The Inheritance

A death ends a working life. It need not end the holdings accumulated during it. The house remains habitable, the bond remains a claim, and a share in an enterprise can continue to yield an income to someone who took no part in its creation. Inheritance is the passage by which the stock survives its holder and becomes another person’s starting position. The volume has followed wealth as a reserve against interruption, as capital that supports production, as a balance of assets and debts, and as a claim upon future receipts. At this passage each of those uses can continue while the relation between the holder and the work that made the holding changes. The heir receives a resource, an option and a measure of independence. The transfer itself supplies no new service by the recipient to explain that initial advantage. It is this separation between the continuity of the property and the discontinuity of the person that makes inheritance a distinct question of distribution: whose work is rewarded when a fortune continues after its maker?

The first distinction is between a transfer of wealth and an addition to it. If a parent passes a house to a child, the child’s balance sheet gains what the parent’s relinquishes. With no other change, the act creates no extra house and adds nothing to the combined wealth of the two. Debts, other beneficiaries, expenses and taxes would alter their particular accounts; they must be recorded where they fall. The underlying transfer is a change in ownership. A gift made during life can perform much the same economic passage before death, and a reckoning confined to estates will miss it. The inheritance received in one year is accordingly a flow of transfers, measured over that year. The inherited wealth held by the living at a date is a stock, assembled from earlier transfers, subsequent returns, consumption and losses. One can be large when the other is small. A year with few bequests may sit within a society whose existing property was extensively transmitted long before. The distinction between the annual passage and the accumulated position is the bathtub’s distinction, now applied to generations.¹

The scale of the annual passage can be expressed with a small account. Suppose adult private wealth totals a thousand monetary units and annual national income is two hundred. Two percent of adults die during the year, and those who die own, on average, twice the wealth of the average adult. On these assumptions, forty units pass at death: two percent times two times a thousand. That is four percent of the wealth stock and twenty percent of one year’s income. Add gifts during life equal to one-quarter of the bequests, and the combined annual transfer becomes fifty, or twenty-five percent of annual income. Each number answers a different question. A lower death rate can reduce the annual flow, but greater wealth relative to income or greater holdings among those who die can offset it. Earlier gifts can also reduce the estates observed at death without reducing what the next generation received. Piketty and Zucman organize the measurement around precisely these relations. Longevity alone cannot tell us how much inherited position is being transmitted; the amount owned, the people who own it and the time of the transfer must enter together.²

Measuring the inherited stock asks a harder question. A person receives a hundred, invests it, spends some receipts, adds saving from wages and eventually holds two hundred. How much of the balance is inherited? Counting only the original hundred gives one answer; accumulating that hundred at an assumed return gives another. The second can exceed the person’s actual holdings if much of the return was consumed. Treating every receipt as wholly preserved would then assign to inherited wealth money that no longer exists in the account. The same property may also have crossed several generations: adding all its historical transfer values would count repeated changes of title as though each created a fresh asset. A stock measure must specify whose past receipts are being counted, how they are carried forward and what remains. Piketty and Zucman’s comparison of definitions shows why estimates can differ before any disagreement about an observed estate begins. The distinction does not make inheritance disappear. It makes the attribution explicit, so that the claim that a fortune is inherited can be examined rather than settled by an unexplained total.³

A dynasty’s continuity also depends on division. Imagine a real holding of a hundred that grows at a net retained rate of two percent for thirty years, after consumption and all other drains have been allowed for. It reaches about a hundred and eighty-one. If it is then divided equally between two heirs, each receives about ninety and a half, less than the original founder’s hundred. The family total has grown while the holding per heir has fallen. In this example it would take a retained annual rate of roughly 2.34 percent to double the stock over thirty years and restore a hundred to each of two heirs. Different fertility, unequal division, fresh saving, losses and transfers would change the outcome. The return on assets therefore cannot be carried straight into a prediction that an intact fortune will enlarge forever. Consumption separates the earned return from the part retained; division separates the lineage’s total from each person’s position. Yet even a diminished inheritance can provide a substantial advantage over receiving nothing. Its importance concerns the alternatives it gives its recipient, as well as whether it exceeds the fortune of the preceding generation.⁴

The question of reward survives all these measurements. A parent may have created a valuable enterprise, worked and saved to provide for children, or taken risks that others declined. The wish to pass the result onward can be part of the purpose for which the work was done. Those reasons concern the maker’s contribution and freedom to dispose of it. The child’s initial claim has a different origin: relationship to the person who could give. An heir may subsequently work, invest well and contribute greatly, but those later services cannot explain the starting advantage as a reward for services already rendered by the heir. The two judgments should be kept visible together. Honoring creation does not determine without further argument how far its ownership should govern the opportunities of later generations. Nor does recognizing the inherited advantage establish that the productive asset must be destroyed. The institutions of transmission can alter ownership and claims while leaving the workshop, dwelling or enterprise in use. The dispute concerns the passage of command, the purposes it serves and the opportunities it closes to people outside the line of descent.⁵

The Stock closes at the point where a quantity becomes a position that can outlast a life. Its earlier plates established the discipline of levels and flows: what is accumulated, what wears away, what is owed, what can be paid out and what remains. Inheritance gives those quantities a succession of names on the ledger. The entries can preserve the fruits of work, extend security and maintain useful resources; they can also carry an advantage forward without a new contribution by its recipient. A number alone cannot settle which justification reaches which part of the claim. It can require that the past work, the current service, the transfer and the future return be reckoned separately, so that none is silently made to stand for all the others. The next volume, The Power, follows a further consequence of holding a position: the ability to shape the terms on which someone else may trade. Wealth can provide such an ability, although a large balance alone does not prove market power. The next inquiry asks when an owner or firm can move the price, and what alternatives remain to the person on the other side.