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The legacies that matter most



The Inheritances that Matter Most

Inheritances can be controversial because some people inherit enormous wealth, while others inherit nothing or even debt. As a result of this apparent disparity, even the arch-conservative economist James Buchanan has broken down supported huge inheritance tax. In contrast, another free market economist, Milton Friedman, has argued Such taxes are inefficient because they encourage people to consume rather than save during their lifetime, which is better for economic growth. Any monetary inheritances we receive from our parents are only a fraction of what we inherit in total. Over time, technology and knowledge are the most important legacies passed down from generation to generation. In the meantime, we all benefit from it.

Consider a policy of universal basic income (UBI), where the government provides a minimum income to every member of society. Some thwart UBI because it could discourage work. If the policy has such an effect, the much larger legacy received in the form of advanced technology is likely to have similar and perhaps more perverse disincentive effects in the future, regardless of whether a UBI is implemented. Those who oppose UBI should consider whether technology should also be opposed.

The inequalities of our time seem less troubling when we place them in this broader context of inequality about time. It’s not fair that my children were born at a time when home heating, the internet and vaccines were commonplace, but my ancestors had no electric lights, plumbing or cars to transport them. This does not mean that large income and wealth differences cannot cause problems. The inequality that arises as a result of corruption is deeply disturbing, but perhaps the problem there is corruption, and inequality is just one of many negative byproducts.

The income difference between someone in today’s United States and, say, someone in rural Mexico or India is also substantial and largely due to the misfortune of where one happens to be born. However, while such differences are large, they still seem relatively trivial compared to the differences over time. Many poor people in developing countries now have smartphones. And plumbing and electricity, while not universal, likely will be in the not-too-distant future. The technology that Bill Gates and I have access to isn’t all that different either, despite him being orders of magnitude richer than me. Meanwhile, a king who lived 400 years ago could not dream of my standard of living.

Today’s inequality can be frustrating because luck plays such a big role in success. Still, there are some reasons to accept it. One reason is that acceptance frees us from petty emotions like jealousy or envy. Once you recognize that most successful people are not significantly more remarkable than anyone else, you have little reason to envy them.

Although successful people tend to work hard, success within the group of hard workers may not have much to do with merit, intelligence, or perseverance. Corporate titans like Elon Musk or Jeff Bezos seem smart because their companies thrive under their leadership, but if these individuals were not the ones at the helm of their respective industries, someone else with similar skills or a similar company would likely take their place and probably do almost as good a job, if not better.

Steve Jobs may be a rare exception given his unique vision. Still, Apple seems to be doing just fine without him.

It’s normal to feel frustrated by inequality, even though a lot of it has to do with luck. But there is little reason why we should expect markets to produce outcomes consistent with human conceptions of justice. Markets are evolutionary selection machines, not meritocracies. By this I mean that the market selects the companies that make the most money, and there is no guarantee that anyone working within successful companies achieved this because they understood the nature of the market in which they were competing. What matters is profit, not intention, and even in retrospect it can be difficult to discern why some methods or business practices worked and others failed. Yet individuals in successful industries and companies will be paid more anyway.

In some markets, network effects and rising returns play such a dominant role that simply by being the first to enter a market, a company can have a significant, long-lasting advantage. This hardly seems fair. But again, markets create wealth, not justice. Once you stop expecting them to produce righteousness, you will rarely be disappointed by them.

This all seems like an argument for more redistribution, and perhaps to some extent it is. (For example, this author favors UBI.) But to the extent that redistribution hinders the workings of the wealth creation machine, it does so at the expense of passing on a richer world to our descendants. In an effort to reduce the “bad” kind of inequality in our time, we often also reduce the “good” kind across generations. That is also a form of injustice.

Maybe all inequality, including inequality over time, is bad, but I’m skeptical. Instead, it seems likely that if there are ways to benefit the poor without sacrificing growth, these practices should take precedence over more naive welfare state redistributive systems.

If the fortunate today have a moral duty or obligation to others, it may be primarily to save rather than help today’s poor. Every dollar of investment spent to consume – even if it is for a good cause – gives up a potential revenue stream in the future that could do much more good. Increasing our own personal wealth through saving and investing is also something within our control, compared to solving global inequality.

Yet there are other options. One of the best ways to kill two birds with one stone is to invest in developing countries when it is safe to do so, and then adopt a ‘buy and hold’ strategy. Likewise, a UBI could be financed by an investment fund, much like the one that exists today in the State of Alaska. These frameworks can provide the most promising opportunities to acquire wealth-producing markets And justice.

If we could change the past, we might have a stronger moral obligation to our ancestors than addressing any inequality today. On the other hand, just as our actions influence the future, our ancestors made choices that impacted our own lives. Undoubtedly many of these consequences were harmful. Just as we overconsume, lowering living standards in the future, our ancestors chose to consume income from wealth that could have been invested, increasing prosperity in our own time. In many cases, they may be the ones who owe a debt to us, rather than the other way around. Yet nothing can be done about it.

Given this reality, it is not clear how much we should care about inequality at all. To the extent that we care, we should focus on those solutions that help today’s poor while leaving behind a richer world. The market mechanism is well adapted to both purposes, but to benefit from its power we must accept its impersonal and, yes, quite arbitrary nature. The market tends to lift all boats, but some boats rise faster than others. Accepting this outcome is difficult, especially because addressing inequality gives so many people a deep sense of purpose and meaning in their lives, even when their efforts are completely in vain. Overcoming such prejudices is of paramount importance if we are ever to succeed in building a world that is both rich and fair.

James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.