in fewer and fewer hands. In his 2013 book, Capital in the Twenty-First Century, French economist Thomas Piketty provided powerful evidence for this. One of the world’s leading researchers into inequality, he argues that unchecked capitalism tends to make the rich richer, producing extremely high levels of inequality.7 Although this may seem old news to some, it turns mainstream economic thinking on its head and does so with more data than has ever been collected on the subject, covering three centuries and over twenty countries. The lesson from history is clear: we cannot rely on the ‘invisible hand’ of the market; we must extend the reach of democracy through regulation and taxation.
Vast wealth may take on a life of its own, but how do people come to own it in the first place? One of the main ways is simply by inheriting it. Inheritance is not a peripheral economic issue. In the US, between 1970 and 1980, inherited wealth accounted for 50 to 60 per cent of total wealth – some estimates have put it as high as 80 per cent.8 Globally, inherited wealth accounts for 60 to 70 per cent of the largest fortunes. Some of these inheritances represent enormous transfers of economic power. The Walton family, for instance, is worth $152 billion.9
As capital accumulates, dynasties form and inherited wealth accounts for a larger proportion of total wealth, giving the richest heirs more wealth than the populations of some countries. This is the main reason why ownership of capital is so extremely concentrated. Historically, the wealthiest 10 per cent have always owned more than half of all capital (and sometimes as much as 90 per cent), while the poorest half owned almost nothing.10 The pattern holds true today. In most European nations, the top 10 per cent own roughly 60 per cent of the wealth, while in the US they own a little over 70 per cent of the wealth. In both cases, the poorest half of the population own less than 5 per cent.11
The impact of inheritance is felt over centuries. By tracking rare surnames, researchers in the UK found that, over the last 150 years, the effect of inheritance has consistently overcome political efforts to improve social mobility. The two economists behind the study of January 2015, Professor Gregory Clark and Dr Neil Cummins, summed up their results in simple terms: ‘To those who have, more is given.’ There was a ‘significant correlation between the wealth of families five generations apart’. In other words, ‘What your great-great-grandfather was doing is still predictive of what you are doing now.’12 Today, the descendants of the nineteenth century’s upper classes are not only richer, but more likely to live longer, attend Oxford or Cambridge and end up a doctor or lawyer. And there is no sign of any let-up in the power of inheritance to shape the world. The wealth transferred via inheritance from one generation to the next is set to break all records. A report by the Boston College Center on Wealth and Philanthropy predicts that the US is set for the largest inter-generational transfer in history: $59 trillion passed down between 2007 and 2061.13
Why should the lottery of birth have such an impact on what people own and the opportunities they enjoy? Being born to wealthy parents is a matter of blind luck. The typical argument made is that those with wealth have the right to do with it as they please, including passing it on to their children. Even if we accept this as a legitimate right, it is certainly not the only legitimate right. It ought to be balanced against other rights – most pressingly, the right of all children to enter a world of equal economic opportunity, or, at the very least, one in which they have access to clean water, food, shelter, medicine, education and dignified employment. When the two rights conflict, why should the wants of the few outweigh the needs of the many? To the younger generation, equal economic opportunities can mean the difference between health and illness, education and illiteracy, happiness and depression, even life and death. By contrast, reducing great concentrations of economic power by regulating inheritance need not threaten anyone’s health, literacy, happiness or existence.14
Inheritance isn’t the only way to acquire great wealth: much of the world’s private property was originally attained through violence and exploitation. Slavery, for instance, rapidly accelerated the accumulation of capital in eighteenth-century Britain. Historian Robin Blackburn writes: ‘The thousands of millions of hours of slave toil helped to underpin the global ascendancy of Victorian Britain.’15 Profits from this exploited labour helped to build many banks (including Barclays), extend vital credit to early industry, modernise British agriculture, finance the experiments of James Watt, and increase economic growth. When a panel of experts attempted to put a figure on the unpaid labour of the slaves who had enriched Britain, they arrived at a figure of £4 trillion.16 Dr Nick Draper from University College London estimates that as many as ‘one-fifth of wealthy Victorian Britons derived all or part of their fortunes from the slave economy’.17 Adding insult to injury, when slavery was eventually abolished in Britain, 46,000 slave-owners were compensated for their loss of ‘property’ to the tune of £17 billion in today’s money. Their freed slaves did not receive a penny.18
What about capital that is secured through talent and hard work – does this entitle an owner to generate unlimited income from it? After a given point, the income generated from capital goes well beyond what is necessary to compensate the owner for any initial effort. As Piketty points out, ‘no matter how justified inequalities of wealth may be initially, fortunes can form and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility. Entrepreneurs thus tend to turn into rentiers, not only with the passing of generations but even within a single lifetime . . .’.19
The problems go deeper than this, however. Many who reject the idea that we should be able to generate income simply from owning capital still believe that we should be rewarded in accordance with the value of our personal contribution. But how do we measure the value of someone’s contribution? In 2010, the world’s highest paid footballer earned over £500,000 a week.20 In the UK, in the same year, a nurse starting in her or his first year earned close to £400 a week.21 How does the market determine that a footballer’s contribution is worth over a thousand times more than the contribution of a nurse?
The mainstream theory of wages defines ‘contribution’ as the market value of what workers produce as determined by supply and demand, but this value changes with market conditions. If 90 per cent of engineers dropped dead tomorrow, the market value of the skills of the remaining 10 per cent would promptly increase. This would have nothing to do with any change in their efforts or output. Numerous factors beyond our control determine the market value of what we can contribute. Ultimately, as with inheritance, it’s just a matter of luck.
Even the ‘self-made’ rich owe a debt greater than their fortune to those who developed the technologies, institutions, laws and infrastructure that made their enrichment possible. Billionaire Warren Buffett concedes that ‘society is responsible’ for most of what he has earned. ‘If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a market system that happens to reward what I do very well – disproportionately well.’22
What’s more, what we can contribute is also a matter of chance. The opportunity to cultivate our innate potential depends on conditions we play no part in creating. For instance, in the US, only 9 per cent of students in elite universities come from the poorer half of the population.23 Another study released in 2015 by the UK Social Mobility and Child Poverty Commission exploded the myth of a meritocratic society.24 According to its findings, children from wealthier families with less academic intelligence than their poorer counterparts were nevertheless 35 per cent more likely to end up becoming high earners. Wealthy parents employ a range of strategies to ensure their children end up in ‘top jobs’ but, whether it’s by tapping into powerful personal networks or subsidising unpaid internships, the result is the same: an absence of downward mobility. And, because high-earning jobs are in limited supply, gifted students from less advantaged backgrounds face an uphill struggle to turn their potential into market rewards.
