherited an estate, Pemberly, from his late father. From this estate he derives an income of £10,000 a year--if landed wealth is capitalized at the conventional twenty years’ income, Mr. Darcy’s fortune is worth some £200,000, and accordion to Lindert (1986), the average holding of the top 1 percent of households at the time Jane Austen was writing was £100,000. Given the shape of the Pareto distribution, that puts Fitzwilliam at the 0.04 percentile of the English income distribution--with 1.3 million adult males in 1810, that means that there are only 500 males richer than Fitzwilliam Darcy. That makes him, "the ladies... declare", "much handsomer than [his friend] Mr. Bingley” who had inherited only half as large a fortune from his late father.
Note the striking disjunction between how virtually everyone would be introduced today--in which the principal question to be answered is “what does he or she do?”--and the introductions in the still overwhelmingly pre-industrial world of Jane Austen, in which the principal question is “what has he inherited?” (or “what will he inherit?”).
The explanation of this is straightforward. Jane Austen’s novel is mirroring the world in which she and her ancestors lived. Back before the industrial revolution, the relative distribution of wealth was much more dependent upon bequests than it is today. Indeed, it is not going too far to say that bequests were the crucial factors influencing the distribution of wealth--and thus the distribution of economic (and often political) power. A much greater proportion than today of society’s wealth was acquired by the members of any particular birth cohort through bequests than through accumulation or entrepreneurship or any alternative channel.
Sound quantitative estimates of the share of inherited wealth in any birth cohort’s total wealth accumulation or in the proportion of wealth inequality generated through bequests are not available for pre-industrial early-modern England. But a few illustrative calculations will convincingly demonstrate that the role played by bequests must have been overwhelming. Societies before the Industrial Revolution saw shorter life expectancies and generation lengths. They saw a ratio of non-human capital wealth to production that was surely not less than is seen today. And they saw extraordinarily low rates of net capital accumulation. These three features of pre-industrial societies together guaranteed that bequests were the single most important factor determining the wealth and wealth distribution of any particular birth cohort.... My guess is that every year bequests turned over to the receiving cohort were equal to between 16 and 24 percent of annual output. This is more than ten times the contribution of net investment to wealth.
Contrast the dominance of inheritance over net investment before the industrial revolution with the situation today. Today investment is a more important component of a cohort’s wealth accumulation than inheritance. Today rates of growth of GDP per capita average 3 percent per year or more, and the population growth rate is approximately 1 percent per year. At a ratio of reproducible capital to output of between 3 and 4, net investment must amount to between 12 percent and 16 percent of total output, while roughly 12 percent of a year’s total output passes to the receiving cohort via bequests and four percent per year in inter-vivos transfers. This balance between accumulation and bequests is in sharp contrast to the more than 1:10 ratio of the pre-Industrial Revolution past.
J. Bradford DeLong (2003, forthcoming), "Bequests: An Historical Perspective," in Alicia Munnell et al., eds., The Role and Impact of Gifts and Estates (Washington: Brookings Institution).